No savings? I’m using the Warren Buffett method to build wealth from scratch

Legendary share market investing expert and owner of Berkshire Hathaway Warren BuffettLegendary share market investing expert and owner of Berkshire Hathaway Warren Buffett

Warren Buffett is one of the richest people on earth, commanding a net worth of nearly US$115 billion today, according to Forbes.

But that wasn’t always the case. Indeed, he famously amassed 99% of his wealth after his fiftieth birthday.

The billionaire behind Berkshire Hathaway made the most of his fortune by investing in the stock market – earning him the title ‘Oracle of Omaha’ and admiration from value investors everywhere.

That’s why I’d turn to Buffett wisdom if I had no savings and an ambition to build wealth.

First things first

If I had absolutely nothing in the bank and a desire to invest in the stock market, the first thing I’d do is assess my financial situation. That means making a budget.

From there, I’d commit to setting aside a certain amount each week or month, even if it doesn’t seem like much.

Initially, that cash would go towards paying off high-interest debt and building a safety net in case of emergency.

Only after that would I use my spare money to consistently invest in ASX shares capable of growing over the years and decades to come.

Warren Buffett looks to the horizon

You’ve likely heard the phrase ‘money doesn’t grow on trees’. Similarly, wealth is rarely built overnight.

It makes sense, then, that Buffett is famously a long-term investor. In fact, he’s held some of his best investments for two decades. He once said:

I buy on the assumption that they could close the market the next day and not reopen it for five years.

That means buying shares in companies you truly believe can outperform over the long term when they’re trading at attractive prices.

To follow in Buffett’s footsteps, I’d personally look for stocks that offer competitive advantages over their peers, boast a strong balance sheet, and have the potential to grow.

Diversification is key

But, since investing in just one such share brings some major risks, I’d also aim to build a portfolio of diverse ASX shares.

That way, if a single company or sector experiences a major downturn, it won’t drag my whole portfolio down with it.

It’s the same idea for the winners. By investing in a variety of shares, I stand more of a chance to find myself holding the market’s next big success story. As Buffett said earlier this year:

The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.

Finally, Warren Buffett takes advantage of compounding

Albert Einstein is widely quoted as having dubbed compound interest “the eighth wonder of the world” and Buffett has attributed his fortune, in part, to the phenomenon.

Compound interest (or compounding) is, to put it simply, realising gains on your gains.

By reinvesting your earnings – or dividends – back into the stock market, it’s possible to realise more returns without forking out additional cash.

It’s a powerful wealth-building tool that requires a decent degree of patience. Indeed, the final quote I’ll leave you with comes not from Buffett, but from Berkshire Hathaway vice chair Charlie Munger, who once said:

The first rule of compounding: Never interrupt it unnecessarily.

The post No savings? I’m using the Warren Buffett method to build wealth from scratch appeared first on The Motley Fool Australia.

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Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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