The most important piece of financial wisdom you will ever hear may be a simple one, but it sure makes a big difference. It’s probably something you’ve heard before but wish you could do more of. Are you ready? Here it is.
Even Buffett Does It
Billionaire Warren Buffett knows the value of saving money. As the world’s most successful investor, Buffett’s financial wisdom is highly respected. He famously lives in the same Nebraska home he bought for $31,850 in 1958 and has very simple tastes. Much of Buffett’s financial advice centers on saving money and avoiding debt.
It Adds Up
“But I’m not Warren Buffett!” you might say, “I don’t have billions of dollars to save!” The good thing about saving money is that you don’t have to save a lot all at once. Every little bit helps and slowly, over time, your savings will build up.
Most financial advisors advocate saving from 10 percent to 20 percent of your income. A popular rule of thumb is the 50/30/20 rule, which says that 50 percent should go to necessities, 30 percent to non-necessary spending and 20 percent to savings.
Save a little bit at a time over a lifetime, and you might find that you’re richer than you thought. Someone earning $75,000 annually – with raises – will earn $4.5 million in a lifetime. If they save 20 percent of that $4.5 million, they’ll have $900,000. Not too shabby! It may help to calculate your own lifetime earnings to find out what you could end up with.
It Also Goes Both Ways
The caveat to the “save a little bit at a time and your savings will build up” rule is that the reverse is true, too. If you incur a little bit of debt over a long period of time, it will eventually add up to a lot. Excessive debt can eliminate the benefits of all of your valiant savings efforts.
It’s best to avoid debt if it isn’t necessary. If you do need to borrow, try to keep your debt-to-income ratio (DTI), how much you owe over how much you earn, as low as possible. The designation of a safe DTI varies from person to person and industry to industry, but a good benchmark to look at is the one used for mortgages. A DTI of 36 percent or lower is desirable to obtain a qualified mortgage, and 43 percent is about the absolute highest.
The lower your debt ratio is, the better off you’ll be. Nonexistent debt is even better than that.
Spend Less, Save More
Even people with plenty of spendable income look for ways to spend less. No one is above clipping coupons, taking advantage of sales and looking online for the best deals. You’d be surprised how little many very well-off folks actually spend. The No. 1 car brand driven by millionaires is Toyota, not some crazy expensive luxury car.
Don’t give in to temptation to buy the most expensive stuff just because you can. Also, limit the amount of things you buy. Do you really need 100 pairs of shoes? Buy what you need. You can splurge a little, but don’t go overboard. Spending less is another great way to slowly build up your savings little by little until you end up with a lot.
Saving income, avoiding debt and spending less will, in time, make you richer. It won’t happen overnight, though, and it’s easier said than done. For this tip to really have an effect, it needs to become a habit that you stick with long enough to see the incredible results it can bring.