The Biggest Mistake of the Big Spenders

In order to learn how to become well off and stay that way it’s important to learn from other people’s mistakes. Here are several examples of how some rich people are risking the status that they worked very hard to achieve:

– Based on court documents that were released recently, it was revealed that Britney Spears doesn’t save any of her $730,000+ monthly income.

– The New York Post reported that the famous photographer Annie Leibovitz managed to accumulate $715,000 in debt, although she has a $2 million a year contract with the magazine Vanity Fair.

– The wrestler turned reality TV celebrity Hulk Hogan is said to spend almost twice his monthly salary of $57,000.

– Dustin Diamond, known to many of us as Screech from the TV show “Saved by the Bell” faced home foreclosure in 2006 although he still received royalties from the show’s reruns.

РThe recent celebrities to have their own housing problems include: Ed McMahon, Evander Holyfield, Jose Cans̩co, and Aretha Franklin.

All of these famous people, and many other not-so-famous but still rich people, are facing financial troubles because they spent more money than they’ve earned. This sounds like a no-brainer, but most people just spend and spend instead of examining their full financial situation. Even rich people need a budget.

Once you save more than you spend, you will become richer if you invest your money regularly, and the sooner you start the better. Investing can involve hiring a broker, financial advisor, real estate guru, etc’ but it’s equallly important for you to learn about how investing works and not just trusting others to make you rich. More on this in a future post.

How Can Warren Buffett Keep Getting Richer?

The world’s richest man, Warren Buffett, is also the most famous stock investor. During the latest financial crisis, and previous ones, he hasn’t panicked but actually did the reverse. He invested big and for the long term.

Buffett’s company, Berkshire Hathaway, is a far-reaching worldwide empire that owns businesses in diverse industries from insurance to furniture, jewelry to candy and Dairy Queen ice cream shops. Starting from 2004 onwards, Berkshire Hathaway had approximately $44 billion in cash. For those 4 years, Buffett decided to sit on this enormous amount of cash and wait for the right opportunities to come along.

Well, the best opportunity is the current economic meltdown.

Buffett termed the current crisis an “economic Pearl Harbor”. He also stated, “In my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are now.” Although arguably true, this is not to say that Buffett was entirely pessimistic.

Earlier this year, Buffett invested $6.5 billion into the candy company MARS in order to acquire the gum company Wrigley, among other deals. Since the latest crisis, Buffett invested in the following:

– $4.7 billion to acquire Constellation Energy, an electricity and natural gas distributor.
– $5 billion stake in Goldman Sachs’ preferred stocks.
– $3 billion stake in General Electric in preferred stocks.

When Buffett made the above investment deals, he was offering much more than straight capital. He was also lending his credibility, which means that Goldman and General Electric were willing to grant him great deals based on the hope that his name alone would stabilize their stock prices for the foreseeable future.

It’s important to keep in mind, however, that Buffett got sweetheart deals which are likely to provide substantial returns on his investments, but other investors cannot get. Instead of buying what Warren Buffet is purchasing these days, it’s better to learn from his overall strategy:

– Assemble a list of attractive businesses
– Invest for life

Buffett hasn’t freaked out during these turbulent financial times, and he hasn’t attempted to make a quick buck. Instead, he is investing for the long term. This is the same strategy that he consistently followed for decades. Wait for the opportunities and strike hard when the iron is hot. When the opportunity is right, the negotiation is much easier and he can get a share of the companies, or the entire companies, at a great price.

As Buffett did, it’s essential to conduct a complete market/company research before the opportunity appears. This is important in order to remove the emotional aspect of investing. Therefore, compile a list of companies that you wish to own for the long term, combined with the prices you wish to pay for them. Regularly check the market value of these firms and whether the business environment has changed since you first added them to your list. Then make your move and keep these stocks for the long term.