Warren Buffett’s Tips for Managing Cost of Living

With the cost of living soaring, and homeowners and renters being hit by higher interest rates and soaring rents, I thought it might be useful to see what kind of advice the world’s most successful investor, Warren Buffet, can offer.

We all know the Oracle of Omaha has plenty of great tips when it comes to investing, but can the 92-year old’s observations help people who are doing it tough?

Judge for yourself.

1. “If you buy things you do not need, soon you will have to sell things you need.”

Over the last 55 years, Warren Buffet has transformed Berkshire-Hathaway from a troubled US textile manufacturer into a profitable conglomerate that has the world’s most expensive stock price ($AUD 763,095 per share at the time of writing).

Despite this, the billionaire maintains a simple lifestyle.

He doesn’t buy flashy cars or yachts, and has lived in the same, relatively modest house since 1958.

As he says, “I’m not interested in cars and my goal is not to make people envious. Don’t confuse the cost of living with the standard of living.”

The moral here is to cut your cloth to suit your purse….otherwise you’ll start running out of the cloth you already have.

Differentiate between needs and wants to avoid excess spending.

And then when times do improve, think carefully before you increase your spending again.

2. “Price is what you pay. Value is what you get.”

When Warren Buffet does open his wallet, it’s to buy a quality item that will last.

As he says, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.

Look for value, robustness and longevity when you make your purchases, in the same way that Warren Buffett looks for sound long-term value in his investments.

3. “Don’t save what is left after spending; spend what is left after saving.”

This is a classic Buffetism.

It emphasises the way the billionaire prioritises saving for the future, instead of spending today like there is no tomorrow.

A good rule of thumb before making a significant purchase is to work out exactly how long it took you to earn the money to buy it (or if you are buying it on credit, how long it will take you to pay it off) and then imagine how you will feel about the same purchase in 12 months time.

Will it have made a significant contribution towards improving your life?

How much extra wealth would you have in 12 months or perhaps even 5 or 10 years if you had foregone that purchase and invested the money instead?

4. “The best investment you can make is in yourself.”

Buffet believes that by continually investing in your personal growth, including your skills, knowledge, and well-being, you can open doors to improved prospects and increased income down the road.

Acquiring knowledge can help you save money, while developing skills can enable you to cut costs by doing things on your own.

Adding extra skills to your resume also won’t hurt when applying for a better-paying job or arguing for a pay rise in your current role.

5. “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.”

Building lasting wealth takes time.

Put aside instant gratification and focus on your long-term financial goals.

Most people don’t realise that the majority of Warren Buffet’s wealth was actually accumulated after his 60th birthday, largely because of the effect of compounding and his strategy of holding steadily growing investments for very long periods.

As Buffet likes to say, “Our favourite holding period is forever”, “The most important commodity is time” and “Someone’s sitting in the shade today because someone planted a tree a long time ago.”

6. “Never depend on a single income. Make investment to create a second source.”

Having a second, preferably passive, source of income can shield you from unforeseen events like losing your job or being hit with sudden expenses.

Buffet sees supplementary income streams as equivalent to frugality, when it comes to bolstering savings or eliminating debt.

At Freedom, years of experience have taught us that careful residential property investment provides the most secure way to build an alternative passive income stream for you and your family.

7. “Never invest in a business you cannot understand.”

Crypto-currencies, NFT’s and derivatives may sound like exciting investments and their promoters may promise great returns, but before you part with your money, do you really understand what you are investing in?

As Warren Buffet puts it, “Risk comes from not knowing what you’re doing.”

Significant losses can come from taking unnecessary financial risks because of the lure of quick rewards.

At Freedom, we invest in Australian residential property because it is tangible (it’s not called “real” estate for nothing), there are records stretching back more than a century showing the sure but steady gains property has made for investors, and because it is easy to understand.

Property is also not a passing fad, as people will always need somewhere to live.

That may sound a bit uninspiring, but as Warren Buffet puts it, “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”

8. “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

Buffet was referring to getting out of bad business deals and investments when he made this remark, but this can equally apply to bad debt.

If you find yourself being held back by debts, put your energy into looking at how you can improve your situation.

For example, you might be able to pay off a high interest personal loan or a credit card debt by rolling it into your existing home loan, which even after the RBA’s latest rise, will still be repaid at a far lower rate and over a longer period of time.

Alternatively, if you are struggling with home loan repayments, take action now, instead of just forking out more and more each month.

There are all sorts of strategies you can employ – switch to interest only payments until rates come down again, extend the term of your loan if your bank will let you, or refinance at a lower rate.