Warren Buffett: How to Make Your First $1 Million

Warren Buffett is universally regarded as the greatest investor ever and has a net worth of over 100 billion dollars. However, this wasn't always the case. Buffett got his start at just 11 years old when he made his first investment, buying three shares of City Service preferred at 38 per share.

I know if you clicked on this video you want tangible steps on how you can build wealth towards your first, or maybe even your next, million dollars. In this video, we're going to talk about four lessons from Warren Buffett to help make sure you are on track to getting that first million. These lessons are from watching countless interviews of Buffett and reading pretty much everything he has ever written. All I ask in exchange is for you to hit that like button. Now let's jump into the video.

One of the most important lessons from studying Buffett is the importance of being what he refers to as a learning machine. Buffett has said that he has never seen anyone become extremely successful without always trying to better themselves and upgrade their skills and knowledge. And this isn't just learning for the sake of learning. The ultimate goal is to become one of the most skilled people in your given career. Because once you reach that level of talent in your chosen career, you can expect to see your earnings skyrocket. Since you can essentially charge whatever you want for your services, people will gladly pay it. If you are the best doctor, lawyer, plumber, real estate agent, or salesperson in your area, you can charge hundreds and maybe even thousands of dollars per hour depending on your profession, and your customers and clients will happily pay it.

Listen to Buffett's business partner, Charlie Munger, describe how being a learning machine has been the key to Buffett's success: "Without Warren Buffett being a learning machine, continuous learning machine, the record would have been absolutely impossible. The same is true at lower walks of life. I constantly see people rise in life who were not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up, and boy does that habit help particularly when you have a long run ahead of you."

Many people don't know this, but before Buffett was the world's most successful investor and CEO of one of the largest companies, he was an entrepreneur. As a kid and a teenager, Buffett was the master of side hustles before side hustles were even cool. When he was really young, he would buy a six-pack of Coca-Cola bottles and sell each bottle for a nickel, making about a penny on each bottle sold. He then upgraded to a pinball business. One of his most lucrative ideas involved setting up pinball machines in barber shops. As Buffett put it, he bought a pinball machine for 25 dollars in 1946 and built a small empire out of it.

Buffett's proposition to the owner of the barber shop was simple: "Let me put this pinball machine in your barbershop, and while people are waiting to get their hair cut, they can pay a nickel to play. Any money would be split between the owner of the barbershop and Buffett." This business was a hit from day one. The first night after he put the pinball machine in the barber shop, Buffett collected four dollars in nickels. After a week, Buffett had 25 dollars, enough money to buy another machine. Soon enough, Buffett had pinball machines operating in barber shops all over Washington D.C., where his family lived at the time. He then ended up selling the business, which he started with just 25 dollars, for 1,000 dollars a year later.

So while pinball machines may have gone out of style, the lesson from Buffett's entrepreneurial ventures as a kid and teenager is still as relevant as ever. Starting some type of business, even if it's not your full-time gig and only done on the side, can be extremely powerful to getting towards your first 1 million dollars. The math behind the statement is very compelling. Let me explain what I mean.

Let's say you are a teacher and make fifty thousand dollars a year at your day job. With this fifty thousand dollar salary, let's say you're able to save five thousand dollars a year after paying for all your living expenses. If you are able to have a business on the side making thirty thousand dollars a year, whether it is blogging, a landscaping company, or really anything, you are able to increase your yearly savings by a factor of seven. Let me explain how: your salary from your day job covers all of your expenses. This means that any additional income you have from your side business can all be used for savings and investing.

So now that five thousand dollars you used to be able to save each year gets an additional thirty thousand dollars added to it, meaning you can now save and invest thirty-five thousand dollars – seven times more than you could before you had your side hustle. This is going to help you build wealth significantly faster. It is much harder to hit that one million dollar goal without having what is referred to as compound interest work on your behalf. If you are only saving money and not investing it, it will take significantly longer to reach the one million dollar target.

Buffett frequently talks about when he learned about the magic of compound interest. It totally changed the way he thought about money and building wealth. In fact, compound interest is so important to the success of Warren Buffett that his official biography is titled "Snowball," because he compares compound interest to rolling a snowball down a hill. The snowball starts out small but picks up more and more snow as it rolls down the hill until at the end of the hill it is huge compared to the snowball that started at the top of the hill.

If you save 25,000 dollars a year, it will take you 40 years to save up 1 million if you just have that money sitting in a bank account and not earning interest. However, if you are able to invest that same 25,000 dollars a year in the stock market and earn a 10% return on that money, you will cross that one million dollar target in just 17 years – less than half the time it would have taken if you weren't investing. In this example, you would have only deposited 425,000 dollars and would have earned over 588,000 dollars in investment returns.

Look at this table of how much money you would have at the end of each year. Notice how at the end of year two, you would have earned twenty-five hundred dollars from your investment account, but at the end of year seventeen, you earned nearly ninety thousand dollars in investment returns that year. This is the power of compound interest Buffett is talking about. Once you understand this concept, you will no longer view that brand new car as only fifty thousand dollars. You will think about how the true cost of the new car is hundreds of thousands of dollars, and maybe even a million dollars of wealth you're missing out on due to not being able to benefit from the effect of compound interest on that fifty thousand dollars.

Just as the power of compound interest can work wonders for you in your investment account, it can also work against you if you aren't careful. As Buffett says, "Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn't pays it." People that have large amounts of high-interest debt are having compound interest work against them. This is why people in America have been paying on their student loans and credit card debt for years but still owe just as much, if not more, money than what they originally borrowed.

One of the biggest lessons from studying Buffett that you can apply to your own life is to make sure compound interest is working for you and not against you. In order to even have money to invest, you first have to be able to save money. Typically, the more people earn, the more money they spend. They upgrade their lifestyles with bigger homes, luxury cars, and better vacations. But Buffett takes a different approach. Despite being one of the world's wealthiest people, he lives a simple and modest life. Buffett currently resides in Omaha, Nebraska, in the home he purchased in 1958 for thirty-one thousand five hundred dollars, and he only earns a base salary of one hundred thousand dollars as chairman and CEO of Berkshire Hathaway.

The math is simple: the more you spend, the longer it will take to earn your first one million dollars. If you live simply and minimize expenses, there are opportunities to save, invest, and earn from compounding interest. One of the most important keys to building wealth is avoiding what is referred to as lifestyle inflation or lifestyle creep. Lifestyle inflation is where the more someone earns in their job, the more they tend to spend on living expenses. As they get paid more, people tend to get nicer cars, live in fancier apartments and houses, and go on fancier vacations.

Lifestyle inflation is like running on a treadmill; you are running faster by making more money, but you aren't going anywhere in terms of savings because your expenses are increasing just as fast as your income is growing. Take a look at this chart to show what I mean by lifestyle inflation. The blue line is someone's income, the orange line is their expenses, and the gray line is that person's savings, which is simply income minus expenses. Notice how in this example, as the person's income increases over time, so do their expenses. As a result, the amount of money that person saves each year stays pretty flat.

On the other hand, let's see how impactful avoiding lifestyle inflation can be when it comes to building wealth. In this new chart, the income is increasing at the same rate as before; however, this person is avoiding lifestyle inflation to the extreme and is able to keep their living expenses flat. Notice how dramatically the amount of money this person is able to save increases over time. There is no doubt that this person will be able to retire a multi-millionaire with that amount of money they are saving and investing.

Now you don't have to be this extreme, but in order to truly build wealth and hit that first million dollar target, you have to resist the urge to have your living expenses increase at the same rate your income grows. It's simple math: the bigger the difference between your income and your living expenses, the more you will be able to save and invest, and ultimately, the quicker you will be able to hit the goal of having your first million dollars.

So there we have it. Make sure to like this video and subscribe to the Investor Center if you aren't already, because it is my goal to make you a better investor and build wealth. As always, let me know your thoughts down in the comments below. Thanks for watching, and I'm looking forward to talking to you guys again soon.