Warren Buffett’s $300,000 Haircut: Lessons In Making Smart Decisions And Patience

Legacy. Life. Lessons:? Navigating 50 Years of Experiences

Warren Buffett, the legendary investor and philanthropist, has long been an icon of financial wisdom dispensing savvy financial advice in homespun humor with powerful examples.? ?His remarkable wealth accumulation story is expressed in part by the "$300,000 Haircut" ?in his biography by Alice Schroeder.? ?Let’s explore some of his wisdom with his “haircut” story.

During the writing of his biography, it is mentioned that when pondering a financial decision ?Buffett was sometimes heard exclaiming loudly, “Why would I spend $300,000 for a haircut?”.? In an Inc. magazine article by Jeff Haden (September 2020), Haden dismisses this as just a metaphor, that really no one could save that much from such a small expenditure.? He does go on to explain how Buffet just meant to make prudent decisions, start early, and use the seemingly magical power of compounding. ??I don’t disagree with this; however, small spending choices can have an outsized effect over time and it shouldn’t be casually dismissed.? You too can save $300,000 from decisions the like the choice of a haircut!? Kind of hard to believe, right?? Let me show you how.

Small Financial Decisions Can Mean A Lot Over Time

Let’s say a rising young executive Justin, who is image-conscience, gets haircuts paying $120 ?(the average price for a man’s cut in NYC is $118).? He gets one every three weeks (17 times a year) so he spends? $2,040 per year (17 X $120) on cuts. ?His friend Aaron finds this too extravagant and gets a more modestly priced $60 cut, saving $1,020 (17 X $60) per year or $85 per month ($1,020/12).??? If Aaron saved and invested the $85 every month for 40 years (assuming a return of 8%/year (NASDAQ averaged 10.4%/year for the last 30 years), the magic of compounding could get him to $300,000!? ?If he placed the money in an IRA, saving an additional $25 a month in reduced income taxes, and saved the $25 tax savings every month, he could save $110 per month and reach almost $400,000 in the same time frame. ?If he had a spouse or significant other and they did the same, they might save almost $800,000!? Impressive. But there is more!

Compounding does a lot of heavy lifting in creating wealth via long-term investing.? If one could earn $300,000 by just shopping for a cheaper haircut, imagine what wealth could be created by looking for other areas of spending for savings.? Saving $220 per month instead of $110 per month might get you to $800k (above).? Saving $440 per month could get you to $1.6 million.? This is the power of compounding.? But how do you find more cash flow opportunities for savings?? One way is to follow Buffett’s lessons.?

As Jeff Haden, pointed out, Buffett’s wisdom using a haircut can just be considered a figure of speech but there are many straight-forward and achievable lessons to glean from the haircut tale.? Buffett’s wealth accumulation lessons are:

• Know what you earn and spend.?
• Make smart decisions….consistently.
• Small amounts can result in great wealth, compounding over time.
• Be patient.? Compounding rewards those who play the long game.

Would you list any other lesson you have learned in your life?? Once you start following these lessons, it might be easier to find more money and create additional wealth.? ??

Applying Buffett’s Wisdom

Know what you earn and spend.? It can seem daunting at first, but start looking at how much money comes in and goes out monthly. If there is no excess to save, you might look at how you spend.? Is that daily Starbucks latte worth it? Are you really watching all those cable channels?? You might review charge cards for what you spend monthly, seeing if some of the spending is wasted.? Maybe drop monthly news, sports, or magazine subscriptions, eat at home more often, cut down on credit card balances, or consolidate or refinance loans.? Just keep looking monthly and you might find a small amount or a lot. ?

However, even though he lives quite modestly for his wealth, Buffet does not say to just cut spending.? You want to enjoy life too, not punish yourself. Maybe there are ways to make more income.? This is part of making smarter decisions.? Put that bonus into savings.? When was the last time you asked for a raise?? Maybe it is time to look for another position that pays more?? Are you fully contributing to your company’s 401k? Employers normally match contributions. Save taxes and get free money!? If self-employed, maybe hire that needed employee or finally decide to expand the business.? Once you start to focus on this, you might surprise yourself.? A client? of mine saw she was not saving enough and found a job that paid $15,000 more per year.? She was determined to save this new-found money.? You can do this too!

Why People Make Poor Financial Choices Ignoring Compounding

Most have heard of or know something about compounding but don’t really believe it and so they end up not making financial decisions using it.? Are you paying extra amounts of principal every month on your mortgage?? Trying to pay down that car or student loan asap?? Not funding you 401k or IRA fully?? If you are doing of these things, you are one of these people making “anti-compounding” decisions preventing compounding from doing its magic.? I know because this was me many years before learning Buffett’s rules.

Maybe you are you thinking “I’m in my 50’s. It is too late for me for compounding to work”?? Hey, you might still have another 40 years or more to live.? Buffett, 93 years young, made most of his wealth since he turned 63, in the last 30 years via compounding.??? You still have time kiddo!

The Key To Making Savvy Wealth Decisions

The "$300,000 Haircut" serves not just as example of Warren Buffett's wisdom but as a symbol of the powerful impact of compound interest and the significant effects of making wise small (and sometimes larger) decisions consistently ….and having patience.? Buffett’s approach also teaches us that anyone, regardless of their income level, can achieve some or very significant wealth. You too can be Warren Buffett!? Let others ignore these ?lessons and ……well, let their wealth potential take a haircut!

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