Warren Buffett is one of the most famous investors in America. The first week of May, Buffett’s holding company Berkshire Hathaway holds its annual shareholder’s meeting. Buffet writes an annual letter to shareholders prior to the meeting. So Buffett is usually in the news this time of year.
I was recently in a Jimmy John’s sandwich shop and saw a sign with Warren Buffett’s 10 Rules posted on the wall. I have always liked those rules and today I’m sharing three bits of advice from Warren Buffett that I think will help most readers.
Keep plenty of cash. At year-end Berkshire Hathaway reported $112 billion in Treasury bills and other cash equivalents. Based on a market capitalization on April 12 of $515.68 billion, that’s 21.72 percent in cash. Do you have 20 percent of your net worth in cash? Buffett talks about this cash as a form of insurance. He is protected from bad luck and unpredictable developments because he has enough cash to cover himself.
My advice to clients is to have six months of family bills in savings at the bank. This is insurance against unexpected bills, like car wrecks or health events. In a savings account at the bank, the money is:
- Safe from loss. FDIC insurance guarantees that the money will be there when you need it.
- Easy to access. You don’t have to fill out a form or ask permission to get it.
- Free to use. No interest will accrue if you use the money.
Focus on the long term. Buffett encourages his managers to focus on long-term value. He does not want them distracted by short-term targets. In your personal life, this can translate to a long-term focus on saving 20 percent of your income for your retirement and less concern about the price of the investments in your retirement account.
Borrow rarely and carefully. Berkshire uses debt very rarely. They have the cash to finance most investments they want to make. This cash is mostly “free” and cannot be called back in a crisis by a lender. A great application of this in your life is to not put stuff on a credit card when you know you don’t have the money in the bank. If you charge a $100 meal when you know you don’t have money in the bank, you are planning to pay interest on the purchase and the $100 meal becomes a $500 expense.
Another example of applying this principle is to never get a 15-year mortgage. If you qualify for a 15-year mortgage and you want one, you should get a 30-year fixed. You can plan on making double payments and you can send a mortgage payment every two weeks. You will pay the loan off in less than 15 years. But if something unexpected and bad happens, and you are in a financial crisis, you only have to make the smaller 30-year payment. This added flexibility is very valuable.
Find a financial advisor
If you want to embrace these ideas and put them into action for your family, you may want to talk with an expert about the best way for you to move forward. I always think it’s a great idea to talk with a CERTIFIED FINANCIAL PLANNER™ professional. Even if you don’t decide to work with a CFP® professional, you will learn a couple things from talking with one. And you can expect an initial meeting to be free.
To find a CFP® professional near you, start your search here.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor only paid by clients, not any financial product manufacturer or distribution network? That would be a fee-only advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-only, CFP® professional can help you make great financial planning choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you wanting to talk, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their financial goals. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.