In response to linkedin question:-
Does it really take complicated formulas and strategies to create wealth? Read on -
Warren Buffet's advice for 2009
Extract -
Every new year, I adopt a couple of old maxims as my beacons to guide my future. This self-prescribed therapy has ensured that with each passing year, I grow wiser and not older. This year, I invite you to tap into the financial wisdom of our elders along with me, and become financially wiser.
* Hard work: All hard work bring a profit, but mere talk leads only to poverty.
* Laziness: A sleeping lobster is carried away by the water current.
* Earnings: Never depend on a single source of income. [At least make your Investments get you second earning]
* Spending: If you buy things you don't need, you'll soon sell things you need.
* Savings: Don't save what is left after spending; Spend what is left after saving.
* Borrowings: The borrower becomes the lender's slave.
* Accounting: It's no use carrying an umbrella, if your shoes are leaking.
* Auditing: Beware of little expenses; A small leak can sink a large ship.
* Risk-taking: Never test the depth of the river with both feet. [ Have an alternate plan ready ]
* Investment: Don't put all your eggs in one basket.
I'm certain that those who have already been practicing these principles remain financially healthy. I'm equally confident that those who resolve to start practicing these principles will quickly regain their financial health.
Let us become wiser and lead a happy, healthy, prosperous and peaceful life.
Article Source - http://www.financialexpress.com/news/warren-buffetts-advice-for-2009/423658/
Having read this one would wonder does it really take all that we try and do to create wealth or does it abiding by some simple and straight maxims to achieve it -
your thoughts folks.
My answer to it is:-
Let me answer this point by point.
Hardwork:- . So the question is, what is ideally a hardwork and what is not. For me:- Everynight when I go to bed if I feel that in a day I did atleast one thing that was more than my daily routine and was a value addition, it means I worked hard. Over longer period of time, to quantify (financially) you should strive to keep your monthly income (from all sources) to grow every year atleast a percent more then inflation rate.
Laziness: Early in the morning if I make a plan for the day and at the end of the day if I feel that I missed the plan and wasted time on something not useful, that means I was lazying around.
Savings: The best habit on planet, but for a family where bills await you much before the pay check arrives, question arises of how to save?
I suggest as soon as a pay check comes 1st thing you should spent it on is towards your investments, make sure you set a minimum limit (ex: 10% +/- of paycheck) and stick to it. Be disciplined and each year, amount should increase minimum by the rate of inflation. Know what you will need later like:- retirement, downpayment, child's school fees etc.
Borrowing:- This point is bit tricky. Borrowing is not that bad as thought. Simply put, if you are borrowing to buy something that is liability (ex: consumer durables, holidays, for regularly eating out) then it is bad, unless its a necessity. However if you are borrowing to create an asset (house, small business, for me even good books) then it is a good thing. Be sure that when you go out to borrow, you shop hard, you bargain hard (ex:- Mortgage payment of $100000 for 25 years at 5% is $584/month and at 4.5% is $556/month. So a 0.5% will make you pay 5% more every month for 25 years and this 5% will cost you $15635 over 25years, that is whopping 15% of the principal borrowed ) and time your borrowing (ex: if you are going to buy something after 2 months, dont borrow today and keep paying interest for extra 2 months. So be a borrower but smart borrower.
Accounting:- Well said quote, however how to practice it. I suggest, plan your monthly budget, be accountable to yourself at personal level. Keep the same principle for work too.
Auditing: Very important in wealth creation. One example is mentioned above. Another could be: imagine you are have a credit card liability (at 17% thats what cards charge at an average) of $5000 and you are paying $100 every month, it will take you 7.75 years and $9311 to clear your debt. However if you convert it to personal loan of $5000, at 8% you need to pay $102/month (almost same), you will clear your debt in 5 years (2.75 years before) and with only $6083...Huge saving of leakage of over 50% and time.
Risk taking: Its difficult to genralize the risk. Some thing is risky for you may not be for me and so on. However the closest answer I can provide is:- Diversify your risk and investments. Over longer period of time equities have delivered highest returns(11% historically) then other asset classes, even though they are risky. Check your risk profile (may be here you need a financial advisor, but remember that they are more concerned in selling the product where they are paid higher commision, so be careful and consult more than1 before hiring them) and decide accordingly your diversification ratios and investments.
Investments: This is my favorite point and I can write a book on it, however already being so long, I would try to keep it short.
Savings are meant nothing if kept idle in checking or normal 2% savings account, because inflation will eat it up over the years. Once you have created your risk profile, you should start investing immediately. Blend of equities+bonds+others if yield 8% returns, investing $2000/monthly will give you $ 9,47,000+ by 25th year, imagine if you keep this investment raising year after year.......
So wealth creation is easy if basics are clear and one follow a disciplined approach.
Hope it was useful.
