The Simple Path to Wealth, by JL Collins
JL Collins’s book – The Simple Path to Wealth – grows out of a series of letters – mostly about money and investing- to his teenage daughter. As a consequence, the advice sound truly personal, authentic and straightforward.
I have better things to do than think about money
One of the pillars of the book is expressed by his daughter’s statement: dad, “I know money is important. I just don’t want to spend my life thinking about it”. The author – a financial geek – took notice that most people have better things to do with their precious time (fulfil other passions, work towards other careers) than think about money. However, he felt that such benign neglect of financial matters leaves most people unprepared for dealing with common financial and investment decisions. The book is therefore written to provide non-financial experts – like his daughter – with simple advice to secure wealth (F.U. Money or Financial freedom).
Control your lifestyle
With the parable of the Monk and the Minister, the author summarises the second cornerstone of his book: control your lifestyle. Two old friends meet after many years. One has become a humble monk, the other a rich minister to the king. Looking down at the monk, the minister says: “you know, if you could learn to cater to the king, you would not have to live on rice and beans”. To which the monk replies: “if you could learn to live on rice and beans, you would not need to cater to the king”. The author states that most of us fall somewhere between the two. His personal choice is to be closer to the monk. While the book provides advice on how to invest, a core assumption is to control our spending and lifestyle.
The importance of Financial Independence
For the author, sound investment skills are necessary to secure financial independence. For him, it is about having options, it is about being able to buy freedom, resources and time to explore life on your own terms.
Here is a list of the key guidelines from JL Collins:
- Avoid debt. Nothing is worth paying interest to own. Debt has been promoted as a perfectly normal part of life, but it is not. It is the single biggest enemy of financial freedom. The more debt you carry, the more % of your income is devoured by interest, the more stress you build, etc. The author also warns against the so-called “good debt”:
- taking a mortgage to buy a house, if not well structured, becomes a bad investment and, consequently, bad debt. Even for your first house, take as little debt as possible. For the author, houses are an expensive indulgence, not an investment. You can buy it when you can easily afford it
- business loans, if used wisely, can greatly improve returns; however, most companies tend to go bankrupt by the debt they took on.
- Spend your early years building your working skills.
- Spend less than you earn and invest the surplus. Don’t get trapped by an expanding lifestyle. Stop thinking about what money can buy and think about what money can earn. And then think about what money earned can earn. Think about the opportunity costs (what you could by diverting money for “wants” into investments for 10-20 years). If your lifestyle matches or exceeds your income, you are no more than a slave.
- Avoid fiscally irresponsible people.
- Money can buy many things, but nothing is more valuable than freedom.
- Life choices are not always about money, but you should always be clear about the financial impact of the choices you make.
- The greater you save and invest (ideally 50% of your income), the sooner you reach financial freedom. The lines between need and want are continually and intentionally blurred. Being independently wealthy is as much about limiting needs as it is about how much money you have and the assets you build.
- Be directly involved in the management of your money. No one will care for it better than you.
- Once you can live on 4% of your yearly investments, you are financially independent.
- The stock market is a powerful wealth-building tool:
- Long term, the US market always goes up (historical averages of 8-12% depending on the time period selected). Invest long-term, and you will benefit from it.
- Keep a simple investment strategy. Use a few simple Vanguard index funds (low fees).
- The market is self-cleansing. An index fund will always provide shares of current successful companies.
- Don’t try to be too smart and “beat the market” by picking single stocks and indulging in short-term investing. Accept “average” returns and seek excitement elsewhere while letting indexing do the heavy lifting. As Jack Bogle said about people successfully beating the market: “I have been in the business 61 years, and I can’t do it. I have never met anybody who did it. I have never met anybody who met anybody who can do it”.
- Everybody makes money when the market is rising. Wealth is created based on what you do during the times the market is collapsing: toughen up, ignore the noise, and ride out the storm.
- When you invest, look at these three factors:
- In which stage of your investing life are you? It is not only related to age but to your stage (goals) in life
- What level of risk do you find acceptable? There are no risk-free investments. Once you accumulate wealth, you can only pick and choose which type of risk you want to manage.
- What is your investment horizon? Long-term or short-term?
- When you invest, look at these three tools:
- Vanguard Total Stock Market Index Fund provides the best returns over time and serves as an inflation hedge.
- Vanguard Total BOND Market Index Fund provides income (dividends), tends to smooth the ride of stock (stock is more volatile than bond) and serves as a deflation hedge.
- The only investment methodology: keep adding to the Stock investment Index fund and let it grow. Yes, put all your eggs in one basket (100 % Total Stock Index fund) and forget about it. No need to apply DCA (dollar-cost averaging): add money anytime you have cash available. The author suggests slightly diversifying and adding the Total Bond Index Fund only when you reach the Wealth Accumulation Phase, and you want to smooth the ride (reduce volatility). During such a phase, you can have a balance of 75% stock, 20% bond, and 5% cash.
I am sure that JL Collins will inspire you along your path to Wealth.
Until next time…Sweat your Assets.
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