“Take the job that you would take if you were independently wealthy.”
—Warren Buffett, Speech at the University of Florida, 1998
In the back half of the last chapter we discussed putting together your resume, which is sort of like a big business card related to your career. In this chapter we'll focus exclusively on other career-related issues, calling on Buffett when appropriate. Buffett has not only had a stellar career, but he's also hired and mentored scores of people. And, like most people, he's also dealt with his fair share of rejection and hardships. We'll get to those stories as the chapter unfolds. Let's get started.
LinkedIn, now owned by Microsoft, is the largest job-oriented social media website in the world. They have more than a half billion users. After joining the website, assuming you are age 13 or older, you typically start out by filling out a profile. As with your resume, there are sections for education, work experience, skills, and other items. You can post comments or provide links to articles, like you can do with Facebook and other social media websites. Some people will even write testimonials on your LinkedIn site, saying what a talented person you are or endorse some of your awesome skills. Most people include a picture of themselves in their LinkedIn profile. In America, it's rare to include a personal photo on your resume, but it's common in Europe and many other regions.
Many people use LinkedIn to “stalk” the employer they are interested in and the people they may be interviewing with. The type of “stalking” we refer to won't put you in jail. It means checking out the firm and some of their people. It's likely a good practice in preparing for the interview, but you may not want to refer to it explicitly during the interview to avoid freaking someone out. On the topic of “stalking,” some employers will examine your own social media accounts, such as Facebook, Instagram, and so forth, and google you as well. In fact, some companies use artificial intelligence software to scope you out. The stuff you post online or text to someone is there forever (often even after you hit the delete key), so keep it clean!
Buffett has a good piece of advice on personal conduct that he communicates to all of his employees and to the students who have visited him over the years. In 1991 he reluctantly became chairman of Salomon Brothers, a Wall Street firm where he had a sizeable ownership stake, after the firm got into some serious regulatory trouble that we'll expand upon in the next chapter. In a speech to a subcommittee of the House of Representatives that was investigating Salomon Brothers, he said, “After they first obey all rules, I then want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter.”
We'll use part of the quote—about your actions appearing on the front page of your local paper—in a Tip. We guess the modern-day equivalent of your local paper would be Facebook, Instagram, Snap, TikTok, and now LinkedIn.
Getting back to LinkedIn, sometimes there are comments about a firm (e.g., culture, dress code, interview questions) on its LinkedIn page and some related news articles or job openings. If you have more than one page of good stuff to fit on your resume, then including a link to your LinkedIn profile might be a smart move, since there is no formal space constraint.
There is no one single best way to get a full-time job, other than the point we mentioned last chapter. That is, getting an internship is the best path to landing a full-time job, especially at the entry level. What's the best way to get an internship? The most common ways for getting entry-level or internship positions include hearing about it through family/friends or by applying through the career services department. Most colleges have a career services department, which acts as the matchmaker between employers and students. They also often provide other services such as helping you prepare your resume and with practice, or mock, interviews.
Websites such as LinkedIn, Monster.com (not the energy drink), and Craigslist often list jobs. A company's own website may also be a good source for finding out about its open jobs. Your network consists of not only family and friends, but also the alumni of the school that you attend(ed). One advantage of attending a top-ranked college is their alumni probably populate many of the leading companies in the world. People tend to have greater familiarity and comfort with someone who went to the same school as themselves and are more likely to hire from there, rightly or wrongly. The reasons may be as innocuous as an alumnus asking a former professor for some good students.
Of course, you may make friends naturally through your classes and on- or off-campus living situations, but another effective way to meet people who may ultimately be useful for your job search is through school activities. These activities may relate to a club, community service group, fraternity, sorority, and countless other things as well. When companies recruit on campus, they often send recent alumni to do the recruiting. Going back to Pat's search for a job in investment banking, senior members of the economics/finance clubs at Pat's college (Princeton) might be the ones doing the recruiting in a few years. Therefore, strong relationships with the leaders of student clubs may be extremely useful down the road. The same goes with relationships with your professors since they may also act as job referral sources, write you recommendations for graduate school at some point in the future, or act as a job reference.
Creating your own job by starting your own company, being an entrepreneur, is also a good path for many self-starters. Buffett started his own long-term business, an investment management firm, after working for his father and then his mentor (Benjamin Graham) for a handful of years. Of course, he had a bunch of side businesses growing up, as we have mentioned a few times throughout this book. Certain colleges, such as Stanford University in Silicon Valley and Babson College and Northeastern University in the Boston area, are well known, in part, for their entrepreneurial students. Students starting their own businesses coming from these schools, and those with similar reputations for creating new businesses, are more likely to receive funding than an entrepreneur from the proverbial Podunk University. Many businesses require external funding if they are going to become meaningful in size (think about creating a Home Depot competitor from scratch), so the odds are stacked against the Podunk entrepreneur versus the Stanford one.
Lastly, sending blind emails or dialing someone whom you don't know (i.e., cold calling) are largely ineffective ways of getting a job, but it has been done with some success before, sort of like a “Hail Mary” pass in football. If you throw hundreds of passes, you may benefit from a few lucky catches. In short, you should view the process of getting a job as a job and of greater importance than any other class that you may take. After all, we're talking about your career, which Buffett ranks as one of the two most important decisions of your life.
If you get an interview, take it very seriously since it means the employer views you as being qualified for the job. Then it often comes down to fit. So if you are bummed out about your 3.5 GPA when other candidates have a 4.0 GPA, get over it. Would you prefer working all day with a person you like or with a jerk or boring person, even if they had strong skills? Of course, there are many great people who did achieve the magic 4.0 GPA number, but our point is leave your GPA at the door in interview situations. And once you start working, no one will ask you about your GPA or SAT/ACT scores; they just want you to work hard, do a good job, and be a nice, thoughtful colleague.
Buffett has weighed in on the topic of the kind of people he likes to work with and hire. We'll include one Tip on his thoughts now and one later in the chapter. In his 1986 Letter to Berkshire Hathaway shareholders, he wrote:
We intend to continue our practice of working only with people whom we like and admire. This policy not only maximizes our chances for good results, it also ensures us an extraordinarily good time. On the other hand, working with people who cause your stomach to churn seems much like marrying for money—probably a bad idea under any circumstances, but absolute madness if you are already rich.
Buffett wanted to work for Graham, whom he greatly admired, right after he graduated from Columbia in 1951. Graham at first said no, but Buffett kept in communication with him, often sending his former professor investment ideas. Eventually, Buffett was hired by Graham and worked for him in New York City for a few years until Graham decided to retire from the investment business. Buffett thoroughly enjoyed his time working for Graham and learned a ton. Basically, his experience working for Graham epitomized Tip 89.
If you want to do well on a test, you usually have to study for it. Similarly, detailed preparation is often required if you want to give yourself the best chance of getting a job. So before you have your interview(s), read up on the history of the organization and its main products or services. You can often find this information on the company's website, in its annual report, on its LinkedIn website, or on its Wikipedia page. You should also know the name of the company's chief executive officer (CEO) and some of its other top executives. If the company is publicly traded, we also suggest that you know the firm's stock price, stock symbol, market cap, sales, profits, and key competitors. These bits of information will help you answer the common interview question, “Tell me about the firm and why you want to work with us?”
Speaking of questions, if you receive the questions in advance of an exam, you could get expelled for cheating. But, in an interview session, you can often predict a bunch of the questions you'll be asked. Most interviewers aren't terribly imaginative, and they are probably interested in the response to standard questions, such as “Tell me about yourself” “What are your greatest strengths and weaknesses?” “Why did you choose your college?” “Why did you select your major course(s) of study?”
You really want to nail these sorts of questions that you know you're likely to get. You can nail them by practicing and being truthful in your response. If you tell them what you think they want to hear, rather than speaking the truth, you might not come off as genuine. And then your job prospects with that firm are probably over. For example, if you get the common interview question, “What is your greatest weakness?” and you give them a bogus response such as “I work too hard” or “I'm a perfectionist” (i.e., a strength positioned as a weakness) you'll probably lose credibility with the interviewer. Rather, tell them a truth about your weakness (e.g., I'm not the most organized) but say what you are doing to fix it (e.g., working on a new system) or how you have improved.
For a legal cheat sheet of interview questions, search the Internet for a “list of the most common interview questions.” You’ll find there is a ton of stuff out there. Vault.com has a bunch of career guides by discipline, such as investment banking, consulting, marketing, nonprofits, and so forth. Wall Street Oasis is a popular message board for finance-oriented jobs. Glassdoor.com also sometimes lists interview questions for specific firms. More on Glassdoor in a minute. If you have a friend or alumnus of your school working at the place you are interviewing, that person might be your best bet for candid and specific advice. This might be a good reason to “stalk” someone on LinkedIn, emailing something to the effect of, “Hi, I'm Pat Jones, a student at Princeton, and I have an interview at your firm next week. Can you please spare a few minutes of your time to speak with me about your firm?”
Dress appropriately for the firm when you go on the interview. You will usually be able to infer the appropriate dress code by doing your homework on the culture of the organization or by asking the person setting up the interview. For many firms, it may require a suit, while for others, casual attire might be best. For example, jobs in the financial services industry tend to require more formal attire, while those in art or advertising often allow for substantially more flexibility. The same goes for any jewelry, makeup, and so forth. When in doubt, err toward dressing more formally and conservatively. It brings to mind the expression “You never get a second chance to make a first impression.” Too bad Buffett didn't come up with this quote or we'd put it as a Tip. There is no agreement on who first said it, but the quote has been attributed to Will Rogers, Oscar Wilde, and the clothing company Botany Suits.
Showing up late for an interview is a surefire way to make a poor first impression. It pretty much kills your chance of getting a job, even if you got stuck in traffic. However, if you show up for the interview too early, some people may find it annoying since they are probably tied up with something else, including interviewing other job candidates, and they may feel obligated to see you. Here is our compromise solution. Show up in the vicinity of where the interview will take place about an hour or two before it occurs. Arriving early will reduce stress and give you time to review your resume and responses to the questions you expect to get asked on the interviews. It will also give you the chance to be on time in case you run into some car trouble or hit terrible traffic. It happens! Psychologist Amy Cuddy, in a famous TED Talk viewed by millions of people, advises practicing some “power poses” (i.e., think Wonder Woman's famous pose with her hands on her hips) as a way to boost your confidence. She calls it a simple life hack, although the results of her study have come under suspicion in recent years.
Arrive at the exact spot for the interview about five minutes before it is scheduled. This will give you a chance to check in and go through any security clearances. Some firms do have airport-like security, requiring you to show ID, be photographed, and go through a scanner. In a post COVID-19 world, we wouldn't be surprised to see temperature scanning as part of a security clearance process as well. Arriving a few minutes early for an interview is fine, and your punctuality may even be viewed as a positive.
While in the waiting area be sure to be courteous to the receptionist or others near the check-in location and try not to look at your phone. Focus on being in the right mindset for your interview (i.e., relaxed and confident), and it's fine to review your resume and interview preparation materials one more time.
Interviews come in many forms. Sometimes firms will conduct a 15–30-minute phone or Skype/Zoom/WebEx interview to weed out potential candidates quickly. For a hilarious example of this type of interview, check out the movie The Internship. You can use a phone interview to your advantage since you can have extra information available to you. For example, you can have your resume, company information, information on the economy and the industry of the job you are interested in, and so forth, spread out on a kitchen island or on the floor of your room. The interviewer might think you are Einstein with all that knowledge at your fingertips! Why not just google in response to questions on a phone interview? It's rude, time consuming, and the person on the phone can probably hear you typing. So ditch the thought.
Most interviews are conducted face-to-face, at least before COVID-19 hit. They are usually with one person at a time, but sometimes there are several people in the same room that fire questions at you, informally known as a “tag team” interview. It's sometimes more efficient for companies to do this, since perhaps one hour of company time will be used instead of two-plus. It's natural to be nervous, especially when the interview first begins. The more interviews you have, the more comfortable you will feel. When first being introduced to someone, smile, look them in the eye, and (before COVID-19) give a firm handshake, making some basic small talk such as, “Hi, I'm Pat. It's nice to meet you < insert person's name here>. Thanks for taking the time to meet with me today.”
The interviewer will usually start with some small talk about the weather, if you were able to find the place okay, and so forth. They will typically scan your resume and start asking some questions, including the dreaded “Tell me about yourself.” These open-ended questions are not easy to answer precisely, but they are really asking why your unique background makes you qualified for the job as well as trying to see that you are a good fit for the job. In addition to your qualifications, the interviewers want to know that you really want to work for their particular firm and that you are a good fit.
Besides being prepared, there are other things that you can do to help you ace the interview(s). Start by telling the truth, being yourself, and displaying a genuine interest in the firm, position, and interviewers. Often an interviewer will say near the end of the interview, “Do you have any questions for me?” The last thing you want to say is no since it shows a lack of preparation and interest. You don't have to wait for the interview to end before you start asking questions, but you should have a couple of questions in the back of your mind to ask. Something may have come up during the course of the interview that sparked your interest. If you're still at a loss for questions, you can ask them about their career path or the characteristics of people that have done well at a similar position that you are interviewing for or what they like most about the firm.
After your interview is finished, we suggest sending a brief thank-you email or note to each person that you interviewed with. After all, they took time out of their day to meet with you and they could be a future colleague, so you want to make a good impression. Fortunately, you will typically get a business card from each person you meet, so you don't have to panic about remembering their exact names, spellings, and email addresses. Don't write one thank-you note and send the exact same thing to each person you interviewed with. It's lazy and sometimes colleagues forward notes and emails, which would reveal your lack of creativity. Try to say something unique about each conversation you had with a particular person. It's okay to bring a pad of paper while you are interviewing and occasionally take notes. Try to make eye contact and do not look down the bulk of the time at your notepad, even if you're nervous. But don't go overboard and give them some kind of death stare or Kobe Bryant “mamba mode” type of look.
For a full-time position, it usually takes multiple interviews before being extended a job offer. You may be interviewing for the better part of the day over several days. In most cases, they will take you out to lunch. We can't cover a full course on business etiquette here, but there are a bunch of good books on the topic, such as Barbara Pachter's The Essentials of Business Etiquette: How to Greet, Eat, and Tweet Your Way to Success.
Here are a few quick points to note while at a business lunch. Eat something you like but that's not too messy. For example, you may like spaghetti, but spending the time and effort twirling it on a fork and then eating it is probably not the best dining option. Don't order alcohol (assuming you are over 21 and it isn't against your religion or moral code) during an interview meal. When sitting at a table with multiple people, it may be confusing to know what dishes and utensils belong to you versus others. You probably learned the mnemonic ROY G BIV to remember the colors of the rainbow. For business meals, think “BMW” for bread, meal, water. Bread is usually served on your left, the plate in the middle, and water on the right. If there are multiple types of utensils, start from the outside for the first course, and then use the inside ones for later courses.
Some firms like to ask brainteaser questions on interviews, especially if you are pursuing an analytical position. These are questions that require detailed computations or deep thought. Here's a well-known example. How many golf balls can you fit in a Boeing 747 airplane? Very few people know the answer to this question with any degree of precision, even those who work for Boeing! The people asking brainteaser questions are mainly interested in your thought process, so don't panic if you don't know the answer. Make some type of logical effort and don't simply give up saying, “I don't know.” It is okay to make some quick calculations on a piece of paper or on your phone.
Regarding the golf ball question, you might start by saying a Boeing 747 airplane is about 250 feet long, 20 feet wide, and 20 feet high, excluding the wings, tail, and wheels. Planes and golf balls aren't rectangular shaped, but you might get in the ballpark of the answer by using a formula that pretty much everyone recalls, volume equals length × width × height. (Bonus point if you recall the formula for the volume of a cylinder from high school: volume = pi × radius squared × height). Using the rectangular volume formula gives 250 × 20 × 20 = 100,000 cubic feet.
A golf ball is about 1.5 to 2 inches in length from top to bottom. So if one ball can fit in a 2-inch line, 6 balls can fit in a one-foot line. Multiplying this number by 6 across and 6 up gives, 6 × 6 × 6, or 216 balls per cubic foot. We are now ready to get our final estimate, 100,000 cubic feet times 216 balls per cubic foot for a grand total of 21,600,000.
In case you are wondering, after doing a quick search on the web, we found an estimate that about 23 million golf balls can fit in a Boeing 747. You can google “brainteaser interview questions” for a list of websites that cover some of the most common ones that may turn up on an interview. Reportedly, Google/Alphabet is one firm that is fond of asking them. As we said earlier in the chapter, you should really try to crush the questions you know that you are likely going to be asked. If you don't do so well on brainteaser or other questions that are not in your wheelhouse, it's no big deal. You can still get the job.
Jerry Maguire is a famous movie, starring Tom Cruise, which was released back in 1996. One of the famous quotes from the movie, said by actor Cuba Gooding Jr., is “Show me the money!” This brings us to some advice on the amount of money you'll be paid to do a job. Never be the first person to bring up money! Let the representative of the hiring firm bring it up. For most large firms, the amount of money paid to interns and for entry-level positions is somewhat fixed. The situation is more fluid for smaller firms.
If they ask you something to the effect of, “What type of compensation are you looking for?” there are at least a few ways you can approach it. One resource is Glassdoor.com, a website we mentioned earlier. They list salary information by company, posted by (anonymous) employees. If you join the site, for free, you can get even more detailed information on salaries (a fixed payment), bonuses (a variable payment often based on performance), and benefits (e.g., health insurance, life insurance, and retirement plans). Getting back to the salary question, you can say, “I read on Glassdoor.com that the average salary for an analyst position at your firm is $60,000. Is this an accurate number? If so, I would be appreciative of something in that range.”
If there is no information on Glassdoor, or other Internet websites, you can ask the firm representative if there is a range of compensation for the position. There usually is (e.g., $55,000 to $65,000), but they may not want to divulge the information. If they give you the range, ask for the midpoint, or something a bit above if you are feeling ambitious or have a competing job offer at a higher salary. If you pick a number that is too high, you may seem too greedy or price yourself out of the position, while a number that is too low may be selling yourself short. If you have a contact at the firm (e.g., an alumnus of your school or a friend of your family), they may also be able to give you some frank advice on salaries. If you are in the fortuitous position of having multiple job offers, go with the job that you will enjoy the most and that has better potential growth rather than focusing simply on the money. In the long run it should pay off better in more ways than one, assuming there is not a huge difference to start.
Working hard is a prerequisite for success in almost any field ranging from sports to a traditional office job. Few people can simply coast on their natural talent and perform at elite levels. What is the definition of hard work? In his bestselling book Outliers, Malcolm Gladwell wrote that it takes at least 10,000 hours to become an expert in a certain field. That's the equivalent of about 40 hours a week for 5 years, or 20 hours a week for 10 years. Buffett often cited the hard work of his colleague Rose “Mrs. B” Blumkin, who worked at the firm she helped build, Nebraska Furniture Mart to the ripe old age of 103. We lauded Mrs. B back in Chapter 10 and with Tip 61.
When you are first starting your career, “face time” (i.e., being at the job site), is important since it helps demonstrate your work ethic. So we suggest new employees arrive at work before their supervisors and leave after them. If you are working remotely, then log on to your remote work system before your colleagues and be the last to log off. Of course, if you have an occasional important event going on (e.g., wedding or funeral) this advice won't apply. We've heard expressions (that we don't particularly like) said by some supervisors, such as “If I'm here, you're here” and “Your job is to make me look good” that indicate the preference for face time at some organizations. Try to go above and beyond your stated work responsibilities and help others to boot. Your efforts will be noticed.
It's a lot easier to work hard if you have a job that you like. Buffett expressed it slightly differently, saying, “Take the job that you would take if you were independently wealthy.” You may not have this luxury early in your career, since the best jobs are often extremely hard to get, but it should be your long-term goal. Buffett first worked for his father's firm, Buffett-Falk & Co., after graduating from Columbia and then eventually created his own firm. He likes the freedom of painting on his own canvas, so to speak. He said, “I feel like I'm on my back, and there's the Sistine Chapel, and I'm painting away.” Let's put Buffett's quote near the opening of this paragraph as our latest Tip.
Networking is perhaps an overused and nebulous term, but it has been shown to be a crucial determinant of success. We mentioned networking in the last chapter in the context of college recruiting, but the concept really applies throughout your entire life. You are likely to get hired or be given a strong recommendation by someone in your network. People would rather hire someone who they know is good than some unknown person who looks great on paper.
Other tips for success include a mindset of continuous learning. We previously mentioned Buffett's voracious reading appetite, with his routine of reading roughly six hours each day. Learning can also take place with company-sponsored (internal or external) training classes, listening to audiobooks, watching and actively engaging in college courses on Coursera, YouTube, and TheGreatCoursesPlus.com, as well as reading Wikipedia articles (despite it not being a primary source). Perhaps most important for new employees, you can earn a lot from your colleagues at work by speaking with them and observing how the most successful workers go about their business. Buffett has often said, “It's difficult to teach a new dog old tricks.” Of course, that quip is a spin on a famous quote from the 1500s, “You can't teach an old dog new tricks.” In short, respect and learn from the collective wisdom of your more experienced colleagues.
A (usually more senior) colleague may turn into one of your mentors. Buffett stated that his father, Howard Buffett, and his professor, Benjamin Graham, had huge impacts on his business career. Jamie Dimon, CEO of JPMorgan Chase & Co. and a good friend of Buffett's, had the former banking executive Sandy Weil as his mentor. Mentors can provide you with advice, act as a reference, push for your promotion (if you work for the same firm), and sometimes give you the option of following them to new and better jobs. Hitching your wagon to a rising star at the firm may also open up some interesting career opportunities. What can you do to repay your mentor? Here, we'll take another page out of Buffett's playbook and turn it into a Tip. When hiring, he looks for someone with integrity, intelligence, and energy. People at all ages, even rookies on the job, can almost always bring those characteristics to the table. Any mentor would be pleased to know or have someone working for them with those qualities. There is no quicker way to sour a mentor-mentee relationship than to do something that brings embarrassment or dishonor to your mentor.
Having a positive attitude, learning from mistakes, and asking for help are other attributes that may also help you succeed in your career. Although there is no one single most important factor that determines success, the closest thing we know that has been rigorously studied has been dubbed “grit” by University of Pennsylvania psychologist Angela Duckworth. In her 2016 bestselling book Grit: The Power of Passion and Perseverance, Duckworth finds that grit, which she defines as a combination of passion and perseverance, is a bigger determinant of success than IQ, socioeconomic status, and a host of other variables. Gritty people not only bounce back from failures, but they also learn from them. Similar to a golfer or ballplayer tweaking their swing. So when things get tough, get gritty, since it may eventually lead to success.
Since this is a book mostly about financial literacy, we'd be remiss to not include some information about filling out a bunch of financial forms your employers give you when you start working. Some of the most common and important forms are W-2, W-4, health care plans, retirement plans, and of course the main US Income Tax form, 1040. We know these topics may be dry as dirt for many, but they are at the heart of building wealth and so necessitate at least a brief discussion. The tax forms mentioned in this chapter may be found at IRS.gov.
The purpose of the Form W-2, or Wage and Tax Statement, is to specify annual wages and taxes paid by an employee. The data on it reflects earnings over the previous calendar year. It's often needed for mortgage or other loan applications. The Federal Insurance Contributions Act (FICA) tax withholdings are also reflected on the Form W-2. These are taxes that help fund Social Security and Medicare. Every employer must send their employees Forms W-2 by January 31, since they provide important information used when filling out Form 1040.
The W-2 is organized in a straightforward manner may be found at IRS.gov. It contains a bunch of sections or boxes, the most important of which we briefly cover below. The left side of the form states information about the employer and employee, such as name and address. Information concerning wages earned and taxes paid is stored on the right side of the form. Box 1 contains your wages over the past year, and boxes 3 and 5 show how much of those wages are subject to Social Security and Medicare taxes, respectively. We'll discuss shortly how health care and retirement deductions are taken pre-tax, meaning they cut your tax bill. Boxes 2, 4, and 6 show the taxes that were actually withheld from your paycheck.
Form W-4, also known as the Employee's Withholding Allowance Certificate, is given to every new employee. Its purpose is to record the amount of income tax that will be withheld from each of your paychecks. The top section of the form simply asks for your name and address information. Box 5 may be the most important and asks for the number of allowances you are claiming. Allowances include people, such as yourself, spouse, and dependent children. The more allowances you claim, the less you have withheld from each paycheck, although this behavior may result in a larger than expected tax payment when taxes are due on April 15. If you claim fewer allowances than you deserve, you may get a refund on tax day.
Form 1040 is perhaps the most infamous form in the United States, notorious for the copious amount of work often involved with filing taxes every year by April 15, COVID-19-type extensions aside. In plain English, when most people talk about “filing their taxes,” this is the form they are referring to. Buffett filed his own taxes, as well as those of his investment partnerships, for many years. If you have a simple case, you should be able to complete your own tax returns, especially with the aid of software such as TurboTax. If your case becomes more complicated, hiring a paid tax preparer may be worth it. They often know nuances of the ever-changing, voluminous tax code that may reduce your overall tax bill. Tax preparers range from one person mom-and-pop shops to national chains, such as H&R Block or Jackson Hewitt. In any case, you need to sign the form and verify the filing is accurate, under the penalty of perjury. Famous mobster Al Capone got away with a lot of things, including murder, but he eventually went to prison for cheating on his taxes.
The first line item or box on Form 1040 asks for your total wages from the previous year. This amount can be found directly on Form W-2 for most people. You may have earned other forms of income, such as interest or dividends from stocks, and these items go in their corresponding locations in boxes 2 through 5. Line 6 asks you to calculate your total income, which is computed by adding up the amounts in boxes 1 through 6. Thankfully, we won't cover each of the 24 lines on Form 1040, just some of the most pertinent.
On line 9 of Form 1040 you are prompted to state your standard deduction or itemized deduction. The standard deduction is a fixed amount you can subtract from your income before you calculate the amount of taxes you owe. Taking the standard deduction saves you a lot of time since you don't have to find receipts to support your expenses. The amount of the standard deduction generally increases each year with inflation. It was recently $12,400 for individuals and higher if you are married (filing jointly) and have kids. That is, if your income (assuming you are single), after deducting for things such as health insurance and retirement contributions, is less than $12,400 you would owe no taxes and might even get a refund. Sweet! For many people, taxes owed and paid are a lot higher so they should itemize deductions, such as mortgage interest and property taxes. This approach often requires that you complete a bunch of additional forms that we (mercifully) won't cover here.
Taxes are progressive, meaning the more money you make, the more taxes you are paying, both in dollar amounts and percentage amounts. For example, if your taxable income (after deductions) is between 0 and $9,875, you would pay 10% of it as federal taxes. Let's use a round number. If your taxable income is $5,000, after all deductions, you would owe 10% of $5,000, or $500, to the federal government. Bummer! State and local governments may require that you pay income taxes on top of that as well. Double bummer! Seven lucky states require no income taxes of their residents. Here they are in case you want to work or retire there: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Getting back to the progressive federal tax table, the taxes owed start at 10%, then increase to 12% for amounts between $9,875 and $40,125, then jump to 22% for amounts between $40,124 and $85,525, and keep going up. There are currently a total of seven tax brackets with the top one starting at an income exceeding $518,400. You'll get there someday! Specific tax tables can be found on pages 67–79 of the IRS's official Instructions for Form 1040, accessible online.
Taxes can be weird since different types of income are taxed at separate rates. For example, income tax rates are usually higher than capital gains tax rates. This has resulted in some strange cases like Buffett paying less taxes, on a percentage basis, than his secretary. Buffett has clearly stated that this is an injustice, although he didn't volunteer to pay more on his taxes. He was just legally taking advantage of the tax code. In 2011, Buffett proposed that people making more than $1 million a year should pay at least 30% of their income in taxes, regardless of tax loopholes, or quirks in the tax code. This proposal became known as The Buffett Rule. Drum roll … it didn't happen after Congress debated its enactment.
Moseying down Form 1040, line 9 tells you to subtract the larger of the standard or itemized deductions from your total income, resulting in your taxable income. Once you have your taxable income number, then you can get the taxes you owe from the tax table or tax software program that you are using. Besides TurboTax, other tax-oriented websites include those run by FreeTaxUSA, TaxSlayer, TaxAct, H&R Block, OLT.com, eSmart, and the appropriately named 1040.com and FileYourTaxes.com. Place the number you get from the tax table on line 12 of Form 1040.
The remaining lines on Form 1040 largely relate to additional possible deductions or taxes, such as a self-employment tax. That item is exactly what is sounds like, taxes paid by those who operate their own businesses and are used to fund items such as Social Security and Medicare. There is also a spot on Form 1040 for taxes already paid, such as those that are taken out of your paycheck that can be found on your W-2. If the amount of taxes paid is greater than the taxes you owe, then you get a refund (Line 20). Awesome! If the taxes paid are less than the taxes owed, then you have to pay more taxes (Line 23). Aargh!
Retirement plans are one of the best vehicles for building long-term wealth. Contributions to your retirement plan are generally tax free, and companies often provide matching funds. We don't need a Buffett Tip to tell you that you should never refuse free money! So your minimum contribution to your retirement plan should be enough to get matching funds, if your employer provides them. Retirement plans often go by the names 401(k), 403(b), IRA, Roth IRA, SEP-IRA, and pension plans. We'll define each of these terms shortly. With most retirement plans you can't take out the money until you reach the age of 59½ or else you have to pay a 10% penalty on the withdrawn funds. There are some hardship exceptions to this rule, such as taking money out to pay for medical expenses.
At a big-picture level, retirement plans often go under the heading of either defined benefit or defined contribution plans. Defined benefit plans are commonly known as pension plans. With this type of plan you typically receive a fixed payment monthly from your retirement date until your death. For example, upon retirement you may receive 60% of your average salary over the final three years you worked before retirement. In general, the longer you work for the firm, the higher the percentage payout. For example, if you work a firm for two years and then move to another company, you're not going to get 60% of your prior salary for life. Pension plans are common with those working for the government, or as teachers, police officers, and in many other fields.
Today, few people stay with one company for decades like Buffett at Berkshire. For them, defined contribution plans often make sense. In this case, the employer often matches a percentage (e.g., 5%) of your salary each year and puts the contribution in a retirement fund, which is usually some type of mutual fund. If you move from one company to another, you can take the money with you. The most popular defined contribution plan is 401(k), named after a provision in the tax code. The nonprofit analog for the 401(k) is the 403(b). The maximum amount of money you can put in is currently $19,500 if you are under the age of 50 and the amount increases roughly by inflation each year. If you are older than 50 you can contribute an additional $6,500 with what is called a “catch-up” contribution.
The self-employed and those working for small businesses often use Individual Retirement Accounts (IRA) as their primary retirement vehicle. The paperwork is often easier for the sponsor, relative to 401(k), 403(b), or defined benefit plans. It is also a common vehicle for “rolling over” 401(k) or 403(b) investments from a former employer.
Most IRAs allow you to contribute money that reduces your taxable income up front. Roth IRAs were introduced in 1997. With the retirement plans we have covered so far, your contributions are tax deductible and when you withdraw funds upon your retirement, the withdrawals are usually taxable. Roth IRAs flip it around. Your contributions are not tax deductible up front, but your withdrawals are tax free. This is beneficial as long as you can deal with the pain of not having the tax-deductible feature up front. There are some income limits to participate in the Roth IRA, currently in the low six figures. The maximum contribution for a Roth IRA, $6,000 if under the age of 50 or $7,000 over 50, is lower than most other plans.
Simplified Employee Pension (SEP) IRA accounts are popular retirement plans for small businesses. They require less paperwork than a traditional defined benefit plan. In addition, the contribution limits are tied to the profitability of the firm, rather than a fixed number. The amount you can save is typically 25% of your overall salary, up to a maximum annual retirement contribution of $57,000.
Millions of people have become millionaires through their 401(k) plans. Like the tortoise versus the hare fable, it does take patience to achieve that magic million-dollar milestone. In general, the earlier you start to save and the higher the return on your investments, the more money you will have upon retirement. The retirement plans that we discussed allow your money to grow tax deferred. That is, you don't pay any taxes on any trades until you withdraw the funds upon retirement, assuming no (non-hardship) withdrawals before the age of 59½. The exception is with the Roth IRA since you pay your taxes up front and not upon withdrawal. Tax deferral is an important feature3for those who like to pick individual securities, like Buffett. If you make trades in a regular brokerage account, you have to pay taxes on capital gains.
We hope you can start saving for retirement as soon as possible (Tip 1), but let's assume you start saving in earnest at the age of 25, a common age for many people to complete graduate school. Saving $250 a month, or $3,000 a year, at an 8% annual rate of return would make you a millionaire by age 65. If you are super ambitious and want to have $10 million upon retirement, simply multiply the numbers by 10, or save $2,500 a month over the same time period. We know that number would be a stretch for most young people, but it is not a stretch as you progress in your career, especially if you follow the advice of this book. :-)
We've dispensed quite a bit of Buffett's investment wisdom over the course of this book, but here's one more story to think about as you invest for your retirement plan. Almost by definition, retirement plans involve long-term thinking. During Buffett's early years in business, computer input and output was often obtained with the aid of a punch card, a thick piece of paper about 7 inches by 3 inches in size. Punch cards were eventually replaced by the floppy disk, then the CD, and now a flash key or no device at all. With that intro, we're now ready for Buffett's advice, which we'll turn into a Tip, sometimes referred to as the “20 slot rule.”
I always tell students in business school they'd be better off when they got out of business school to have a punch card with 20 punches on it. And every time they made an investment decision, they used up one of their punches, because they aren't going to get 20 great ideas in their lifetime. They're going to get five or three or seven, and you can get rich off five or three or seven. But what you can't get rich doing is trying to get one every day.
Health Benefits Information
Health care benefits are some of the most valuable parts of a compensation package and, for entry-level positions, they could amount to about 20% of your total comp. That's serious dough, so hopefully we have your attention. Health care benefits are typically offered to most full-time employees, but some firms, such as Starbucks, also offer them to part-time employees. And you thought Starbucks just made awesome coffee! Some companies pay the entire cost for your entire health care benefits while others pay a small portion. It really depends on the firm, but a rule of thumb is you'll probably pay about a quarter to half of the cost that your employer pays for your particular plan. Fortunately, it is a pre-tax deduction, so the cost is also indirectly subsidized by the government since you'll owe less come tax time.
Your health, of course, is your most valuable asset. Perhaps you’ve heard the quote, attributed to Barbara Hutton, “I've never seen a Brink's truck follow a hearse to a cemetery.” A serious health problem, without insurance coverage, may also prove to be financially devastating. Health care, in aggregate, is roughly 18 percent of GDP, so it's of enormous size and complexity. Most people around the world got a wake-up call on the value of health care as the COVID-19 pandemic swept across the globe in 2020. We discussed Buffett's notoriously poor diet in Chapter 1, but he does take other aspects of his health seriously. Buffett said a doctor told him, “Either you eat better or you exercise.” Buffett chose the second option, calling it “the lesser of two evils.”
At a big-picture level, you have a few broad choices when selecting health care plans. One option, generally known as a Traditional Health Care Insurance Plan, provides wide choices among doctors and hospitals. It's usually the most expensive option. Another option, known as a Health Maintenance Organization (HMO), has more limited choices of doctors and hospitals but normally costs less money. Why? Typically, the HMO, such as United Healthcare, does the equivalent of buying in bulk and works out a deal with the health care providers, passing along some of the savings to the employee. A third organization, called a Preferred Provider Organization (PPO) is a hybrid between the two and costs somewhere in between.
With most health care plans, you pay a fee for each doctor's appointment, called a co-pay. The co-pay is usually less than $20, but it ensures that you have some skin in the game—pun intended—paying for your health care and to also provide a disincentive for visiting the doctor for every minor bump or bruise. Often preventative visits, such as an annual physical or flu shot, have no co-pay. Some procedures, such as a magnetic resonance imaging (MRI), may require significant out-of-pocket expenses.
If you're a very healthy person, then a high deductible plan may minimize your total health care costs. Let's use $5,000 as the deductible amount. If you visit the doctor on somewhat rare occasions, let's say for your annual physical, a vaccine, or flu treatment, perhaps you pay less than a few hundred dollars in out-of-pocket expenses. But you also pay another monthly fee in the unlikely event that you encounter a serious or expensive illness. Once again, plans vary, but a rule of thumb is the monthly premium you pay the insurance company is about half the amount you pay for one of the traditional plans discussed above. Any amounts over the deductible amount, $5,000 in our example, would be covered by the health insurance. There is often some fine print on the limits of what they'll pay if the costs get prohibitively expensive, but we'll skip the details here.
You may be worried about shelling out up to $5,000, plus the bi-weekly or monthly fee for your health insurance. Fortunately, there is another type of health insurance product that can help. It's called a Health Savings Account (HSA). The amount you can put in an HSA increases with inflation. It's currently $3,550 for individuals and $7,100 for a family. Any unused dollars in the HSA can be rolled over for use in following years. There is a related account called a Flexible Spending Account (FSA) that has similar deduction limits, but it has the increased flexibility of being also used for childcare expenses. The catch with FSA money is that it is “use it or lose it.” It can't be rolled into future years, so if you put aside $1,000 in your FSA and spend only $700, you lose $300. If you find yourself running into this position, you can always buy some covered health care devices/treatment at a website such as FSAStore.com. In addition, self-employed individuals usually can't set up an FSA, while they can use an HSA. Both HSA and FSA deductions are taken out of your paycheck using pre-tax dollars, once again providing a reduction in your tax bill come tax time on April 15.
Some firms also offer a Prescription Drug Benefit Plan that allow members to buy prescription drugs at very attractive prices. The employer's health care plan is typically buying these drugs in bulk, through a health care firm known as a Pharmacy Benefit Manager (PBM). The largest PBMs include firms such as CVS Health/Caremark, Express Scripts, and OptumRx. Money taken out of your paycheck for Prescription Drug Plans is also a pre-tax deduction and typically costs about $100 a month. Other health care benefits may include disability insurance, in case you are unable to perform your work due to injury or illness, and long-term care insurance that can pay partially or fully for the cost of care in case you become incapacitated or wind up in an assisted living facility or nursing home. Long-term care insurance tends to be very expensive, and you also need to look at the credit rating of the insurer to have confidence they will be around after the 50-plus-year time period when you may first need the insurance (if you are just getting started in your career).
Of course, there are also dental insurance plans. Dental plans typically cost less than $100 a month to the employee but usually offer sparse coverage, such as cleanings twice a year, fillings, and x-rays, without significant out-of-pocket expenses. If you want a perfect smile through braces, plastic aligners, or porcelain veneers, it will probably cost you thousands of dollars in out-of-pocket expenses. Dental insurance options are usually analogous to those of health insurance plans with traditional, Dental Plan Organizations (DPO), and preferred provider varieties.
By now, we're sure you've got the feeling that health care is complicated and expensive. Not surprisingly, Buffett is trying to do something about it. Berkshire has teamed up with J.P. Morgan and Amazon to try to create a new approach to health care benefits that reduces costs but also has at least as good patient outcomes. The name of this nonprofit joint venture is Haven. The three firms have about a million employees among them so they may make a good test pilot. Haven has been tight lipped about the details of their plans, so few results are available in 2020. You can check out their website at www.havenhealthcare.com to see their offerings and accomplishments as they unfold.