Monday, June 24, 2013
5 Warren Buffett tips everyone must follow
Inspired from most admired finance guru in the world, we recommend five most important personal finance tips for everyone:
1. Spend wisely
If you buy things you don't need, you will soon sell things you need. - Warren Buffett
All of us suffer from the urge to splurge and we justify our spending using the pretext of special occasions, peer pressure, lifestyle, family, emotions and even smart decisions. Most marketing companies understand this urge and try to exploit it by making offers that give consumers the false notion of having made the right decision. Unhealthy carbonated drinks are sold with promises of happiness, adventure, youthfulness, etc. Take the example of the current EMI options on expensive smartphones.
When one could do with a Rs. 15,000 phone (within budget), the EMI option gives a false sense of smart decision and instead makes you buy a Rs. 35,000 phone (overstretched budget). Spending wisely is not being stingy but being smart and aware. Every rupee spent on unnecessary urges contributes to lost wealth.
What you should do: Always ask these questions: Do I really need this? Am I overspending? Can I save some money without compromising on the value I want from a particular product/service? Encourage your family members to follow this path.
Lesson: Rule No. 1 : Never lose money. Rule No.2: Never forget Rule No.1 - Warren Buffett
2. Saving: Save for the unexpected
Someone's sitting in the shade today because someone planted a tree a long time ago. - Warren Buffett
All of us know that saving is important for a better future. But it is alarming to observe that most of us do not even save enough for emergencies. This happens due to our myopic view about personal finance.
Instant gratification today matters more than saving for tomorrow. In fact, saving is perceived as sacrifice by people.
What you should do: Follow "pay yourself first" principle. Set aside money for your future goals (and risk) as soon as you receive your monthly paycheck. Take professional advice to know where and how much you should invest for achieving goals.
Lesson: Don't save what is left after spending; spend what is left after saving. - Warren Buffett
3. Think long-term and be patient
"No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant." - Warren Buffett
Money is part of nature, it doesn't grow overnight. However, we overestimate money we can make in a year and underestimate what we can make in 10 years. People make money by staying invested for the long-term and without doing much "dancing in and dancing out" i.e. changing portfolios frequently.
Investors around the world believe in the India story in the long-term. You can benefit from India's growth only if you invest for long-term and not panic seeing short-term fluctuations.
What you should do: Make a diversified portfolio based on your risk appetite and financial goals. Pick right financial instruments recommended by your financial advisor and invest regularly and persistently for the long term (8-10 years).
Lesson: Life is like a snowball. The important thing is finding wet snow (opportunities) and a really long hill (long term). - Warren Buffett
4. Borrowing: Limit what you borrow
You will not become rich by living on borrowed money (credit cards, loans). People initially think that borrowing is manageable. But our country is full of examples when managing debt becomes overwhelming. Borrowing should never be done without an objective assessment of future cash flow and other financial needs. One needs to have a solid plan to pay the debt back and not become its lifetime slave. A debt-free life is the best life.
What you should do: Start with thinking that borrowing money is not an option. Shift to using debit card (in-hand money) from credit card. Negotiate your interest rates with the banks and re-finance (early phase) if necessary. Objectively assess inflation rates, income growth, sources of income, assets to pledge, etc, while planning long-term borrowing.
Lesson: I've seen more people fail because of liquor and leverage - leverage being borrowed money. You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing. - Warren Buffett
Risk comes from not knowing what you're doing. - Warren Buffett
Everyone wants to make money and we all want it quick. We go for investments which promise high returns. But we fail to objectively analyze the associated higher rate of risk. Trying to hit a six on every ball with your hard-earned money is nothing short of gambling. This happens because we are greedy, don't read fine prints of financial instruments and don't understand their investment objective. Our financial planning is vague and is done in a random fashion which leaves us susceptible to risk.
What you should do: Understand the objective of various financial instruments and asset classes.
Consult professional advisors to understand the investment pyramid, develop an investment strategy, review regularly and diversify.
Lesson: Investing without knowing increases risk. However, instead of shying away from investing one should acquire knowledge to get it right.