Warren Buffett has long been known for two rules: Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1. At first glance, “never lose money” sounds extreme. After all, some risk is unavoidable.
But it’s a guiding mindset: protect your capital, avoid unnecessary losses, and make decisions so that your money works for you, instead of slipping away. Translating that philosophy into everyday budgeting can make a big difference in financial resilience.
Here are ways to apply Buffett’s rule in your budget, avoid common money drains and build in safety margins so you don’t lose more than you can afford.
Have you ever wondered why some billionaires pay lower tax rates than their secretaries? That’s exactly what the Warren Buffett Rule aims to address! As someone who’s been researching tax policies for years, I think this topic deserves a clear explanation that cuts through all the political noise.
The Basics: What Exactly IS the Buffett Rule?
The Buffett Rule is pretty straightforward when you strip away all the fancy political language It’s a tax proposal that says people making over $1 million per year should pay at least the same percentage of their income in taxes as middle-class families.
More specifically, the rule would implement a minimum tax rate of 30% for individuals earning more than $1 million annually. According to White House data, this would directly affect about 0.3% of taxpayers – a tiny fraction of Americans.
Where Did the Buffett Rule Come From?
The rule is named after Warren Buffett, one of the world’s most successful investors who publicly stated in 2011 that it was wrong for rich people like himself to pay a lower tax rate than middle-class Americans.
In a now-famous New York Times op-ed titled “Stop Coddling the Super-Rich” Buffett revealed that he paid a lower tax rate than any of the other 20 people in his office – including his secretary!
President Barack Obama proposed the Buffett Rule in 2011 as part of his administration’s tax reform efforts. The rule was later submitted to the Senate as the “Paying a Fair Share Act of 2012” (Senate Bill S.2059).
Why Was the Buffett Rule Needed?
There were several compelling reasons why supporters believed this rule was necessary:
1. Falling Tax Rates for the Super-Rich
- The average tax rate paid by the wealthiest Americans had fallen to nearly its lowest level in over 50 years.
- The top 0.1% of income earners (the richest 1 in 1,000 households) were paying roughly 26% of their income in federal taxes in 2010 – half of what they would have paid in 1960 (51%).
- The 400 richest Americans, all making over $110 million annually, paid only about 18% of their income in taxes in 2008.
2. Growing Income Inequality
- Since 1979, the after-tax income of the top 1% had grown nearly four times faster than middle-class incomes.
- The typical CEO who once earned about 30 times more than their workers was now earning about 110 times more.
- The wealthiest 1% of households were taking home about 17% of all income earned by American workers.
3. Tax Loopholes for the Wealthy
Many high-income Americans were paying extraordinarily low tax rates by taking advantage of special tax breaks and loopholes:
- In 2009, about 22,000 households making more than $1 million paid less than 15% of their income in taxes.
- Even more shocking, 1,470 millionaires paid ZERO federal income taxes on their million-plus incomes!
- Of the 400 highest-income Americans, one-third paid less than 15% of their income in taxes in 2008.
The Most Unfair Part
Perhaps the most compelling argument for the Buffett Rule was this simple fact: Nearly one-quarter of all millionaires (about 55,000 taxpayers) were paying a LOWER tax rate than millions of middle-class families.
This happened because wealthy individuals often receive most of their income from investments, which are taxed at lower capital gains rates (maximum 23.8%) rather than as regular income.
What Happened to the Buffett Rule?
On April 16, 2012, the Buffett Rule (as Senate Bill S.2059) received 51 affirmative votes in the Senate. However, it was blocked by a Republican filibuster that required 60 votes to proceed to debate and final passage.
The rule was never enacted into law, though the principle continues to influence debates about tax fairness.
How Much Revenue Would the Buffett Rule Generate?
There were several different estimates about how much additional tax revenue the Buffett Rule would generate:
- The Tax Foundation estimated $36.7 billion per year ($367 billion over a decade)
- Citizens for Tax Justice estimated $50 billion per year ($500 billion over a decade)
- The Joint Committee on Taxation estimated $46.7 billion over 10 years
While these amounts would help reduce the deficit, they would offset only a small percentage of projected spending increases. The estimated $47 billion would offset by 0.7% the $6.4 trillion increase in spending over the next decade based on Obama’s 2013 budget plan.
Arguments For and Against the Buffett Rule
Support for the Buffett Rule
- Paul Krugman, Nobel Prize-winning economist, wrote that “such low taxes on the very rich are indefensible” and that economic records don’t support the notion that super-low taxes on the super-rich are key to prosperity.
- Public Opinion: Multiple polls showed strong public support for the rule:
- A CBS News/NYT poll found 52% of Americans agreed investments should be taxed at the same rate as income
- A Gallup poll showed 60% of Americans supported the rule
- A CNN poll found 72% of Americans backed the idea
Opposition to the Buffett Rule
- Rep. Paul Ryan criticized the proposal as “class warfare” and claimed it would negatively impact job creation and investment.
- Sen. Mitch McConnell argued the U.S. economy was ill-disposed to raising taxes.
- House Speaker John Boehner defended low capital gains rates, saying they “spur new investment in our economy and allow capital to move more quickly.”
- Dana Milbank from The Washington Post called the proposed tax a “gimmick” and suggested Obama was prioritizing it over the alternative minimum tax for political reasons.
The Economic Argument for the Buffett Rule
Beyond fairness, there were economic efficiency arguments for the rule:
- Nobel-prize winning economist Peter Diamond and tax economist Emmanuel Saez noted that high-income taxpayers have greater ability to avoid taxes and argued that “the natural policy response should be to close tax avoidance opportunities.”
- Research showed that “base broadening reduces the marginal efficiency cost of taxation.”
- A permanent Buffett Rule would limit opportunities for tax avoidance, enhancing economic efficiency.
- Many existing tax subsidies are “upside down,” with the largest incentives going to the highest-income households that need them least.
My Thoughts on the Buffett Rule
I’ve always found it weird that our tax system allows some of the wealthiest Americans to pay lower rates than teachers, nurses, and other middle-class workers. The principle behind the Buffett Rule – that no millionaire should pay a lower tax rate than middle-class families – seems like basic fairness to me.
Whether you agree with the specific 30% minimum tax rate or not, it’s hard to justify a system where 22,000 millionaires pay less than 15% in taxes while most middle-class families pay higher rates.
Bottom Line
The Buffett Rule represented a simple principle: those who earn the most should pay at least the same percentage of their income in taxes as middle-class Americans. While the specific proposal didn’t become law, the underlying idea continues to influence discussions about tax fairness in America.
Always Budget with a Margin of Safety
Buffett doesn’t invest without building in a margin of safety, and your budget needs the same protection. One way to do this is by slightly underestimating your income and overestimating your expenses when you plan. That way, you’re not caught off guard if something costs more than expected or if your income dips unexpectedly. Planning for irregular expenses is another helpful move.
Costs like car repairs, holiday gifts, school fees and annual renewals have a way of sneaking up on people who only budget for the current month. When you’re prepared for these, they don’t have to derail your finances.
Reserving funds in a separate savings account, whether it’s for emergencies or a sinking fund for specific goals, creates a natural barrier that helps you avoid spending what should be protected. It’s easier to stay disciplined when your money is organized and you’ve accounted for life’s curveballs.
Watch Out for Budget “Value Traps”
In the investing world, Buffett warns about buying businesses that look like bargains but are actually losing value underneath. In your personal budget, these traps often come in the form of impulse purchases, lifestyle upgrades or trendy “deals” that don’t serve you long term. A flashy new car might seem like a win until you realize how quickly it depreciates and how much it costs to maintain.
Signing up for too many streaming platforms or subscription boxes can feel harmless until you check your bank statement and realize you’ve forgotten about half of them.
Another trap is emotional spending. Whether it’s treating yourself after a hard day or trying to keep up with others on social media, emotional spending often leads to regret. Giving yourself a 24-48 hour pause before making non-essential purchases helps break the cycle and gives your rational brain a chance to weigh in.
Warren Buffett Explains the 7 Rules Investors Must Follow in 2023
FAQ
What is the Buffett rule of investing?
What is Warren Buffett’s 70/30 rule?
What is Warren Buffett’s golden rule?
Warren Buffett’s golden rule is “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1,” emphasizing capital preservation as the top priority for any investor. This principle is supported by other key tenets of his philosophy, such as investing in businesses you understand, focusing on long-term value, and maintaining financial discipline to avoid unnecessary losses.
What are Warren Buffett’s five rules?
Warren Buffett’s five rules of investing often discussed include: 1. Never lose money (by preserving capital and avoiding risk), 2. Never miss an opportunity (by being patient and ready to act when others are fearful), 3. Buy what you understand (focusing on business fundamentals), 4. Invest for the long term (using a buy-and-hold strategy), and 5. Be emotionally disciplined (avoiding panic selling or chasing trends).