Warren (not Jimmy) Buffett on Two Basic Financial Mistakes

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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 got a 2.5% raise and worked until they were 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