The Simple Path to Wealth

I owe a lot of my financial thinking to one book. That book is “The Simple Path to Wealth” by JL. Collins. His book has inspired many to go out and work on achieving financial independence.

This book breaks down the keys to creating wealth, simple attitudes to adopt, and a plan to implement. Let’s take a look at the simple path to wealth.

Key #1: Spend Less than you Earn

Collins starts off his book with a story of a monk and a minister. These two guys grew up together, and one became a humble monk, and the other was the minister to the king.

One day, the Minister in his nice robes came to the Monk and said “You know if you could learn to cater to the king, you wouldn’t have to live on rice and beans.” The monk responded “If you could learn to live on rice and beans, you wouldn’t have to cater to the king.”

Let's look at this story; it shows us how people live and work. A person that gets a raise is no more wealthier than he was before the raise. This is called “Lifestyle creep.”

As we make more money we spend more money. It does not mean you are more wealthy. You are just earning more money while still living on that paycheck to paycheck lifestyle

Famous Examples of Spending

The Richest Man in Babylon also mentions the same concept. He asked a group of people if they had money in their purses, but they had empty purses. It showed that these people even though they had different jobs and made different loads of money they kept spending it.

A famous example in the book is the story of Mike Tyson. Mike Tyson had a Net worth of $300,000,000 and went bankrupt. He was spending $400,000 a month.

Collins Advice:

Collins offers the advice that to be able to be wealthy you need to spend less than you earn. Most people will say to save 10,15, or 20% of your take home income.

He recommends 50%. If you are able to live off of 50% of your income, and are able to invest the remainder of that 50% in a total stock market index fund that averages 8% a year, you could be financially independent very quickly. 

If we can learn how to spend less than we earn we can become financially independent quicker, and not have to rely on working for our income.

Key #2: Avoid Debt

Debt is a massive thing, especially in America. At the time of writing this book (2016), America was approximately $12 Trillion in debt. These numbers are probably way higher by now.

• $8 trillion in home mortgages
• $1 trillion in student loans
• $3 trillion in other consumer loans such as credit card debt and auto loans.

 That is a ton of debt. This debt could kill any momentum you may have in your financial journey.

“Debt should not be considered normal. It should be recognized as the vicious, pernicious destroyer of wealth-building potential.”

Collins goes on to say how debt destroys your life.

• Your Lifestyle is diminished
• You are enslaved to whatever source of income you have
• Your stress levels build
• You endure the same type of negative emotions experienced by any addict
• Your options are narrowed
• You will have debt that tends to focus your attention on the past, present, and future in the most negative way.
• Your brain tends to shut down on the subject.

Debt is something that people do not wish upon others. It is a soul sucking device to keep people down.

Path to get rid of Debt

If you have debt there are ways to get out of it quickly and efficiently.

Dave Ramsey would suggest to take the smallest loan and pay that off using the Snowball method. JL. Collins believes in the Avalanche method. 

You take the loan with the highest interest rate and pay that off first. Paying the minimum on all of the other loans.

You then Rinse and Repeat going on to the next highest interest rate. In this way you pay down the debt much quicker, and you pay less in interest.

Collins goes into a list of ways to help pay if off quicker as well:

• Make a list of all your debts
• Eliminate all non-essential spending. (like coffee, cocktails, and $20 dinners)
• Rank your debts by interest rate
• Knock out the one with the highest interest first.

If you spend less and avoid debt you are halfway there to your financial freedom.

Key #3: Invest the Rest

We have gone over the first two keys of his book. Spend less than you earn, avoid debt, and lastly invest the rest. 

Collins calls this book “The Simple Path to Wealth,” and investing is not as simple as people may think. Stock picking is hard. Even the experts get it wrong. Collins knows this so he made it simple.

Invest in Index Funds

Why pick one stock when you can pick them all. 

From 1975-2015 the stock market went on an up and down cycle averaging 11.9%. That number may not always happen.

If you had put $12,000 in an index fund tracking the SP500 in 1975, by 2015 it would be worth $1,077,485. That is a lot of money. You did try to beat the market. All you did was to match it with a simple index fund.

When investing, people can get mixed up in the emotional game of picking stocks. Even the best stock pickers, like Warren Buffet, cannot always get it right.

The thing is if you pick a total market index fund like VTSAX, which is made by Vanguard, you will not beat the market, but you will match it every step of the way. 

Why pick many stocks when you can pick one fund with all the stocks. At 8% return, you could effectively become a millionaire if you invest the money you do not spend.

The higher the savings rate the money that money will compound and create even more wealth. That is the power of compounding interest.

The 4% Rule

Lastly, Collins ends off with talking about a withdrawal rate of 4%. The trinity study created the 4% rule to show that we need 25x more of what we spend to retire on. If we spend less we can be financially independent quicker.

The Simple Path to Wealth Formula:

Collins puts all of his advice in his simple formula: 

“Spend less than you earn–invest the surplus–avoid debt”

We can truly take a lesson from these words and this book. I may have not covered the entire book since there is more in it, but this is the gist for The Simple Path to Wealth. This is the inspiration of the quote I like to use. 

With gratitude, I thank JL. Collins for his insightful book and a path for us all to travel upon.

” Spend less than you make, stay out of debt, and invest the rest”