Warren Buffett is one of the wealthiest individuals in the United States. He is well known as a legendary investor. However, what Buffett really excels at is operating a business. He is excellent at finding value in various enterprises and the people that run them. Most middle-class Americans probably assume they have little in common with Buffett. They likely believe that how Buffett runs his company, Berkshire Hathaway, has little application to their own lives. However, what if I told you this is wrong? What if I told you that the differences are small once a person scales down Berkshire’s large financial numbers? You don’t have to lead a massive corporation to be considered a Chief Executive Officer (CEO). If you’re the head of a household, congratulations, you’re a CEO. Let’s dive into why your household is like a business and why you should run it as such.
The Basics of Business
Warren Buffett doesn’t just invest. He runs a business that integrates investing into its daily operations. However, before he, or any other business leader, can begin to think about investing, they must first build a solid financial foundation by doing the following:
- Choose partners and employees with similar goals and beliefs
- Generate strong and, hopefully, diverse revenue streams
- Maintain accurate financial records
- Manage risk appropriately
Choose the Correct Business Partner
Through the years, Warren Buffett has made it abundantly clear that he cherishes one attribute in his business partners above all else: integrity. While at the 2005 Berkshire shareholder’s meeting, Buffett emphasized what he looks for in a business partner. He said, “We’re looking for intelligence. We’re looking for energy. And we’re looking for integrity. And we tell them (students), if they (a potential business partner or employee) don’t have the last, the first two will kill you.” Buffett thinks someone’s integrity should be the most important criteria when deciding to do business with them. Intelligence and energy are important, but, without integrity, those attributes can cause harm.
When applied to a household, this can only mean one thing: the person you decide to partner with must have integrity. Moreover, finding someone with the additional attributes of intelligence and energy is even better. This idea may not be the most romantic sentiment in the world, but when you’re deciding on who you’ll partner with (in whatever capacity that looks like), you must meet practical considerations. You may have a great emotional connection with someone, but, if you can’t trust them, consider starting your household partnership with someone else.
Generate Strong and Diverse Revenue
Berkshire Hathaway is a conglomerate with multiple revenue sources. To name a few, the company operates businesses in rail transportation, insurance, energy distribution, manufacturing, and retailing. Those same businesses also consistently generate strong profits and cash flow. Buffett and his partners are smart about which businesses (revenue sources) they either start or acquire. Once you realize your household is a business, you’ll look to do something similar.
Most people need training (i.e. – college, technical school, etc.) before they can generate revenue. If you choose to train in an expensive field without considering the prospects for future revenue, your household business may underperform. Your decision on training should include your expected return on investment (ROI) after completion. Degrees don’t generate revenue, but skills do. In addition, a smart household CEO will always be looking for ways to diversify revenue streams. This could be a part-time job, a dual-income household, or a small-business on-the-side. Revenue coming from more than one source will always enhance the financial stability of a firm.
Maintain Accurate Financial Records
All successful businesses maintain complete and accurate accounting records. Business management decisions would be quite difficult without a budget, income statement, and balance sheet. As a public company, Buffett must ensure that Berkshire Hathaway maintains financial records in accordance with the generally-accepted accounting principles (GAAP) in the United States. However, Buffett takes the accuracy of such reports very seriously.
In his 2024 chairman’s letter to shareholders, Buffett said, “In addition to the mandated data, we believe we owe you additional commentary about what you own and how we think. Our goal is to communicate with you in a manner that we would wish you to use if our positions were reversed – that is, if you were Berkshire’s CEO while I and my family were passive investors, trusting you with our savings.” Buffett requires his company to maintain financial statements and documentation that transparently communicate the firm’s position to both owners and operators, going beyond what is merely required.
As both the owner and operator of your household business, you should maintain the following accounting records:
- An annual budget that projects the day-to-day expenses you expect to incur over the year.
- A budget for capital expenditures that develops a plan to pay for long-term assets like cars or a house.
- An income statement that tracks the realized revenue and expenses of your household.
- A balance sheet that tracks your net worth over time and visibly lays out what your assets and liabilities are.
Keeping financial records is essential when constantly making household decisions. Just as a pilot needs gauges to fly a plane, your household needs clear financial tracking. This helps you identify unnecessary spending, plan for future needs, and make informed decisions about investing in long-term assets. Without proper financial oversight, any business, including your household, risks failure.
Manage Risk Appropriately
While the components mentioned above are important when running a business, one of the primary reasons why Warren Buffett is a household name may be his ability to manage risk. In his 2008 chairman’s letter to shareholders, Buffett said, “I have pledged – to you, the rating agencies and myself – to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.” Buffett has his priorities straight. A business cannot prosper if it does not survive and it cannot survive without managing its risk.
Buffett and Berkshire mostly manage risk by maintaining an ample supply of cash. Figure 1 below shows the number of months in operating expenses Berkshire has held in cash by year from 2000 through 2024.
The media often highlights Berkshire’s cash reserves, but a closer look reveals a more interesting story. Over the past 25 years, Berkshire has always kept at least six months of operating expenses in cash as, essentially, an emergency fund. When Berkshire’s investment opportunities are scarce, cash levels rise, but they never fall below the six-month threshold. Your household business should do something similar. Maintain a safe emergency fund so you never need to count on, as Buffett said, “the kindness of strangers.”
In addition to a healthy emergency fund, any sound business should also carry necessary insurance to manage risk. This can include insurance for health, disability, life, homeowners, car, umbrella, and anything else to hedge the unique risks of your household. A reasonable emergency fund and necessary insurance will help you survive difficult times and allow you to prosper in times of growth.
Invest and Grow Your Wealth
Once your household masters the basics of business, investing becomes an option. Remember, however, that how you invest is up to you. Many individual investors have asked Buffett for investing tips over the years. Although you can learn a lot by how Buffett runs a business, how he invests is mostly irrelevant to you. Buffett’s oft-cited portfolio recommendation of 90% in the S&P 500 and 10% in short-term treasury bills may be a suitable option for you. However, it might also be disastrous.
Once your household business is generating a profit, you’ll need to learn how to wisely invest the proceeds. You can start by learning what it means to “invest quietly.”1 Next, learning who you are as an investor is very important. The best way to find your investing path is to consider many opinions.2 Yes, you can consider Buffett’s opinion, but you should also examine many other viewpoints to determine what is best for you.
Your Household is a Business
In conclusion, running your household like a business is a powerful way to build long-term wealth and financial security. By adopting the same principles that have made successful business leaders like Warren Buffett thrive—such as partnering wisely, diversifying revenue, keeping accurate financial records, managing risk, and investing thoughtfully—you can lay the foundation for a prosperous future. The key is to treat your household as a dynamic entity that requires careful planning, decision-making, and continuous improvement. By doing so, you not only ensure financial stability for yourself and your family but also set the stage for growth and wealth accumulation over time. Treat your household like the business it is, and you’ll be better equipped to navigate life’s financial challenges while capitalizing on opportunities to build lasting wealth.
Thanks for reading.
1 Invest Quietly: How to Build Wealth Without the Noise
2 Investing Education and Opinions
Data Sources for:
Warren Buffett’s 2008 & 2024 Letters to Shareholders: Berkshire Hathaway
Berkshire’s 2005 Annual Shareholder’s Meeting: CNBC’s Warren Buffett Archive