7 lessons from The Simple Path to Wealth
If the FIRE (Financial Independence Retire Early) movement collectively had to pick one book, it would probably be JJ Collins’ The Simple Path to Wealth.
It’s not hard to see why. His route to financial independence is so concise and straightforward that you could hypothetically just read his summary list on the first page of the book and get all you need to know about how to manage your money.
In his signature no non-sense, no frills, sometimes tough-lovey style, Collins lays out the basic principles of financial freedom, which he believes to be accessible to everyone who’s willing to adopt his simple strategies. The Simple Path to Wealth is especially a good resource if you’re new to investing, and are intimidated by the whole thing.
Here are 7 lessons I learned from Collins’ seminal book.
1) Spend less than you earn; invest the surplus; avoid debt.
If this book could be summarized in one sentence, it would be this. Regardless of what your income is, Collins suggests you can get to financial freedom if you keep your spending below it.
“Being independently wealthy is every bit as much about limiting needs as it is about how much money you have,” he writes, “if your lifestyle matches—or god forbid exceeds—your income, you are no more than a gilded slave.”
That’s why he recommends as high a savings rate as you can muster without making yourself miserable. The higher your savings rate, the faster you will get to financial freedom (provided you invest most of your savings), and avoid debt at all costs. A high savings rate also has the advantage of training to be happy to live with less, which is a crucial skill to have to maintain financial freedom.
Debt is to be avoided, because it diminishes your lifestyle, makes you enslaved to your job, devours your income in interest payments, narrows your options, erodes your power to choose what’s best for you, and undermines your mental health. Collins recommends you pay anything above 5% interest rate ASAP, anything between 3-5% while investing at the same time, and anything less than 3% slowly while routing more of the money to your investments. (This is because index funds typically bring back about 4% over the long term.) To do this, (1) make a list of all your debts, (2) rank your debts by interest rate, (3) pay the minimum required on all and then focus the rest of your money on the one with the highest interest rate first, (4) keep going down the list until it’s all paid off, and (5) celebrate once you’re done.
2) Always have F-You money.
This is also known as “emergency fund” amongst personal finance circles, but I like Collins’ version because I think people are hit with frustrations much more often than they are with true emergencies. And it puts more emphasis on freedom than survival.
Collins suggests that no tool is more important than an F-You fund in the world we live in, where a lack of financial resources so easily translates to a complete lack of control on our destiny. With no social safety or proper welfare measure in place (especially in the United States), everyone is sort of left to their own devices to save themselves from destitution.
An emergency fund typically consists of six months of expenses, but F-You money is a larger, more inclusive concept, and can mean anything from a basic emergency fund to the amount of net worth you need to no longer have to work to meet your needs.
To accumulate your F-You funds, Collins recommends saving and investing 50% of your income, suggesting that “with no debt, this is perfectly doable.” I think this is a very tall order, particularly for low-income folks living in HCOL (high cost-of-living) areas, but the fact still remains that we all need to have as big a cash cushion as we possibly can to weather any unexpected event that may be headed our way. Every little bit counts.
3) Sound investing is not complicated.
The stock market is a powerful wealth building tool, and you should be investing in it no matter your income or age. Most people are afraid of its daily fluctuations and intimidated by the plethora of funds with confusing-looking five letter ticker symbols. This is mostly intentional, as we’ll see down in #4, and should not prevent you from starting to invest.
The major principles that will put you ahead of most are actually quite simple:
Don’t try to time the market, invest in the market in its entirety instead of individual stocks. (Bet on the casino.) You can do that with index funds.
Index funds include funds from a bunch of different companies, and they are “self-cleansing,” because corporations that fail also fall off the index.
Nobody can predict when drops will happen in the market. Do your best when they happen and do NOT sell. (In fact, keep buying since everything will be “discounted.”) This is normal—the market will very likely correct itself, and continue its upward trajectory.
When you can live on 4 percent of your investments per year, you are financially independent. (For example, if your yearly expenses are $50,000, your freedom number would be 50,000x25=1,250,000. This number may seem too big, but it’s fairly accessible when you are investing, as opposed to just keeping your money in a checking account.)
The market is the single best performing investment class over time, bar none.
4) Complex investments exist only to profit those who create and sell them.
As I said above, some of the complexity attributed to the stock market is deliberately fabricated by corporations that make their money out of the general public’s intimidation. In other words, they fill their pockets precisely when other people say, “this is too complex and the stakes are too high. Let me hire a professional.” In reality, it’s simple enough that you can (and should) do most of the work yourself.
Collins writes, “avoid investment advisors. Too many have only their own interests at heart. By the time you know enough to pick a good one, you know enough to handle your finances yourself.”
Not only are advisors costly and self-interested, but also most mutual fund managers are less effective than the market itself. In a 2013 study Vanguard conducted, looking at all of the 1540 actively managed equity funds since 1998, they found that only 55% of these funds survived and only 18% outperformed the market. In other words, you would have been better off 82 percent of the time betting on the market rather than trusting a person who actively picks all the stocks in a mutual fund.
The truth can’t be stated too many times: Nobody can time the market. So instead of trying to pick the winning mutual fund managers or focusing on daily fluctuations, play the long-term game.
5) You own the things you own and they in turn own you.
We purchase various things with our money, and at least some of them tend to make our lives harder instead of easier. Whether it’s the extra sweater you don’t really wear, or a home that’s expensive to own, the maintenance costs, property taxes, the clutter they create all have a negative effect on our mental health while also limiting our options. They keep us bogged down and worried.
Yet these expenses often go unquestioned along with our assumptions about our values and priorities. Most of us tend to do things because we’ve “always” been doing them, purchase things because we think we can’t live without them, and don’t engage in a simple thought process that’ll show you that these assumptions aren’t true of our present selves. In the words of the author, “if you want to be wealthy—both by controlling your needs and expanding your assets—it pays to reexamine and question those beliefs.”
The aim here is to know your true priorities and align your purchases with them. Let needs emerge organically before you actually meet them. Keep your belongings as light as possible without feeling deprived. As Collins writes, “money can buy many things, but nothing more valuable than your freedom.”
6) Since money is the single most powerful tool we have for navigating this complex world we’ve created, understanding it is critical.
Understanding the basics of personal finance is relatively easy, and yet the lack of this basic education is as neglected as it is crucial. As someone who has been in schools getting various degrees in three different countries, I can tell you that I’ve never come across any financial education in any of the schools I attended. It took me finding myself in financial dire straits to educate myself using books and free online resources.
Based on my experience, I can tell you this: If this stuff intimidates you, it’s because financial professionals want you to think it’s complex because that’s how they make money. You owe it to yourself to learn enough so that you can manage your own assets without getting help from a family member or paying a professional whose motives may not align with your goals. A basic financial education would also help you consider the financial side of things when making big life decisions, like picking a career, or choosing a place to live.
7) Financial independence is not about retirement. It’s about having options. It’s about being able to say “no.”
Money is ultimately about other things like freedom, and the ability to control one’s time on this earth. It’s about being able to provide for people you care for, and say “no” to the ones who want things from you that you don’t want to give (hint: your time).
Each day of life is precious. Having financial confidence helps you to enjoy the present moment without worrying too much about the future. To get there, it’s useful to stop thinking about what money can buy and start thinking about what it can earn. “Once you begin to do this,” Collins writes, “you’ll start to see that when you spend money, not only is that money gone forever, the money it might have earned is gone as well.”
The balance between enjoying today and creating safety for tomorrow is not an easy one to strike. But once you decide to at least strive for it, it is one that’s available to most of us, regardless of our income level.
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The Simple Path to Wealth is a great reference book for those who want to start investing and are afraid to get into the seemingly complex world of the stock market. It also includes straightforward and valuable wisdom about the role of money in all of our lives.
Collins lays out his financial principles in all their simplicity: avoid debt, build a career that makes you proud, don’t get trapped by lifestyle inflation, save as much of your income as you can, invest in low fee index funds, take advantage of employer sponsored retirement options, invest in a Roth IRA and a brokerage account, don’t get phased by market drops, and keep doing these for at least one decade to reach (or at least get very close to) financial independence.
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