Even with zero savings in the bank, it’s possible to at least start planning to build wealth today. I could reduce debt, increase my passive income, and start collecting some savings. Then I could consider investing in the wealth-building machine that is the stock market. And to do so, I’d draw inspiration from billionaire investing legend Warren Buffett.
Here are three Buffett lessons I’d follow to help me start compiling wealth.
The magic of compound interest
Firstly, here’s an exercise to demonstrate that it’s never too late to start investing money in stocks. The secret is that I have a very powerful force working on my side to help me build wealth: compound interest.
Let’s assume I start 2023 with no savings, but commit to putting £100 a week into the stock market from now on. And let’s assume I earn a 9% annual return on my money, which is the long-term average of the market. What would happen?
Well, at first, for a couple of years, nothing spectacular happens. In that sense, it’s rather like going to the gym. A few workouts in isolation won’t produce a dream physique. But the accumulated effect over time can be extraordinary.
|Year||Deposit (£433 x 12)||Compound Interest||Total|
If I could one day start putting more than £100 a week into stocks, then that £792,711 figure could be much higher. And if I were to find stocks that beat the 9% market average, then I’d be looking at a truly life-transforming sum of money.
Compound interest explains why 90% of Warren Buffett’s wealth (now standing at over $100bn) has been amassed since he turned 65.
No wonder Albert Einstein supposedly said: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
Of course, this is for demonstrative purposes only. All stock market investing carries risk, and that 9% return is the long-term average. What happens over one or two years is anyone’s guess.
So I’d certainly be investing for the long term, just like Buffett.
Play your own game
An estimated nine million people across the UK have no savings, according to research from the Money and Pensions Service. Meanwhile, some people are fortunate to start with a lot of money.
Everyone’s financial situations and goals are different. As Buffett wisely said, “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.”
So I should play my own game, at my own pace, within a time frame that suits me. And without worrying about the scoreboards of other investors.
Rome wasn’t built in a day
It takes time to accumulate a large sum of money through stock market investing. That’s why The Motley Fool advocates holding stocks for the long term rather than constantly trading.
As Warren Buffett has proved, the ingredients for building wealth are consistency, patience, and finding the right investments.