Warren Buffett is considered to be one of the best investors in the world. He’s also one of the wealthiest people in the world, and he didn’t get there by accident.
Over the past few decades, Buffett has steadily built his fortune by following several strict rules. These rules can help anyone improve their financial prospects. With that in mind, here are three of his tips that may help you achieve financial independence.
Warren Buffett’s rules
The investor’s first rule of making money is “don’t lose money.” Over the years, Buffett has invested in thousands of companies, but he’s always avoided businesses he doesn’t understand. By following this rule, he’s been able to avoid any significant investment losses and grow his wealth rapidly.
The stock market can be a great tool to help you grow your financial nest egg over the long term, but you can also lose much money in the market if you don’t know what you’re doing. As such, it may be sensible to follow Buffett’s advice and stick to investments you understand and avoid losing money in those you don’t.
Don’t borrow money
Buffett says he’s never borrowed a significant sum of money in his life. This is an excellent principle to follow in life. Borrowing money can be extremely costly. Some credit cards charge interest rates of more than 30% a year. If you start borrowing lots of money at this rate of interest, it can be tough to get out of the hole.
Therefore, it may be best to avoid borrowing money altogether, if you can. If you do need to borrow money, keep an eye on the interest rates lenders are charging. Borrowing money at low rates of interest can be sustainable, or even helpful in some situations (when buying a house, for example). But high-cost credit is always damaging. It’s best to stay away altogether as Buffett always has.
Invest for the future
By far the most important thing we can learn from Buffett is the wealth-creating power of the stock market. He started investing in the 1950s with just $100,000. Today, he’s worth around $90bn, and he’s made virtually all of his money by investing in the stock market.
Even if you don’t have Buffett’s stock-picking skills, investing in the market is still a great way to grow your wealth over the long term. Indeed, over the past three-and-a-half decades, the FTSE 250 has produced an average annual return of 12% for investors.
According to my calculations, at this rate of return, it would take just 30 years to grow a monthly investment of £300 into a fortune of £1m. That might not come close to Buffett’s colossal fortune, but it may be enough to help you achieve financial independence.
Rupert Hargreaves owns no share 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.