Here are some solid words of wisdom on generating wealth and being generous with it as well.
You may be looking for an edge in your personal finances -- something that can help you rethink your approach to money and start getting ahead financially. If so, you might benefit from hearing what billionaires have to say and learning from their experiences. So, here are a few lessons on frugality, investing, and generosity from some of the wealthiest people in the world.
1. Live simply and be frugal
Most people don't associate billionaires with penny-pinching, but that's how famed investor and billionaire Warren Buffett approaches his personal finances. Buffet bought a relatively modest house back in 1958 for just $31,000, which was around $275,000 in today's dollars, and he continues to live in it to this day. For context, the median home price in July of this year was $313,700.
Buffett has summarized his views on success and happiness like this:
Success is really doing what you love and doing it well. It's as simple as that. Really getting to do what you love to do every day -- that's really the ultimate luxury ... your standard of living is not equal to your cost of living.
Buffett also holds on to his vehicles for a long time, as does Wal-Mart founder Sam Walton. And IKEA founder and billionaire Ingvar Kamprad once shared why having lots of money doesn't mean you should indulge yourself to no end:
I'm a bit tight with money, but so what? I look at the money I'm about to spend on myself and ask myself if IKEA's customers can afford it.... I could regularly travel first class, but having money in abundance doesn't seem like a good reason to waste it.
2. Have a long-term investing strategy
There's no better way to build up your wealth than let your money earn even more money for you by investing in stocks or index funds. John Bogle, the founder of The Vanguard Group and the creator of index mutual funds, says many things will try to distract you from your long-term goals, but you have to stay the course: "Do not let false hope, fear and greed crowd out good investment judgment. If you focus on the long term and stick with your plan, success should be yours."
Bogle's words aren't puffery, either. The index funds offered by his company are some of the easiest ways to build long-term wealth because of their historic 10% annual returns and low expense ratios.
3. Be generous
Microsoft founder and billionaire Bill Gates is well known for his philanthropic work, and his views on being generous can inspire all of us to support causes we believe in, no matter what our income levels.
"My wife and I had a long dialogue about how we were going to take the wealth that we're lucky enough to have and give it back in a way that's most impactful to the world," Gates told The Telegraph three years ago.
When it comes to his fortune, Gates has said, "Its utility is entirely in building an organization and getting the resources out to the poorest in the world."
The good news is that the United States is already one of the most generous countries in the world, according to the Charities Aid Foundation World Giving Index report from last year. And according to Giving USA's annual report about philanthropy in America, individual charitable donations increased last year by 2.6% (adjusted for inflation) to $281.8 billion.
4. Pay down your debt, especially credit cards
Before he became a billionaire, the outspoken owner of the Dallas Mavericks, Mark Cuban, said there was one thing he wishes he had known about personal finance when he was in his 20s:
That credit card is the worst investment that you can make. That the money I save on interest by not having debt is better than any return I could possibly get by investing that money in the stock market. I thought I would be a stock market genius. Until I wasn't. I should have paid off my cards every 30 days.
Unfortunately, Americans are racking up more debt than ever before. The Federal Reserve says that Americans now have over $1 trillion in outstanding revolving credit, which tops the previous record set back in April 2008.
Be smart with your money
It's easy to skim through a list like this and assume that just because the people mentioned above are billionaires, their ideas aren't applicable to our own personal finances. But these simple, straightforward approaches to spending, investing, and giving are all practical ideas that any of us can put to use now.
There are many factors to consider when you start investing – such as what to invest in and how much it will cost. But what many people might not realize is that one of the most important considerations is your age.
How old you are determines how long you have to invest, and that can help decide how much investment risk you should take.
Ryan Hughes of pension provider AJ Bell says: ‘The rule of thumb is that the longer timeframe you have the more risk you can afford to take.
‘But, of course, you should never take more risk than you are comfortable with. There is no point investing in a way that will give you sleepless nights.’
Beginning as young as possible can give you a head start. For many people, the investment journey may begin as a child. Parents and grandparents can squirrel away up to £4,128 a year tax-free for children through a Junior Isa.
Not only will starting early give the investment pot longer to grow, it can also get youngsters into a good savings habit for later life. Grandparents who invest £50 a month into a Junior Isa from a child’s birth could see the investment grow to more than £17,500 by age 18 if it grew at 5 per cent a year.
The younger you are, the more risk you can afford to take – for if there is a stock market crash there is more time for your money to recover.
Hughes says of savers starting in their 20s: ‘Investing for retirement could involve someone investing for 40 years, so higher-risk investments such as emerging markets and technology stocks could be appropriate.’
He suggests Fidelity Index World as a core investment choice for a young person’s portfolio. The fund is a cheap way to invest in stock markets worldwide and has returned 47 per cent over the past three years.
He also likes fund Invesco Perpetual Asian which focuses on companies based in China, South Korea and Hong Kong, such as electronics firm Samsung and internet specialist Baidu. It has returned 68 per cent over three years.
A racier choice is Polar Capital Technology fund, which aims to tap into key technology trends. It invests in internet giants such as Amazon and Facebook, plus lesser-known outfits with growth potential such as semiconductor maker Advanced Micro Devices.
The fund has returned 100 per cent over three years.
Rob Morgan, investment analyst at Charles Stanley, likes Franklin UK Smaller Companies fund. He says: ‘Investors sometimes overlook smaller companies. But they tend to be more dynamic and quick to react to growth opportunities.’
The fund, which has returned 45 per cent over three years, aims to find fast-growing companies.
The manager likes software companies and support services firms such as Clipper Logistics and shipping company Clarkson.
Mid-life Money Management
When you reach your 40s, it is time to start taking a more conservative approach.
As you get closer to retirement you may want to start being more cautious and reducing the proportion of your portfolio which is equity-based.
Michael Martin of investment house Seven Investment Management likes Troy Trojan fund as an ‘all-weather option’.
The fund, which has returned 22 per cent over three years, invests in a mix of company shares, government bonds and gold. This should mean the fund offers steady growth regardless of what the economy is doing.
He also likes Fundsmith Equity fund, run by veteran City investor Terry Smith. His strategy is to invest in companies which are so successful you never need to sell the shares.
The fund favors firms with strong brands such as Pepsico and Microsoft – with two-thirds of its money in US firms. It has returned 87 per cent in the past three years.
Another favorite is Lindsell Train Global Equity fund which invests in ‘boring’ firms renowned for paying a good income.
An increasing number of people keep their money invested even after they stop working. But investment choices should be cautious and focus on paying an income. Hughes says: ‘Generating income is vital. A good quality equity income fund can fulfill this purpose.
He likes Evenlode Income fund, which currently yields 3.4 per cent. The fund invests in firms such as Johnson & Johnson and AstraZeneca, which consistently grow their dividends.
Another favorite is Newton Global Income which invests in dividend-paying firm across the globe. It has a focus on larger businesses such as Microsoft and Unilever and currently yields 3.2 per cent.
A fixed income fund is a sensible choice for income. These invest in government and company bonds. Henderson Fixed Interest Monthly Income invests in the debt of companies including Barclays and Nationwide Building Society.
One-Stop Shop Choices
For many investors, the idea of picking their own investment funds can be daunting. There are now some 2,500 funds available through fund supermarkets such as Fidelity and Hargreaves Lansdown.
Deciding which ones are right can prove challenging. Multi-asset funds are a good one-stop solution.
Charles Stanley’s Morgan says: ‘Multi-asset funds invest across different areas, mixing shares and bonds as well as alternative assets such as property. The result is a diverse portfolio in a single fund, which is helpful for those looking for a low-maintenance investment choice.’
He likes Investec Diversified Income fund as an ‘uncomplicated, conservatively-run’ choice.
Another strategy is to pick a multi-manager fund. These invest in other funds using their expertise to find the best mixture of fund managers to generate returns.
Seven’s Martin likes Jupiter Merlin Balanced which invests in funds such as Woodford Equity Income and Fundsmith Equity.
The S&P 500 didn't gain ground in 2015, so neither did retiree Bruce Stanton's spending money. That summer, the former teacher in Washougal, Wash., dialed back what he withdrew from his retirement account to reflect the lackluster market. Fluctuations in income aren't that rare. During his career as a chemistry teacher, Stanton would sometimes get a big raise and other times get none. "I'm used to going without them," says Stanton, 63.
A challenge for all retirees is creating an income stream that will last a lifetime even if a downturn takes a big bite out of their savings. Some, like Stanton, are tackling this by adjusting withdrawals based on the market's performance.
But market-linked approaches run counter to the long-standing 4% rule, which holds that your money will last for a 30-year retirement if you withdraw 4% of your nest egg the first year and adjust that dollar amount annually for inflation.
Some experts are now arguing for a lower initial rate—such as 3%—since stocks and bonds may deliver below-average returns over the next few decades. Yet for much of history, 4% has been conservative, according to financial adviser Michael Kitces.
So what's a retiree to do? As an alternative to withdrawing a fixed percentage, here's a look at four "dynamic" withdrawal strategies.
Skip rises in down years.
Under the 4% rule, retirees with $1 million would take out $40,000 in the first year. Then they'd typically boost that dollar amount in subsequent years based on the consumer price index (CPI), a common gauge of inflation. So if CPI rises 2%, they'd take out $40,800 in year two.
But to play it safer, you could choose to skip those raises in years following negative returns for your portfolio.
David Blanchett, Morningstar's head of retirement research, says if you skip the inflation bump in down years, the chances your money will last until age 90 will go up by nearly 11 percentage points, assuming an initial 4% withdrawal.
Ratchet higher in up years.
What if you care about flexibility, but instead of sacrificing after down years, you want to reap the rewards of a strong market?
Kitces says if your account ever grows 50% above its starting value after initiating withdrawals—says you retired with $1 million but your balance rises to $1.5 million—you can go ahead and boost your withdrawals by an additional 10% above any inflation adjustments in perpetuity. Assuming you were going to withdraw $45,000 this year, you'd actually be able to tap as much as $49,500. And you wouldn't have to slash withdrawals after subsequent downturns.
According to Kitces, this strategy won't deplete your account under any scenario. The higher spending, though, makes this less than ideal if you want to leave legacies to your heirs.
Set a floor and a ceiling.
This hybrid approach, pioneered by Vanguard, starts out by establishing an annual rate of withdrawals—say, 4%. Then you set a ceiling that's no more than 5% higher than the prior year's income level, and a floor that's no more than 2.5% lower.
Here's how that would work: Assume you start with $1 million, and say you plan to withdraw 4%, or $40,000, at year's end. But market forces boost the value of your nest egg by 20% to $1.2 million. How much would you be able to tap at the end of year two? Well, you'd start by applying that 4% rate again to your new balance, which comes to $48,000. Then you'd see if that amount falls within your ceiling and floor. In this case, a 5% ceiling on $40,000 would be $42,000, which is below the $48,000 mark—so you'd go with the lower figure.
This ceiling-and-floor approach had a 92% success rate, meaning in more than nine out of 10 possible scenarios, retirement funds aren't depleted even after 35 years, according to Vanguard. By contrast, the traditional 4% rule with annual inflation adjustments resulted in a 78% success rate.
This also mimics human behavior: People tend to splurge when the market is up, and dial back when it's down, says Francis Kinniry, a principal in Vanguard Investment Strategy Group.
Use RMDs as your guide.
Once you reach age 70½, you have to take required minimum distributions (RMDs) from your traditional IRAs. Its Uncle Sam's way of getting his hands on money that's been tax sheltered for years.
To calculate your RMD, you divide your IRA balance by an IRS-provided figure that represents an actuarial estimate of the remaining life span of someone your age. At 70, your denominator is 27.4; meaning that under certain circumstances someone your age may live until nearly 97½.
As it happens, you can "take advantage of the actuarial strategy behind RMDs to guide your spending," says Wade Pfau, professor of retirement income at the American College of Financial Services. No one under 70½ must take RMDs, but there are equivalent lifetime expectancy figures. For a 65 year old, it's 31.9.
If you retire at 65, you'd divide your nest egg by 31.9. With a $1 million account, that's $31,350, meaning rather than tapping 4% of your nest egg, you'd be taking 3.1%, a relatively conservative approach.
Investors who aren't looking to leave a lot in their accounts for heirs might alter the formula slightly to boost their income.
For instance, you might modify your RMD amount by a factor of 1.1. Here, you'd multiply that $31,350 figure by 1.1, and at 65 you could withdraw close to $34,500 on that $1 million account.