Everyone should have a reserve

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With a net worth of $38bn, investor Warren Buffett is one of the wealthiest men on the planet. In 1970, he discovered the following letter in a safe deposit box along with the $1,000 cash mentioned therein. 30 years earlier it had been sent by his grandfather, Ernest — a grocery store owner — to Warren's uncle, Fred, and Fred's wife. Similar letters had also been sent to Ernest's other children.

Earlier this year, Warren Buffett said of his grandfather's valuable financial advice:
"At Berkshire, we have taken his $1,000 solution a bit further and have pledged that we will hold at least $10bn of cash, excluding that held at our regulated utility and railroad businesses. Because of that commitment, we customarily keep at least $20bn on hand so that we can both withstand unprecedented insurance losses (our largest to date having been about $3 billion from Katrina,the insurance industry’s most expensive catastrophe) and quickly seize acquisition or investment opportunities."
Transcript follows. Image courtesy of Berkshire Hathaway (PDF).



Transcript
Dear Fred & Catherine:

Over a period of a good many years I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash. I have known people how have had to sacrifice some of their holdings in order to have money that was necessary at that time.

For a good many years your grandfather kept a certain amount of money where he could put his hands on it in very short notice.

For a number of years I have made it a point to keep a reserve, should some occasion come up where I would need money quickly, without disturbing the money that I have in my business. There have been a couple occasions when I found it very convenient to go to this fund.

Thus, I feel that everyone should have a reserve. I hope it never happens to you, but the chances are that some day you will need money, and need it badly, and with this thought in view, I started a fund by placing $200.00 in an envelope, with your name on it, when you were married. Each year I added something to it, until there is now $1000.00 in the fund.

Ten years have elapsed since you were married, and this fund is now completed.

It is my wish that you place this envelope in your safety deposit box, and keep it for the purpose that it was created for. Should the time come when you need part, I would suggest that you use as little as possible, and replace it as soon as possible.

You might feel that this should be invested and bring you an income. Forget it — the mental satisfaction of having $1000.00 laid away where you can put your hands on it, is worth more than what interest it might bring, especially if you have the investment in something that you could not realize on quickly.

If in after years you feel this has been a good idea, you might repeat it with your own children.

For your information, I might mention that there has never been a Buffet who ever left a very large estate, but there has never been one that did not leave something. They never spent all they made, but always saved part of what they made, and it has all worked out pretty well.

This letter is being written at the expiration of ten years after you were married.

(Signed)