No savings at 40? Use the Warren Buffett method in 2023 to target financial freedom

Warren Buffett has built incredible wealth. Here's what we can learn to build a portfolio worth $1 million.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points
  • Warren Buffett has built incredible wealth over the decades, with returns of an average of 20% per annum
  • He did it by sticking with investments he understands, investing in great businesses in fair prices and allowing compounding to take its course
  • Investing $1,000 a month for 25 years could make a $1 million portfolio

Warren Buffett is one of the richest people in the world. He started at a young age and has built a huge amount of wealth by being frugal and investing for the long term in businesses that can compound over many years.

While there is plenty to worry investors about, I think now can prove to be a great time to invest despite the inflation, banking concerns in the United States and Europe, and so on. Share prices don't fall heavily for no reason – it's only when there are real concerns that the market goes noticeably backwards.

Indeed, Warren Buffett said one of the world's often-quoted pieces of advice about investing:

Be fearful when others are greedy, and greedy when others are fearful.

As individual investors, we can't control what management teams will do in their businesses. However, we can control when we invest and the price we pay. It's times like this that can open up much-cheaper prices for some of the best investments out there.

A head shot of legendary investor Warren Buffett speaking into a microphone at an event.

Image source: The Motley Fool

Invest like Warren Buffett

Warren Buffett hasn't precisely told investors what his formula is for investing. But, he has revealed a number of factors that he keeps in mind.

He typically stays within his 'circle of competence'. What that means is that he only invests in businesses and industries that he understands. I think it keeps things simpler, it makes it easier to understand if things are going well, and it may mean it's easier to know when to sell.

Buffett also likes to find value, he says it's best to invest in great businesses at fair prices rather than trying to invest in fair businesses at cheap prices. He also likes those businesses to have a strong economic moat, or a strong competitive advantage. That means they're more resilient to competitors trying to 'invade' and hopefully strong enough to get through times like this unscathed.

When there is widespread fear in the market, it gives investors the chance to buy almost every investment at a cheaper price. As the investment environment recovers, as it always has in the past, share prices can then rise.

How to build a $1 million portfolio starting at 40

Between 1965 to 2022, Warren Buffett's company Berkshire Hathaway has returned an average of around 20% per year. However, the last five years haven't been as solid as that because it becomes increasingly difficult to perform strongly as the portfolio becomes bigger.

It wouldn't be easy for you and me to try to achieve gains like that. So, just achieving a return of 10% per annum could turn out very well for wealth-building at the starting age of 40. Or any age for that matter.

Investing $500 a month, returning an average of 10% per annum, would turn into $590,000 after 25 years – taking the investor to 65 years old.

If we bump that up to investing $1,000 per month, it would become $1.18 million after 25 years if it returned an average of 10% per annum.

That's not quite the same wealth as Warren Buffett, but it'd achieve an adequate lifestyle for investors.

However, remember that investing in great businesses can still mean volatility. Just look at what has happened to the Wesfarmers Ltd (ASX: WES) share price in recent times.

But, just because a share price moves down in the short term doesn't mean that the company has turned rubbish. There will likely be market declines over a 25-year period, but those could be the best times to buy.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway. The Motley Fool Australia has positions in and has recommended Wesfarmers. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ASX Share Market News

Red buy button on an Apple keyboard with a finger on it.
Broker Notes

Up 109%! 3 reasons this ASX All Ords lithium stock is still a buy today

A leading expert forecasts more outperformance from this rocketing ASX lithium stock.

Read more »

Broker written in white with a man drawing a yellow underline.
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

Five healthcare workers standing together and smiling.
ASX Share Market News

ASX 200 healthcare shares soar 9% amid notable FY26 reports from CSL, Pro Medicus

Healthcare outperformed while the ASX 200 weakened as earnings season continued last week.

Read more »

ETF in grey and exchange traded fund in blue.
Broker Notes

Expert names 2 top ASX ETFs to buy today

A leading analyst expects these two ASX ETFs are well-placed to outperform.

Read more »

A businessman lights up the fifth star in a lineup, indicating positive share price for a top performer
Broker Notes

Bell Potter names the best ASX shares to buy in August

These could be the best of the best according to the broker.

Read more »

A happy young woman in a red t-shirt hold up two delicious burritos.
Consumer Staples & Discretionary Shares

Why I'd still buy Guzman Y Gomez shares after its big rise

GYG has won back investors with tasty growth. I think it’s still a buy.

Read more »

Hand holding Australian dollar (AUD) bills, symbolising ex dividend day. Passive income.
ASX Share Market News

If I invest $15,000 in Telstra shares, how much passive income will I receive in 2027?

Telstra is a top blue-chip for passive income.

Read more »

A neon sign says 'Top Ten'.
Share Gainers

Here are the top 10 ASX 200 shares today

It wasn't a great Friday session for the ASX.

Read more »