3 personal finance lessons from Warren Buffett

For a man who has consistently been counted among the richest people on earth, Warren Buffett is remarkably prudent. There are no flash cars, no mansions, exotic islands or private planes. In fact, he's rumoured to drive a pretty average car, live in the same modest house as he has done for most of his life, while preferring fast food to fine dining.

This rejection of a lavish lifestyle by one of the richest people of all time can teach us all something about wealth. While society may encourage us all to consume a whole plethora of products, Warren Buffett seems to have discovered that true wealth lies in having the freedom to do whatever it is he likes every minute of every day.

As such, he seems to have always lived within his means. This has doubtlessly helped him to increase his wealth over the years - particularly when he was starting out and had a lot less capital than he does now. And the same viewpoint could help all of us to save more, invest more and in time be able to have the freedom that Warren Buffett clearly values so dearly.

Keeping cash

As well as living within his means, Warren Buffett always keeps a significant proportion of his wealth in cash. Apparently this was learned in his younger years from his grandfather who always insisted on keeping a sum of cash in a safety deposit box in case of emergency. Today, Warrant Buffett keeps at least $10bn in cash in case of losses or in order to take advantage of deals that may be on offer at short notice.

This cash buffer is an excellent idea. Certainly, it dilutes investment returns somewhat since the return on cash is usually lower than the return on stocks over a long period. However, as Warren Buffett has noted in the past, having cash on hand helps an individual to sleep soundly at night and for that reason is worth the reduced return.

Although having too much cash is equally not a sound idea, having some in case a roof needs repairing, a job is lost or another emergency comes along is sound advice.

Consistency, not risk

As well as keeping some cash and living within your means, Warren Buffett also appears to be a man who hasn't taken unnecessary risks. While the business world is full of people who have risked everything and received huge rewards, Buffett seems to have focused on consistency over short-term success.

In fact, he's been quoted as saying that you only have to do a very few things right in your life, so long as you don't do too many things wrong. This can be applied to personal finance in terms of being a little more prudent and sensible than perhaps our emotions would like us to be. For example, taking a smaller mortgage than is possible in order to take less risk, buying a lower value car and investing the rest for retirement and investing in a diverse range of stocks rather than falling for any get rich quick schemes.

So, while Warren Buffett is known as one of the world's greatest ever investors, he seems to keep things simple when it comes to his personal finances. By keeping a cash fund, living within your means and considering risk before reward, it's possible for anyone to enjoy success when it comes to their personal finances.

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