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The 3 Warren Buffett rules to financial independence

Warren Buffett is the world’s best investor alive today, and with a fortune of $80bn, he’s the world’s third richest man. 

The Oracle of Ohama built his massive fortune investing in some of the world’s largest and most successful companies. While these investments have created a tremendous amount of wealth for the billionaire, Buffett would be nowhere near as successful as he is today if he hadn’t followed three fundamental investment rules during his career. 

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Rule number one: Save your money 

Buffett has always had a knack for saving and investing. He started his first business at age six selling Juicy Fruit chewing gum packs. Saving profits from this business, he was able to expand into selling Coca-Cola from his grandfather’s grocery store. 

Over the years profits from this business grew, and at age 11 he brought his first shares. He acquired six shares of Cities Service, at $36 each for a total investment of $216 or $3,700 in today’s money. 

Buffett’s job as a teenager was delivering newspapers. Here he devised a way to deliver the most papers in the shortest possible time and trade routes with other delivery boys. From this job, he saved $1,200 ($25,600 today) to buy 40 acres of farmland in Omaha, Nebraska.

In just nine years Buffett, who started with nothing, saved more than $25,600 before his 16th birthday. The rest, as they say, is history. 

Rule number two: Compound 

Saving isn’t enough on its own. To be able to achieve the best returns on your cash, you have to be able to compound your money at a suitable rate. 

The power of compounding should not be understated. Buffett is obsessed with this mathematical principle. 

For example, if you save £100 a month, or £1,200 a year and receive no interest, or return on your money from investments, you’ll have £12,000 at the end of a decade (excluding the impact of inflation). If you invest this cash at 5% per annum, you will have £15,550 at the end of the period. If you earn 10% per annum, you’ll have £20,400. And if you make 20%, you’ll end up with £36,300 — three times more than the initial figure.  

Buffett has been able to successfully compound his wealth at a rate of 20% or more for around eight decades. If you could replicate this performance, that simple £100 monthly deposit would grow to be worth £26.6bn. 

Rule number three: Don’t lose money 

It’s all very well saving and compounding, but all this hard work will come undone if you end up losing everything. This is where Buffett really stands out. 

Over the years, he has made very few bad investments, and those that have gone against him, haven’t cost him that much. Avoiding losing investments has helped him compound at a faster rate and ensure that any savings are reinvested with the best possible return, not used to fill a hole caused by a loss. 

You can replicate this strategy by buying only safe investments. Stocks where the risk of permanent capital impairment is low, rather than, for instance, high-risk, high-reward mining stocks. 

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.