Warren Buffett: Stop These 5 Things That Are Keeping You Poor
There's an unfortunate American reality that has accompanied their dream.
Many individuals who have diligently pursued education, worked hard, and maintained good financial habits have experienced a precarious financial existence throughout their lives.
This situation often extends to their children.
As Warren Buffett has pointed out, a significant portion of the American population is living the "American Nightmare" instead of the "American Dream."
A Surprising Statistic
To illustrate, did you know that 58% of Americans are living from paycheck to paycheck?
This means that nearly two-thirds of the population struggles to make ends meet and can barely afford their groceries when they go to the store.
The harsh truth is that this issue isn't isolated to a specific region; it affects the entire nation.
But here's a surprising fact: financial struggles are not solely determined by the amount of money you earn.
There are cases of individuals who have managed to accumulate substantial savings while working minimum wage jobs and supporting a family.
On the flip side, some people earn six-figure salaries and yet find themselves living from one paycheck to the next, and often, this is a matter of personal choice.
Warren Buffett's Case
Warren Buffett is a notable example of someone who built considerable wealth without spending extravagantly.
We all need money to sustain our lives, and that's why we work.
In the famous words of Warren Buffett,
If you don't find a way to make money while you sleep, you will work until you die.
If you aspire to break free from the shackles of debt, live the life you desire, and assist those around you, it's crucial to understand these financial principles.
I've conducted extensive research on how Warren Buffett amassed his wealth and discovered five key factors that tend to keep people in poverty.
In the following discussion, I'll share these insights with you.
#1: Zero Balance
It all begins with the concept of a zero balance, which is the first key factor.
Let's say you have $50 dollars in your bank account.
Typically, when you believe you have $50 dollars in your account, you think you have $50 dollars to spend, right?
Well, this way of thinking can lead to significant financial pitfalls.
My advice is simple: if you can't afford to pay for something in cash, don't buy it.
Strive to be in a position where you can pay for anything you want in full.
As Warren Buffett wisely advises:
Don't buy what you can't afford.
Just because you see $50 dollars in your account doesn't mean you can actually afford to spend $50 dollars.
This principle is at the core of what we call "zero balance thinking."
It is crucial to understand that zero balance thinking is detrimental to wealth building.
Don't Just Look At Your Income
Your income isn't the sole determinant of whether you are financially secure or not.
For instance, Warren Buffett, the world's fifth-richest person, maintains a lifestyle on an annual budget of around $100,000 dollars.
This is despite having amassed enormous wealth.
On the contrary, if you earn $40,000 dollars per year and spend every penny of it, you're still broke.
Likewise, if you make $100,000 per year but spend every dollar of your income, you're in the same situation – broke.
To break free from this cycle, you must save a portion of your earnings for emergencies and investments, allowing your money to grow over time.
A remarkable illustration is the legendary investor Warren Buffett himself.
He purchased his first stock when he was just 11 years old, and it was only three shares of City Service Preferred for which he paid $114.75.
An Example On Zero Balance Thinking
To further clarify the concept of zero balance thinking, let me share an example.
I had a close co-worker who had a penchant for fashion and often invested in expensive clothing.
That year, we received a generous stimulus check, amounting to approximately $250 dollars, due to our company's success.
When I inquired about their plans for the check, my co-worker mentioned that they intended to use the entire amount to buy a new pair of pants.
Yeah, you heard it right – their entire stimulus check was going towards a single pair of pants, rather than using it to build their wealth.
How To Avoid This Thinking?
Now, you might wonder how to avoid falling into this way of thinking.
It's simple, and it's called the "Rule of Five."
If you can't afford to buy five of the items you desire with cash, then you can't truly afford it at all.
For example, if you have $50 dollars, you should only buy something that costs $10 dollars or less.
Don't overcomplicate this.
In the words of Warren Buffett:
I don't look to jump over seven-foot bars; I look around for one-foot bars to step over.
The key is not to make your path to wealth more complicated than it needs to be.
Avoid zero balance thinking.
However, there's another aspect of spending that is often overlooked, similar to the consistent need to buy food.
I expect to buy food throughout my life, and I hope that food becomes more affordable in the future.
Similarly, in investing, when stock prices are down, it's an opportunity to purchase stocks at lower prices.
As Warren Buffett emphasizes:
Who wouldn't prefer to buy at a lower price rather than a higher one?
#2: Payment Traps
The second key principle is the notion of "payment traps."
Warren Buffett points out that low prices can easily ensnare you, and it's something quite evident.
Many people who seem wealthy are often not truly wealthy; they merely project an image of wealth through their possession of expensive items.
This can make you wonder how they can afford these luxuries while you struggle.
Warren Buffett offers a valuable insight regarding such individuals:
Only when the tide goes out do you discover who's been swimming naked.
In essence, when you scrutinize their financial situation closely, you'll see who is genuinely wealthy and who isn't.
The reality is that these individuals can't truly afford what they have; they simply believe they can.
An Example
For instance, let's consider someone you know who recently purchased a brand new Mercedes.
It's a stunning car, and they make manageable monthly payments of $350 for it.
However, this doesn't mean they could afford to purchase the car outright with cash.
In other words, they can't truly afford it.
This creates an illusion that you can spend more money than you actually possess because you're not making substantial lump sum payments for the items you acquire.
For instance, the prevalence of zero APR deals contributes to this illusion.
With a zero APR rate, you can purchase almost anything and pay for it in monthly installments.
Take, for example, an inflatable kayak on Amazon that costs between $150 dollars and $300 dollars; you can spread this cost over monthly payments of $20 to $30 dollars.
Can You Afford It?
While these installment plans may make you feel like you can afford more, in the end, you'll have to pay the entire amount.
And when you're not only paying $350 dollars a month for a car but also $75 dollars a month for a couch, along with various other items in your home, combined with credit card debt, you could find yourself financially strained indefinitely.
Payment traps are also encountered by individuals who accumulate significant credit card debt, often leading to bankruptcy or having gone through bankruptcy once before.
Many people in this situation owe substantial amounts of money and struggle to even cover the interest, let alone make a dent in the principal amount.
This problem is avoidable.
So, it's crucial not to fall into payment traps, which are designed to keep you financially constrained.
But what do you do once you avoid payment traps?
#3: Compounding
The third principle is all about "compounding."
Once you've successfully navigated the pitfalls of payment traps and the zero balance mindset, you can concentrate on harnessing the power of compounding to grow your money.
Compounding is a magical effect that takes your money and multiplies it exponentially.
Warren Buffett, who knows these concepts better than most, emphasizes the significance of deploying capital intelligently:
When we get chances to deploy the capital, we've always tried to make any entity, whether it was the partnership originally, or Berkshire now, or Blue Chip Stamps when we owned it, or Diversified Retailing, we wanted them all to be compounding machines.
Assets And Liabilities
To effectively harness this magical compounding effect, you need to understand two key words: "assets" and "liabilities."
Assets are things you own that generate income, putting money in your pocket. These could include dividend-paying stocks or real estate.
Liabilities, on the other hand, are things you purchase that take money out of your pocket. This category encompasses items like cars, clothing, or new cell phones.
What often leads to financial hardship is the tendency of many people to buy things that create the appearance of wealth, such as flashy cars or extravagant clothes.
However, since these items are liabilities, they don't contribute to genuine wealth.
The shift to a wealthy mindset involves focusing on acquiring assets. When you purchase assets, you have the potential to become genuinely wealthy, to the point where you can afford liabilities with cash.
A Practical Example
Someone I knew was in a strong financial position and was contemplating buying a new car, a symbol of status they've always desired.
However, this individual also had a keen interest in personal finance and wealth growth.
They’ve read numerous books and recognized that rich individuals often invest in real estate, a lesson also learned from Warren Buffett and Charlie Munger.
So, instead of that flashy car, they decided to invest in a small apartment complex.
After a month of preparing the property for rental, they found a tenant and began making a $300 dollar profit every month.
This example illustrates how an asset generates income, while a liability, although appearing impressive, yields nothing in return.
The Advantage
A significant advantage is that you don't require substantial initial capital to begin building the compounding effect.
Real estate can be costly, but you can invest in assets like dividend-paying stocks with as little as $5 dollars a day, $5 dollars a week, or even $5 dollars a month – whichever you're comfortable with.
It's important to note that assets aren't the same as leaving your money in a savings account, which grows very slowly.
You work hard to earn an income, but you can't work endlessly, nor would you want to.
Your goal is to have your money work for you, and that is exactly what assets do.
The Rule To Apply Compounding Effect
A simple rule to effectively apply the principle of compounding is the "five-to-one rule."
This means for every five dollars you spend on liabilities, you invest one dollar in assets.
For instance, if you spend $15 dollars at Walmart, you invest $3 dollars in Walmart.
If you spend $80 dollars at Costco, you invest $16 dollars in Costco.
This approach will help you make sure that you're growing your wealth while balancing your expenses.
#4: Flashy Lifestyle
The fourth principle relates to the "flashy lifestyle."
In our modern age, social media tends to exaggerate and showcase images of individuals who appear affluent but are, in reality, far from it.
There are numerous stories of people who racked up substantial debt solely to maintain a lavish image on platforms like Instagram.
The remedy is quite straightforward: steer clear of the flashy lifestyle.
Consider Warren Buffett as your example.
You won't find any prominent brands on his suits, he opts for economical meals, and he resides in the very first house he purchased.
Yet, he is immensely wealthy.
You can choose to follow his example and concentrate on what truly matters in your life while concurrently accumulating wealth.
There's one more crucial factor to consider if you want to accelerate your wealth-building journey.
#5: Step Ahead
The fifth principle centers on staying one step ahead.
While it's easy to complain that businesses are solely interested in your money, the reality is that we're all striving to make ends meet, and that's just how the world operates at this point in time.
The real issue lies in the choices we make to either purchase or abstain from buying.
Regrettably, most people lack a filter, impulsively buying items they don't actually need simply because they want them.
However, if you develop this filter and refrain from purchasing things solely based on urges, you'll soon discover how much wealthier you feel with that extra money.
This newfound capital can be invested, and as you witness it growing, your desire for further growth intensifies.
You begin contemplating ways to increase your income.
Make The Shift
You, as a saver and investor, transition to the other side, where you start exploring ways to become a producer like the businesses you purchase from.
This shift aims to generate more cash flow because you now understand how the game works.
You might choose to:
- work extra hours at your current job,
- aiming for a promotion,
- or you might initiate a side hustle, such as freelancing or a small business.
Regardless of the path you take, your objective is to bring in more money so that you can acquire additional assets and expand your wealth as expeditiously as possible.
This allows you to focus on the things that hold the most significance to you.
In essence, it all boils down to being prepared.
Predicting rain doesn't make a difference; what counts is building the proverbial ark, as wisely stated by Warren Buffett.
- Ivan