How to Build Wealth Wisely: A Cryptic Lesson from Warren Buffet

4 minute read

I couldn’t believe it. I was only a month away from locking in a guaranteed payment of $1,000,000,000.00. I kept reading the letter in disbelief. He couldn’t actually be offering this to me, could he? But there was no denying. Unless Warren Buffett went back on his word, I would be a billionaire at the end of March Madness, 2014.

If you follow the NCAA men’s tournament, you might be familiar with this little wager Warren Buffet offered to anyone interested in participating. All you had to do was correctly guess the outcome of 63 games, and Buffett would write a check for an astounding one billion dollars, no questions asked.

There are countless programs, pamphlets, and prognosticators that offer riches beyond your wildest dreams. The path to success, they say, doesn’t have to be hard. You just have to follow steps X and Y (along with a monthly subscription of $19.99), and you can have the life of your dreams. Many buy into this notion of quick wins and overnight success. It is a road traveled by many, with a destination that few find.

In reality, there are only two primary ways to build wealth. The first is that you can make a product that other people want, and sell it for a significant amount of money. The second is that you can live below your means and save the excess. This article will focus on the latter.

So what are some simple steps that will help you build wealth wisely?

1. Live Below Your Means

To build wealth, set a goal for how much you plan to save every month. I often meet with individuals who have received increases in income. They are shocked at how quickly the money has been absorbed into their budget. How, they wonder, were they surviving the month before without this additional income? The answer is that we all tend to live right up to our earnings, and then a little more. I’m not sure of the science behind it, but it is invariable. To build wealth, you must intentionally put aside money that your budget cannot touch.

One way to do this is to siphon off any excess budget money at the end of the month into your savings account. Let’s say you have $11.43 left in your gas budget. Instead of treating yourself, move that exact amount to your savings account. It may not seem like much, but this is how we got to step 2.

2. $458 Per Month

A goal is crucial to success in saving. Not just an idea, but a written-down goal. Our first goal was $458/month, which is approximately the amount that will max out a Roth IRA each year for one person. Our next goal is to hit $916/month, which would max out two. One for me, and one for my wife.

This is our personal goal, but you should make yours whatever suits your budget. For the record, maxing out one Roth IRA every year for 35 years could mean approximately $800,000 of tax-free money in retirement!

3. Invest Your Savings

Once you have established your emergency fund and eliminated debt, it’s time to start investing. A 401(k) or Roth IRA are great places to start, as they have penalties for withdrawing the money that will help protect it from a splurge. An individual in 2018 can contribute up to $18,500 to their 401(k), and $5,500 to a Roth IRA. If you’re already maxing out your 401(k) match, the Roth IRA is a great partner. Once you are age 59 1/2, you can pull money out of the Roth IRA entirely tax-free, including the growth! Keeping Uncle Sam out of your retirement savings can go a long way in helping your money last.

Warren Knows

Buffett still offers enormous rewards for the March Madness challenge, though it is currently only available to those who work for his organization, Berkshire Hathaway. He even recently made the contest easier to win. This gives me a sneaking suspicion that Warren knows what he is doing.

Perhaps the most legendary investor of our time knows that the secret to success is not getting lucky, but working hard and sticking to what you know. I wonder if the contest is his way of reminding the world that while many seek overnight success, there is no substitute for working hard, living below your means, and investing the excess wisely.

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About Daniel Browne

Daniel is a writer, speaker, and financial planner. He's currently pursuing his Certified Financial Planner designation and has a passion for helping anyone seeking financial freedom. Daniel is married to Abby and they have two children, Gia and Henry.

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