7 Personal Finance Tips From Warren Buffett

Warren Buffett is generally considered to be the best long-term investor of all time, so it’s no wonder many people like to listen closely to Buffett’s words of wisdom, in order to apply them to their own lives. With that in mind, here are seven of the best personal finance lessons I’ve learned from Warren Buffett over the years.

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1. “Someone’s sitting in the shade today because someone planted a tree a long time ago”

The lesson here is to be a forward thinker when it comes to personal finance, whether you’re talking about investing, saving, or spending. When you’re deciding whether to put some more money aside for emergencies, think of a financial emergency actually happening and how much easier your life will be if you have enough money set aside.

Similarly, few people get rich quick by investing, and most people who try end up going broke. The most certain path to wealth (and the one Buffett took) is to build your portfolio one step at a time, and keep your focus on the long run.

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2. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”

In addition to this, one of my all-time favorite Warren Buffett quotes is “our favorite holding period is forever,” which is also one of the most misunderstood things he says. The point isn’t that Buffett only invests in stocks he’s going to buy and forget about — after all, Buffett’s company Berkshire Hathaway sells stocks regularly, and for a variety of reasons. Rather, what Buffett is saying is to invest in stable, established businesses that have durable competitive advantages. That is, approach your investments with the long term in mind, but keep an eye on them to make sure your original reasons for buying still apply.

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3. “Price is what you pay; value is what you get”

When you’re buying an investment (or anything else for that matter), the price you pay and the value you receive are often two very different things. In other words, you should buy a stock if you believe its share price is less than the intrinsic value of the business — not simply because you think the price is low.

For example, if a market correction hit tomorrow and a certain stock were to fall by 10% along with the overall market, would the business inherently be worth 10% less than it is today? Probably not. Similarly, if a stock rose rapidly, it wouldn’t necessarily mean that the value of the underlying business had risen as well. Be sure you consider value and price separately when making investing decisions.

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4. “Cash … is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent”

One of the reasons Berkshire Hathaway not only survives recessions and crashes, but tends to come out of them even better than it went in, is that Warren Buffett understands the value of keeping an “emergency fund.” In fact, when the market was crashing in 2008, Berkshire had enough cash on hand to make several lucrative investments, such as its purchase of Goldman Sachs warrants.

Granted, Berkshire Hathaway’s rainy-day fund is probably a bit bigger than yours; Buffett insists on keeping a minimum of $20 billion in cash at all times, and the current total is around $85 billion. However, the same applies to your own financial health. If you have a decent stockpile of cash on the sidelines, you’ll be much better equipped to deal with whatever financial challenges and opportunities life throws at you.

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5. “Risk comes from not knowing what you’re doing”

In Buffett’s mind, one of the best investments you can make is in yourself and the knowledge you have. This is why Buffett spends hours of every day reading, and has done so for most of his life. The better educated you are on a topic, whether it’s investing or anything else, the better equipped you’ll be to make wise decisions and avoid unnecessary risks. As Buffett’s partner Charlie Munger has advised: “Go to bed smarter than when you woke up.”

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6. Most people should avoid individual stocks

This may seem like strange advice coming from Warren Buffett, since he’s widely regarded as one of the best stock-pickers of all time.

However, Buffett has said on several occasions that the best investment for most people is a basic, low-cost S&P 500 index fund, like the one he is using in a bet to outperform a basket of hedge funds. The idea is that investing in the S&P 500 is simply a bet on American business as a whole, which is almost certain to be a winner over time.

To be clear, Buffett isn’t against buying individual stocks if you have the time, knowledge, and desire to do it right. He’s said that if you have six to eight hours per week to dedicate to investing, individual stocks can be a smart idea. If not, you should probably stick with low-cost index funds.

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7. Remember to give back

Warren Buffett is a co-founder of and participant in The Giving Pledge, which encourages billionaires to give their fortunes away. Buffett plans to give virtually all of his money to charity, and since he signed the pledge, he has given away billions of dollars’ worth of his Berkshire shares to benefit various charitable organizations.

Buffett once said, “If you’re in the luckiest one percent of humanity, you owe it to the rest of humanity to think about the other 99 percent.” And even if you’re not a member of the 1%, it’s still important to find ways to give back.

 

 

 

Written By: Matthew Frankel
Source: The Motley Fool

The Taxability of Oscars Gift Bags

The Associated Press: Nominees who don't want any negative tax consequences on their consolation prize can donate to a chosen charity in advance.
The Associated Press

When Oscar night arrives later this month, winners will take home bragging rights and the famous gold-plated statuette. For 21 of the nominees who don’t win, their consolation prize is a gift bag worth over six figures – along with an accompanying tax bill.

In recent years, the IRS has launched an outreach campaign to the entertainment industry about the taxability of gift bags and promotional items. That’s right: In the eyes of the IRS, so-called gift bags aren’t actually gifts because they’re given with the expectation of publicity or other benefits.

Celebs who take home lavish gift bags and freebies from appearing at awards shows and other gatherings are subject to taxes on the value of the items they receive. Similarly, the Super Bowl MVP who receives a vehicle each year also owes taxes on that vehicle (a precedent that goes back to the 1960s, when NFL Hall of Famer Paul Hornung argued unsuccessfully that his Corvette should not be taxable). Winning money or goods on a TV game show would also generate taxable income.

“One might think that it’s a gift out of generosity from all these [brands] providing these goodies in these gift bags, so I‘m sure a number of recipients are very surprised when they get a 1099 in the mail,” says Robert Charron, partner-in-charge of the tax department of accounting firm Friedman LLP.

“For any gift [from a business] that’s valued at $600 or more, you’re supposed to get a 1099-MISC,” says Len Hayduchok, president of advisory firm Dedicated Financial Services. “If you have a gift that’s valued at $100,000 and you’re in a 33 percent tax bracket, that’s costing you $33,000. If it’s worth $33,000 to you, then you’d keep it.”

Last year’s Oscar gift bag was the most valuable collection of items yet, with the contents valued at over $168,000, according to Vanity Fair and other media outlets. Stars received swag including a $20,000 astrology reading, $25,000 worth of custom furniture and a nine-night Italian vacation package valued at $11,500.

However, these gift bags and promotional items don’t generate self-employment tax, according to Tim Speiss, partner-in-charge of accounting firm EisnerAmper’s Personal Wealth Advisors Group. Self-employment tax is the portion of Social Security and Medicare deductions normally covered by the employer (12.4 and 2.9 percent, respectively) that self-employed peoplemust pay themselves in addition to regular income taxes.

Let’s assume that you’re a nominee and you’d rather not pay income taxes on items you don’t plan to use. “One thing that a person can do is refuse to accept it and therefore not be faced with paying taxes on some of the bizarre things that are in the bag,” Charron says. “There’s things in there that people may have very little interest in.”

Rather than refusing the bag, you could donate it to charity. George Clooney reportedly donated his 2006 Oscar gift bag to the United Way, and it sold at auction for $45,100. “Presuming that the charity is a proper exempt organization, they can get a tax deduction, and the deduction would be eligible against the value of the property received,” Speiss says. “Generally speaking, it’s a dollar-for-dollar write-off.”

However, the donation strategy isn’t foolproof either, because you’re generally limited to deducting donations of up to 50 percent of your adjusted gross income. And if you need to hire a professional appraiser to assess the value of the items, that cost is not tax-deductible.

Rather than accepting the bag and having it appraised, Charron says you could plan a donation to your chosen charity in advance. “If the person signs a proscribed form and assigns it to a recognized charity before they actually receive a bag, that will work to provide no negative tax consequences,” he says.

It gets messier when you want some – but not all – items from the bag. In that case, you might keep some items and sell or donate others. “If the net price you get from [selling] them is higher than your tax hit, then you’re ahead of the game,” Hayduchok says. “If you’re a celebrity and you get some stuff you don’t want, I would think some people might be willing to pay something for that on eBay.”

Stars who make millions on one film or endorsement deal may not flinch at paying a little extra in taxes, but it’s smart to consider the implications of supposed freebies and remember that the IRS may view these items as taxable income.

Copyright 2015 U.S. News & World Report

Written by Susan Johnston Taylor of U.S. News & World Report

(Source: U.S News & World Report)