I wasn’t sure what to expect from The Simple Path to Wealth. It is highly recommended on many of the podcasts I listen to and blogs that I read, and I thoroughly enjoyed this interview with J.L. Collins, the author (part two of the interview is here). Could it live up to the hype?
Yes, it could.
While I’m no longer a beginner when it comes to investing, having read the book from cover to cover, I think even if you were a newbie it would be a great book to start with.
Can Creating Wealth Really Be Simple?
If you are drawn to the book because of the title, you may approach it with a fair bit of skepticism. “Money’s not simple” you are probably thinking, “so how in the world could there be a simple path to wealth?”
- Have no debt
- Save a big chunk of what you earn
- After setting aside some money in an F-You fund (yes, that is what he calls it), invest what you save in broad, low cost index funds.
These three things, according to the book, are the recipe for becoming wealthy or, as I prefer to think about it, financially independent.
Debt (aka “the Single Most Dangerous Obstacle to Building Wealth”)
For years—hell, more like decades—debt was a constant part of my life. If I could fit the payment into my monthly budget and my credit cards didn’t get too high, I just didn’t think about it that much. What a mistake!
“If you intend to achieve financial freedom, you are going to have to think differently. It starts by recognizing that debt should not be considered normal.”
As J.L. Collins rightly points out, having debt significantly impairs your ability to achieve financial freedom. How?
- Companies who loan you money want something in return and that comes in the form of paying interest on what they loan you. And it doesn’t matter if it is ‘good’ debt or ‘bad’ debt. Every cent you pay in interest is money you don’t get to keep and you won’t be able to invest for your future benefit.
- Don’t like your job? Too bad. Hopefully you can find something else that is more fulfilling but true mobility to step away from work for a few months or retrain for a new profession will be hard if you have revolving financial obligations.
- Debt can be overwhelming emotionally, and mess with your self esteem. “Your debt tends to focus your attention on the past, present and future exclusively in the worst possible way. You become fixated on your past mistakes, your present pain, and the disaster looming ahead.” Exactly.
The book recommends quickly paying off debt with the highest interest rate first (over 5%) and then tackling debt with interest rates between 3% and 5%, leaving the debt with the lowest interest rates for last.
That may sound impossible but I promise you it is not. I paid off almost $60k in debt in 16 months and lived to tell about it. If you aren’t in a position to plow through your debt in a short period of time, that is okay: just get started today!
Why You Need to Shoot for a High Savings Rate
For the longest time, I thought about saving money the same way I thought about flossing. I knew I should do it but unless there was something demanding I take care of it right away, it was rare I actually did it.
Now I know better. The truth is saving money is like winning the gold, silver, and bronze medals at the same time!
First, when you live off of less then you make, you get used to a more cost-conscious lifestyle. You are also more focused on spending money on the things that truly matter.
Second, the money you save can be invested so it earns you even more money without you having to do anything.
And third, the money earned from your initial investment will also start working for you, earning you even more money without you having to do anything (this is the magic of compounding).
“Stop thinking about what your money can buy. Start thinking about what your money can earn. And then, think about what the money it earns can earn.”
J.L. Collins recommends saving 50% of your income which, as he illustrates, would result in a quick accumulation of money to fund whatever you want to do next. If you can do that, great. If you can’t, don’t worry. Saving even 10% will still win you your medals!
And if it makes you feel any better, I’ve been reluctant personally to define my savings rate, and instead focus on what I’m saving for and put enough away to fund that.
Low Cost Index Funds
The bulk of the book is focused on why you should invest in low cost index funds. My guess is that this is because some people still need convincing that this is the best approach. I am not one of those people.
I like data and what the data say is that investing in individual stocks or putting your money into an actively managed mutual fund that charges high fees almost never produces better results.
Even so, I still found this section really interesting.
It was like reading the science behind why chili peppers are hot without having to be convinced that they are, in fact, hot. I could focus on the information and logic without having to deal with an ego that got all riled up about someone questioning my ability to time the market. Question away because I am under no illusions I can do so.
If you are like me—convinced even if you don’t understand every nuance—this book will be helpful. If you are not like me—not convinced and believing there is a trick out there if you can just figure it out—then this book will be really helpful.
Are You Ready to Start Down the Simple Path?
Have you read The Simple Path to Wealth? What did you think? Let me know your thoughts in the comment section below!