Warren Buffett's Simple Cash Trick That Could Keep You Out of Debt
KEY POINTS
- Warren Buffett is known for his investing prowess, but his saving strategy works for anyone.
- Buffett continually stresses the importance of having a large emergency savings fund.
- Automate your savings for an easy "set it and forget it" approach.
Warren Buffett is best known for his investing success, but one of his smartest financial strategies can work for anyone: maintaining a strong emergency fund.
Buffett knows that a financial emergency can cost his company, Berkshire Hathaway, dearly, so he keeps a ton of cash -- often hundreds of billions of dollars -- on hand. Berkshire's massive cash pile kept the company out of debt during the 2008 financial crisis.
This strategy works for anyone -- even if you don't have billions in the bank. By following Buffett's blueprint, you can be prepared to handle an emergency car repair or medical bill with no stress.
Why Buffett believes in emergency funds
Buffett has talked about how keeping cash on hand at Berkshire has served as a financial safety net. Some people see unused cash as a missed investment opportunity, but Buffett values the power of liquidity.
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Buffett's company, Berkshire Hathaway, is known for holding billions of dollars in cash. This buffer allows the company to weather economic downturns, capitalize on new investment opportunities, and avoid going into debt. You can apply the same logic on a smaller scale.
How to build your own emergency fund
To work toward building your own cash pile, consider these steps:
Determine your goal amount
Most experts recommend saving enough cash to cover three to six months' worth of living expenses. Buffett's conservative approach suggests erring on the side of caution -- especially if your income is unpredictable or your expenses are high.
Pick the right account
Buffett's cash reserves are highly liquid, ensuring easy access when opportunities arise. For you, this means keeping emergency funds in a high-yield savings account (HYSA). Some HYSAs currently earn 4.00% or more on your savings -- that's nearly 10 times the national average rate of 0.41%. You can also access your cash whenever you need it.
Automate your savings
Setting up automatic transfers to your emergency fund can help you consistently grow your savings without having to think about it. Splitting a direct deposit or automating a weekly or monthly transfer between accounts easily accomplishes this.
Why a strong emergency fund is crucial
A well-funded emergency account can prevent financial disaster. It protects you from relying on high-interest credit cards or draining long-term investments to cover expenses like medical bills or car repairs. Buffett's strategy of ample cash reserves underscores the importance of financial flexibility.
Want to prioritize saving like Warren Buffett does? Check out our list of best high-yield savings accounts to get started now.
Building a sizable emergency fund may feel overwhelming, but starting small can make a big difference. Even setting aside $25 or $50 per week can grow into a substantial safety net over time.
By adopting Warren Buffett's cash-first mindset, you can build your financial foundation and position yourself to thrive during uncertain times.
Our Research Expert
Jake is a full-time Editorial Strategist for Motley Fool Money. He specializes in product ratings and all things credit cards, and wants to make sure each person has the best card for them.
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