In this year’s annual letter to its shareholders, Berkshire Hathaway CEO Warren Buffett had an eloquent yet simple perspective on looking at finances: “Focus on the forest, forget the trees.”
Too often, investors who evaluate Berkshire Hathaway obsess on the details of its numerous businesses, or its “trees.” Rather than assess each tree individually, though, Buffett suggests taking a step back to look at the larger picture, the “forest,” to get a better estimate of Berkshire’s value.
Buffett’s principles aren’t just limited to billion-dollar conglomerates. His advice can be applied to your personal finances and goals, too. Breaking up your finances into categories and remembering to look at the big picture makes analyzing your finances less daunting.
Divide Your Finances Into “Groves”
Take Buffett’s approach and divide your finances into “groves,” or sections of your financial forest. Assessing each grove on its own is easier than analyzing the entire forest and more accurate than zooming in on the individual trees.
Your groves might include:
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Cash flow from your business or job
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Major assets such as your house
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Liabilities, such as student loans or credit card debt
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Investments
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Risk management, such as insurance policies
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Estate planning for after you pass
Breaking up your finances into groves helps you see more clearly what you’re trying to achieve in each one. Then, you can assess how each grove fits together to create your forest. Here are some tips on caring for each grove so your financial forest can flourish.
Cover the Basics First
A healthy financial forest is built on a solid foundation: cleared land, tilled soil, and a plan for growth. These include the basics of cultivating your forest. First, work towards having a positive cash flow so that you can put money towards a rainy day fund. Your income should exceed your expenses so that you can set aside extra for emergencies. Prioritize paying off credit card debt, mortgage, or student loans. Budget enough to pay for life insurance and health insurance. Finally, in case the unexpected happens, make sure you have a will in place to determine where your assets will go. Of course, for many of you reading this, this may seem elementary, but you have to plant the seeds before the trees will grow, right?
Plan for the Future
To make sure your forest and groves flourish, it’s now time to go beyond saving for a rainy day or for that next vacation. Your future planning may vary, but consider having separate savings plans for:
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Emergencies
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Retirement
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Your child’s or grandchild’s education
You can also plan for the future by automating many of your regular tasks. Set up periodic transfers into your savings account, or automate bill payments so you don’t miss deadlines. Automating saves you time and effort, but it’s still a good idea to keep an eye on every grove in your forest.
Check Finances for Healthy Growth
Your groves will grow best when you check on them often and adjust as needed. Are you making progress on your goals? Is your cash flow positive and are you spending within your budget? How are your investments doing compared to the market? Do you need to tweak your financial goals for the following month?
Tend to Different Groves and Diversify
Your financial forest has a better chance of thriving if you have a coordinated approach to your wealth. To do so, you’ll need to buy assets (groves) that align with your goals and make sure that they fit within your larger picture/forest. Work with a financial planner to create a cohesive investing approach, especially if you are new to investing or are now managing more than you have in the past.
Remember that Buffett’s perspective about “the forest, not the trees” is meant to help you gain a bigger picture of your finances. Poring through your finances, identifying weaknesses, and setting goals can be much more effective when you consult a financial advisor who can help steer you in the right direction — and help you cultivate a financial forest that can protect and provide for you throughout your life.