Warren Buffett Says He'd Be Broke if He Did This One Thing

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KEY POINTS

  • Warren Buffett is a shrewd investor known for his frugal habits.
  • One habit has saved him a ton of money, and it could save you a lot, too.


He makes a really good -- and scary -- point.

When it comes to investing money, Warren Buffett clearly knows what he's doing. Buffett is a billionaire many times over, and while his stock-picking prowess has largely led to his success, another reason he's so wealthy is his frugal tendencies.

Take his home, for example. Buffett bought his first house in 1958 for $31,500, and he's yet to upsize -- even though he clearly could purchase his own mansion (heck, he could easily purchase an island if he wanted to).

Another smart money habit of Buffett's is living within his means. And that includes avoiding unhealthy debt. Buffett is not a fan of credit cards, and he's been known to advise consumers to avoid them altogether. Buffett has even said that if he borrowed money at 18% or 20% -- what credit cards commonly charge -- he'd be broke. And that's advice worth taking to heart. 

The dangers of credit card debt

Credit cards can be a useful financial tool. It's when consumers rack up debt on their credit cards that things become problematic. As Buffett alluded to, credit cards commonly charge 18% to 20% interest -- sometimes more -- on balances carried forward. Now if you're an investing wiz like Buffett, you might buy the right stocks and generate a return that matches or exceeds credit card interest rates. But most likely, carrying debt on a credit card will cost you money -- and potentially a lot of it. 

To put those credit card interest rates into context, right now, you can sign a 30-year mortgage at around 6% interest, the highest mortgage rates have been in over a decade. But 6% is still considerably cheaper than 18% to 20%. 

Similarly, while some personal loans charge interest rates in line with those of credit cards, many also charge much lower rates. With great credit, you might snag a personal loan at 6% or 7% interest.

That's why it pays to take Buffett's advice and avoid carrying a credit card balance -- or avoid credit cards altogether if you don't trust yourself to only charge expenses you can pay off monthly. Remember, the more money you throw away on interest, the less you have to put toward other financial goals, and the less you have to invest with. And as Buffett attests, investing consistently is a great way to grow a lot of wealth.

Should you cut up your credit cards?

If you're serious about heeding Buffett's advice, you might consider cutting up your credit cards to avoid temptation. But canceling long-standing credit card accounts could actually damage your credit score, making it harder to take out lower-cost loans. 

So instead of canceling, simply tuck your existing credit cards away in a safe place and reserve them for emergencies only (if that). You'll leave more healthy borrowing options, like getting a mortgage, on the table. And while Buffett doesn't encourage the use of credit cards, he is a big fan of getting a 30-year mortgage to finance a home.

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