If he picked up a penny on every elevator ride for a year he might collect 15

# If he picked up a penny on every elevator ride for a

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his Return on Investment averaged 36 percent per year. If he picked up a penny on every elevator ride for a year, he might collect \$15. At 36 percent compounded rate of return over forty years of investing, those pennies add up to over \$12 million. One of my good friends and fellow motivational speakers likes to tell audiences that it takes twenty doubles to turn \$1 into \$1 million. It takes ten doubles to go from \$1 to \$1,000, and then ten more to go from \$1,000 to \$1 million. The first ten steps are the hardest, because every time you get to \$1,000 you spend it on something like a new refrigerator and then have to start the doubling process over again. You begin again with \$1 and start doubling it … and ten doubles later you finally get to \$1,000. Now you’ve gone through the process of twenty doubles but instead of having \$1 million you’ve got \$1,000 and a refrigerator “worth” \$999,000. Probably the single best thing you can do for yourself financially is to become a penny-pinching miser while you’re learning to stockpile. The combination of savings and knowledge can make you much richer than you ever dreamed possible. It almost goes without saying that the first place to pinch pennies is our tax bill. The federal government not only has the largest ownership in the profits of our businesses, it’s also the largest expense in our personal budget. Anything we can do to legally reduce our tax burden can have a dramatic impact on our financial future. That brings us to the second key quality of a Berky—the money comes into the Berky before it gets taxed. CASH MOVES INTO THE BERKY BEFORE BEING TAXED (IDEALLY) Let’s say Mike is a stockpiler with an extra \$1,000 per year he wants to invest. First he has to pay taxes at 25 percent on the \$1,000, so his actual investment capital is \$750 per year posttax. He invests this \$750 once a year from the time he’s thirty years old. On average Mike holds every business he buys about ten years and makes a 15 percent compounded return and pays long-term capital gains taxes of 28 percent whenever he sells. (Yes, I know long-term capital gains taxes aren’t that
high now. But just wait.) If Mike keeps this up for forty years, he’ll have \$460,000 when he turns seventy (see graph below). Not too bad. Let’s say John does everything Mike does but does not pay the long- term capital gains taxes when he sells because he’s got his money in a gains-protected account (more on these below). When John is seventy he’ll have \$1,535,000. Nice. And let’s say Bill is also a stockpiler with an extra \$1,000 that he wants to invest every year, but Bill invests it pretax—that is, before the government gets to take its piece out of it. And when he sells off the portfolio every ten years, like John, he also doesn’t pay tax on the gains. When Bill turns seventy, he will have \$2,046,000. Very nice. Taxation will hurt you. How much it hurts you depends on how well you use the tax-deferral opportunities set up by Congress.

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• Spring '20
• Warren Buffett

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