Warren Buffett Reveals the Biggest Mistake We Make When It Comes to Money

Warren Buffett says that there are just two simple things that can make all the difference in the world when it comes to managing our money.

Feb 8, 2014 at 1:45PM

According to Warren Buffett, there are two simple and costly mistakes most of us make when managing our personal finances.

Warren Buffett of Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) is the third richest man on the planet, and knows a thing or two about success when it comes to money and investing.

Buffett Coca Cola

Source: Coca-Cola

When he first took over Berkshire Hathaway in 1964, the book value of the company stood at $19. At the end of last year it was $114,214 - a growth rate of 19.7% every year for 48 years! Similarly, $19 placed in the S&P 500 would've only grown to around $1,400 over that same time period.

He is a man whose wisdom should be trusted. And while he is full of investment advice, he also doesn't stray to give insight when it comes to personal finances as well.

On personal finances
Buffett recently teamed up with Quicken Loans to offer someone the chance to win $1 billion for a perfect NCAA bracket. When he went on the Dan Patrick Show to discuss the bracket-challenge, Dan asked him a simple question, "What's the biggest mistake we make when it comes to money?" and Buffett had a direct, but vitally important response:

Well, I think the biggest mistake is not learning the habits of saving properly early. Because saving is a habit. And then, trying to get rich quick. It's pretty easy to get well-to-do slowly. But it's not easy to get rich quick.

So often when money and investing is considered, it's easy to fall into the trap of thinking that saving can wait until a later date, and that the best investments are the ones that no one knows about. However, those thoughts are undeniably mistaken.

A powerful example
Consider a scenario of two people, each 25 years old, David who makes $40,000 a year and Michael who makes $80,000 a year. Each year, they get a 2.5% raise and work until they are 73. Let's say the only difference is David starts saving 10% of his income when he's 25, but Michael decides to wait until he's 40, while he's making $115,000 a year.

Let's also err on the conservative side of things and say that money grows at an annual rate of 7% each year, which is actually less than the average historical annual return of the S&P 500.

By the time each is 50, they would've each taken a little more than $144,000 out of their paychecks and put it toward retirement. But when they retire at 73, do you know who would end up with more money?

Despite earning half as much money over the course of his lifetime, David would end up with roughly 10% more than Michael. David would have $2.3 million in savings when they retired, and Michael would have $2.1 million:


What is even more remarkable than David ending up with more money despite earning half as much in salary, is that ultimately Michael saved 60% more money than David (roughly $610,000 in savings for Michael versus $375,000 for David).

If you decide to get ambitious and say the money grows at 8.5% a year, David actually ends up with almost 30% more than Michael, with $3.7 million in savings versus $2.9 million. 

What we can learn
All too often in investing people are taught, "in order to make money, you must have money," and the stock market is only useful if you find the next big company where your money is doubled in a matter of days.

Yet as Buffett expounds, and the example above shows, the true key to becoming rich is patient saving starting today and an understanding that wealth accumulation happens over the course of a lifetime.

Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.

Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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