The Simple Path to Wealth: Your road map to financial independence and a rich, free lifeby J.L. Collins
Understanding how to properly manage your money is critical, as it is the single most powerful tool we have for navigating the complex world we’ve created. The Simple Path to Wealth simplifies the roadmap to financial success, from building wealth to preserving it for generations.
Debt: The Unacceptable Burden
“Not surprisingly, debt has been promoted as, and largely embraced as, a perfectly normal part of life.”
To achieve financial freedom, you must think differently. Recognize that debt should not be considered normal. Rather, it should be recognized as the vicious, pernicious destroyer of wealth-building potential it truly is. It has no place in your financial life.
Debt is a crisis that needs immediate attention. If you are currently in debt, paying it off should be your top priority. Nothing else is more important.
Once all your debts are paid off, remind yourself to avoid having them again at all costs–except when you can use them wisely to generate more money and are 100% sure you can properly take care of them. Otherwise, it can bring you more consequences than you think.
Instead of acquiring debts, start saving money more than you earn and investing what is left over. Since money is our most powerful tool for navigating the complex world we've created, understanding it is critical. If you choose to master it, money becomes a wonderful servant. If you don't, it will surely master you.
Money can buy things, but nothing is more valuable than your freedom.
In terms of investing, you must understand that your home is not a part of it. Houses are usually expensive and won’t provide more income when bought. Thus, you should buy the least amount of house to meet your needs. Remember that allowing more and greater things in your life will also demand more time, money, and energy.
To build wealth, invest in the stock market instead. This requires weathering ups and downs to realize the market gains, holding your shares through the downturns, and never selling for less.
Remember to buy more when shares cost less and don’t worry about drops. Expect your wealth to disappear several times during your investing career, and be willing to take those risks for bigger returns.
Actions to take
The Most Powerful Wealth-Building Tool
"Simplicity is the keynote of all true elegance."
The market is unpredictable. Regardless of what people say, no one can precisely know what will happen in the market.
Take Warren Buffet, for example. During the economic crash of 2008-2009, he lost about 25 billion dollars. Instead of panicking and trying to time the market, he kept investing and patiently waited for the market to recover. He gained back the wealth he lost, and much more.
There are many types of investments where we can put and grow our money. Two of the most popular are stocks and mutual funds.
Stocks are not just little slips of traded paper. When you own stock, you own a piece of a business. These are companies filled with people working endlessly to expand and serve their customer base. They compete in an unforgiving environment that rewards those who can make it happen and discards those who can't. This intense dynamic makes stocks and the companies they represent the most powerful and successful investment class in history.
Actively Managed Stock Mutual Funds are huge and highly profitable for the companies that run them, but not so much for their investors. In fact, it’s so profitable that more mutual funds are available than stocks.
Complex investments have added fees and benefits for external parties. If you want to avoid financial advisors who charge high fees and place your money in complicated investments, it’s best to buy Vanguard Total Stock Market Index Fund or VTSAX.
VTSAX is a Vanguard index fund that covers the entire US stock market. By buying VTSAX, you will invest in roughly 3,700 companies throughout the country—a pretty safe bet. This is ideal for those who want to put all their eggs in one basket.
Investing in Tax-Deferred Accounts is also suggested, especially when preparing for retirement. These are accounts that let your investments compound without paying taxes so that you’ll have a major source of income when you retire. Fund these accounts first whenever possible.
If you find yourself hesitating to invest, even if you’re already knowledgeable about it, remind yourself to stop thinking about what your money can buy; instead, focus on what your money can earn and then think about what those earnings can earn.
Actions to take
There Isn't a Magic Formula
"Wisdom comes from experience. Experience is often a result of lack of wisdom."
In these days of low-interest rates, lazily investing doesn't have much earning potential. So, it’s better to keep as little as possible on hand, consistent with your needs and comfort level.
It is a challenge for smart people to accept that they can't outperform an index that simply buys everything. They think that spotting the good companies and avoiding the bad is easy when in fact, it’s not. Life is balance and choice; add more of this, and lose a little of that. When it comes to investing, that balance and choice are informed by your temperament and goals.
When you feel bad about not being able to predict a stock that is not performing well, don’t worry too much because nobody can. Anyone who tells you otherwise is just a financial guru trying to make promises they can't deliver. They're just speculating.
At some point in your life, you may find yourself in the dilemma of having to decide what to do with a large sum of money. The minute you decide to invest it, you may hear about the dollar cost average (DCA).
When you dollar cost average into an investment, you take your chunk of money, divide it into equal parts and then invest those parts at specific times over an extended period of time.
This is not the best strategy since it only has a 23% success rate. Instead, it’s better to identify first what stage you are in—wealth accumulation or preservation? Then, pick the best strategy. If it is the first, choose to invest a large percentage of your income in index funds. If it is the latter, choose asset allocation for a smooth ride.
Actions to take
What to Do When You Get There
"Money frees you from doing things you dislike."
As you approach retirement, you’ll reach a wealth preservation stage where bonds can help you level the playing field. It’s recommended to have at least a 20/75 split in your investments where you hold 20% in bonds, 75% in stocks, and 5% in cash. You can change this ratio depending on the risk you feel comfortable with. For example, some people have a ratio of stocks and bonds to 50/50.
The amount you can spend when you’ve reached this stage varies in your situation. If you have avoided debt, spent less than you earned, and invested the surplus for the past years, you can spend up to 4% of your money—or more, depending on your current financial state.
Basically, withdrawing 3% or less is the safest bet, but the 4% rule is still pretty safe. If you withdraw anything from 7% and above, you are nearly guaranteed to run out of money long-term. Following this principle protects you from inflation and financial crises that may happen in the future.
Actions to take
Types of Accounts
"Complex investments exist only to profit those who create and sell them."
Now, you might be sitting on your stash and wondering just how much to put in each account, how much you can spend each year and not run out, and what types of accounts are available to you. This could be stressful, but it really should be fun.
There are different types of accounts in which you can invest. Here are the following options:
Health Savings Accounts (HSA) - are great places to hold investment money. You can let the money grow indefinitely by investing it instead of spending it. If you pay your health expenses out of pocket, you can use the account to pay yourself back later without any taxes or penalties.
401(k) - is a retirement account provided by an employer. Employers will often match the amount you put into the account up to a certain threshold. These offer tax-free growth, but taxes will be due when the money is withdrawn.
Roth 401(k) - similar to a Roth IRA, tax is paid immediately, but the money can grow tax-free, and no taxes are due on the withdrawal.
Deductible IRA - refers to an individual retirement account created for personal investments. Here, you can only invest a certain amount per year. Often, you can roll over 401(k) accounts into your IRA accounts if you leave your employer.
Non-Deductible IRA - taxes are due on the account’s earnings when money is withdrawn. The good thing is that it has no income requirements.
Roth IRA - this is where you’ll pay taxes as you fund the account, but it can grow tax-free, meaning you pay no taxes when you withdraw it later. Eligibility to fund these accounts depends on your income.
Actions to take
"If you choose to master it, money becomes a wonderful servant. If you don’t, it will surely master you.”
When it comes to wealth, one important topic that is often overlooked is preserving it for up to seven generations. Invest not only for your personal gain but also for your family, who will outlive you for many decades.
If wondering if it’s possible to manage wealth across seven generations, the answer is a resounding yes. While seeing fortunes squandered by irresponsible heirs makes for compelling storytelling, the successes are more frequent. They are certainly more quietly achieved. This is likely especially true with the relatively modest amounts being discussed here.