Summer Reading: The Simple Path to Wealth

For many of us, the process of investing in the stock market seems like magic. It’s complex, difficult to understand or predict, and comes with a price. Our latest summer read, The Simple Path to Wealth by JL Collins, promises to change all that.

Collins wrote the book after giving sage investing advice to his daughter in a series of letters. Like most young people, his daughter wasn’t interested in spending extensive amounts of time thinking about and stressing about money.

Collins’ point was that by getting into debt, living beyond our means, and not investing in the stock market, we end up doing just that: stressing about money. So, he came up with what he says is a simple way to build your wealth. In most cases, the end goal would be to become a millionaire and have true financial independence.

Who this book is for:

While there are hidden gems peppered throughout The Simple Path to Wealth, the book’s overall strategy isn’t for everyone. Who will get the most out of this summertime read? If some or all of these things describe you, you may find success on this “simple” path to financial freedom:

You are young: Nearly all of the examples Collins gives are based on a 40-year investment period. If you’re already in your 30s or 40s, it would mean you’d be 70-80+ before you’d see the type of overall return he’s advocating for.

You can live like a monk: Following the simple path doesn’t mean you have to live on ketchup and rice like Collins did in early adulthood, but it does mean you’ll need to buckle down and stop spending money on non-essentials. If you won’t give up weekly lattes and yearly vacays, at least to start, your likelihood of succeeding on this path is very low.

You don’t have excessive debt: Collins firmly believes that you shouldn’t carry any debt, if possible. Unfortunately, if you already have a 300K mortgage, a 100K student loan, large credit card or medical bills etc., you probably can’t invest the recommended 50% of your income. Before stepping onto the simple path, you’ll need to find ways to pay off most or all of that debt first. Check out this Good Morning America video on how one couple paid off $120K in debt in less than three years.

You’re all about the long-game: Over the 40-year period that Collins grew his wealth, he estimates an average return of 11.9% on his investments. However, as the market fluctuates, you may see lower returns; and in some periods, actually lose money. The simple path assumes that you are willing and able to wait out the inevitable downturns of the market.

What’s inside?

Collins covers everything from debt and spending money to stocks and Social Security. While most of the book focuses on strategies for building your wealth and working toward his vision of financial independence, more specifically by investing in Index funds, he has a few key concepts that aren’t just about the market.

  • The 4% Rule: Collins’ plan is based on the idea that you should (and can, if you’re smart) be able to live off of just 4% of your net worth each year.
  • F-you Money: The F here really stands for “freedom.” This is Collins’ colorful name for cash you have stashed as a cushion should something unexpected happen. According to the author, it comes from a novel by James Clavell in which a young woman aims to make $10M in order to gain financial independence. Translation: If you have F-you Money saved, then you could up and quit a terrible job today, or take a month off to travel the world, without any financial fears.
  • Debt is bad. Yes, this was in the list above, but we’re underscoring it here. It is nearly impossible to get the kind of results that Collins lays out in the book if you have debt hanging over your head. Sure, you can still invest in HSAs, 401(k) accounts, mutual funds and more while managing a big debt load. But you’ll barely be able to scratch the surface of what’s possible if your income is largely going toward debts.
  • Learn to live with less. Like this guy who retired at age 35, Collins isn’t living large most of the time. Unless you make bank, frugal living will likely be a key part of the plan. Note that Collins’ wealth building plan does allow occasional splurging on experiences that will boost your overall life satisfaction, such as a vacation to remember or an art class with a master painter.

You Can Become a Millionaire, but Not Overnight

The author’s singular focus on investing makes The Simple Path to Wealth easy to understand, if not implement. Collins is confident that his path is the best way to achieve financial freedom. Just follow his overarching rules, and you’ll eventually get there.

Pay off debt. Put 50% or more of your take-home pay to work for you in the market. Don’t live beyond your means. Invest in mutual funds, specifically VTSAX (Vanguard Total Stock Market Index Funds) and VBTLX (Vanguard Total Stock Market Index Funds). Be prepared to wait.

Even if you aren’t willing to make the sacrifices necessary to follow the advice Collins gives, there are things to be learned from reading The Simple Path to Wealth. Use it as a primer to learn the basics of investing. Take the advice with a grain of salt. And decide for yourself whether this simple path will help you reach your financial goals, or whether another road is a better one for you.

The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.