Warren Buffett, the Chairman of Berkshire Hathaway (NYSE: BRK.B), knows a thing or two about success when it comes to money and investing.
According to the Oracle of Omaha, there are two simple and costly mistakes most of us make when managing our personal finances.
Given Buffett’s track record, you may want to listen.
Since taking over Berkshire Hathaway, he has strung together a track record of growing its market value by 20% per year between 1965 and 2020.
In comparison, the SPDR STI ETF (SGX: ES3), an ETF that mimics the Straits Times Index (SGX: ^STI), has only managed a 6.6% per annum return since its inception in April 2002 up till the end of last month.
It’s personal
In 2014, Buffett appeared on the Dan Patrick Show (a US sports show).
During the interview, the Oracle was asked for his view on the biggest mistake we can make when it comes to money.
True to form, Buffett gave a direct response in plain english:
“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.”
The Oracle’s simple advice deserves more thought.
Often times, some of us may put off saving money till a later date.
And if our retirement age is decades away, it may seem like there is plenty of time to catch up.
However, you might want to reconsider if you are thinking along those lines.
The power of compounding
The difference of a few years can add up to significant amounts over time.
A simple way to calculate your future returns is by using the rule of 72.
With the STI’s track record of rising by 6.6% per year, you can expect to double your money every 11 years or so.
Let’s do some math.
For instance, if you started with S$10,000 and went on to grow your money at around 6.6% per year for 10 years, you would end up with close to S$19,000.
Extend that same growth rate to 15 years with the same amount of money, and you will arrive at more than S$26,000.
Push that horizon to 20 years, and you will get almost S$36,000.
And if you continue on to 30 years, your S$10,000 capital will turn to over S$68,000.
The simple exercise above clearly shows why it is important to start early when it comes to investing.
A few years can indeed make a big difference in how much you end up with.
Saving money at a young age, as Buffett suggests, can turn into a lifelong habit and further grow your retirement pot if you add more money every year.
With patience measured in years and not months, you stand to gain far more than you think you can, as the maths show.
If you would like to catch more of the wit and wisdom of Warren Buffett, check out the recording of Berkshire Hathaway’s annual general meeting here:
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Disclosure: Chin Hui Leong owns shares of Berkshire Hathaway.
