Book notes: The Simple Path to Wealth by JL Collins

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The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life by JL Collins

Synopsis:

“This book grew out of a series of letters to my daughter concerning various things – mostly about money and investing – she was not yet quite ready to hear.

Since money is the single most powerful tool we have for navigating this complex world we’ve created, understanding it is critical.

“But Dad,” she once said, “I know money is important. I just don’t want to spend my life thinking about it.” This was eye-opening. I love this stuff. But most people have better things to do with their precious time. Bridges to build, diseases to cure, treaties to negotiate, mountains to climb, technologies to create, children to teach, businesses to run.

Unfortunately, benign neglect of things financial leaves you open to the charlatans of the financial world. The people who make investing endlessly complex, because if it can be made complex it becomes more profitable for them, more expensive for us, and we are forced into their waiting arms.

Here’s an important truth: Complex investments exist only to profit those who create and sell them. Not only are they more costly to the investor, they are less effective.

The simple approach I created for her and present now to you is not only easy to understand and implement, it is more powerful than any other.” -Audible

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Opening thoughts:

I heard about this author when I saw him as a guest on Hasan Minhaj’s YouTube podcast HMDK – Financial Literacy for Dummies (Like Me) with JL Collins. Even though I’m big on personal finance, I had never heard of this author. After looking him up and seeing his credentials, I decided to pick up his book which seemed like a solid book on personal finance, particularly investing and building wealth.

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Key notes:

Chapter 1: Introduction

• Complex investments only exist to profit those who want to sell them. They’re ultimately less effective and more costly
• The path to wealth is simple: spend less than you earn, invest the difference, and avoid debt

Chapter 2: A parable: The Monk and the Minister

Chapter 3: My Story: It has never been about retirement

• For him, it’s always been about having options and the freedom money provides

Chapter 4: Important notes

Part One: Orientation

Chapter 1: Debt: The Unacceptable Burden

• Debt is the single most dangerous obstacle to building wealth
  • Debt should not be seen as normal

Chapter 2: Why you need F-You money

• There are many things that money can buy, but the most valuable thing is freedom

Chapter 3: Can everyone really retire a millionaire?

• Being independently wealthy is every bit as much about limiting needs as it is about how much money you have
  • It is less about how much money you earn

Chapter 4: How to think about money

• There is always an opportunity cost involved when you decide to spend your money instead of saving or investing it

Chapter 5

• Fear and greed are the two emotions that drive most investors
• Nobody can reliably predict the future or time the market
  • The best advice is to not try or believe you can

Part Two: How to Harness the World’s Most Powerful Wealth-Building Tool

• “Simplicity is the keynote of all true elegance“

Chapter 6: There’s a major market crash coming!!!! and even famous economists can’t save you

• The most important thing is to correct bad behavior
  • Recognize the counterproductive psychology that causes bad investment decisions, such as panic selling, and correct it in yourself 
• Market crashes cannot be predicted, but they are to be expected
• The market always recovers
  • And even if it doesn’t, no financial advice would matter anyway
• The market always goes up over the long-term
  • The market is the single best performing investment class over time, bar none

Chapter 7: The market always goes up

• Index funds like VTSAX mean you own a piece of almost every publicly traded company on the market, and it’s a self-cleansing entity
  • The companies within it are constantly trying to grow, which makes it the single best investment class in the long run

Chapter 8: Why most people lose money in the market

• The reason why most people lose money in the stock market is that they try to time and beat the market, but statistically, most people who try to do this by high and sell low
• Analogy: investing in the stock market with a bunch of so-called smart and credentialed financial experts is like figuring out how much of a mug is filled with beer versus foam

Chapter 9: The Big Ugly Event

Chapter 10: Keeping it simple: Considerations and tools

• The more complex an investment is, the less likely it is to be profitable
• Be aware of your investment stage, your risk tolerance, and your investment time horizon
• Complete safety is an illusion and risk is a fact of life
  • F-you money is critical especially for life’s uncertainty
• Don’t be quick to think short term
• Most of us should be long-term investors
• The three tools you’ll need are:
  1. Vanguard total stock market index
  2. Vanguard total bond market index
  3. Cash

Chapter 11: Index funds are really just for lazy people, right?

• Indexing is not cool or exciting, but it is effective, simple, and less effort for more returns

Chapter 12: Bonds

• Simply stated, bonds are ways to loan money to organizations or governments that will pay you back over time
  • Bonds hedge, the risk when deflation occurs
  • When interest rates rise, bond prices fall. When interest rate rates fall, bond prices rise
• Municipal bonds are bonds issued by governments and government agencies at the state and local level
  • While offering lower interest rates than corporate bonds, they have the advantage of being exempt from federal income taxes, and also generally exempt from state income taxes in the state where they’re issued, which makes them appealing for people in high tax brackets, especially if they live in a high income tax state

Chapter 13: Portfolio ideas to build and keep your wealth

Chapter 14: Selecting your asset allocation

• Depending on what stage you’re in, either the wealth building or the wealth preservation stage, as well as your tolerance for risk, will determine your strategy

Chapter 15: International funds

• The argument against needing to add international funds is that our U.S. total stock accounts mostly for companies that do business internationally, so we already participate in international markets

Chapter 16: TRFs: The simplest path to wealth of all

• Target Retirement Funds are the simplest of the simplest paths to wealth of all

Chapter 17: What if you can’t buy VTSAX? Or even Vanguard?

Chapter 18: What is it about Vanguard anyway?

• He recommends Vanguard because it is investor-owned, which means lower fees, so it operates at cost

Chapter 19: The 401(k), 403(b), TSP, IRA and Roth buckets

Chapter 20: RMDs: The ugly surprise at the end of the tax-deferred rainbow

• Be aware of the required minimum distribution rules and plan for a withdrawal strategy that makes sense for you

Chapter 21: HSAs: More than just a way to pay your medical bills

• HSAs are like IRAs for your medical bills
• There are requirements, but usually you need a high-deductible health plan

Chapter 22: Case study: Putting The Simple Path to Wealth into action

Chapter 23: Why I don’t like investment advisors

• The incentives for financial advisors (how they make money) are not aligned with saving you money and maximizing your returns
  • Ex: starting with $100k over 20 years at 11.9%, compared to subtracting a 2% annual fee for an advisor, results in $286k less money
• The great irony of successful investing is that simple is cheaper and more profitable
  • Complicated investments only benefit the people and companies that sell them

Part Three: Magic Beans

Chapter 24: Jack Bogle and the bashing of index funds

• Even Warren Buffett recommended 10% in short-term government bonds and 90% in low-cost index funds, specifically Vanguard, as a portfolio recommendation

Chapter 25: Why I can’t pick winning stocks and you can’t either

Chapter 26: Why I don’t like dollar cost averaging

Chapter 27: How to be a stock market guru and get on CNBC

Chapter 28: You, too, can be conned

Part Four: What to Do When You Get There

Chapter 29: Withdrawal rates: How much can I spend anyway?

• The standard recommendation is 4%, but no more than a 6-7% withdrawal rate

Chapter 30: How do I pull my 4%?

• Reader’s note: He outlines the mechanics of how he withdraws 4% as a starting point. Also, he advises to not set up an automatic withdrawal schedule but rather to adjust as needed per the market

Chapter 31: Social Security: How secure and when to take it

Chapter 32: How to give like a billionaire

• Reader’s note: This section talks about the mechanics of having a charitable organization and how that can work with your finances and investments

Chapter 33: My path for my kid: The first 10 years

Chapter 34: Tales from the South Pacific

Chapter 35: Some final thoughts on risk

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Closing thoughts:

Absolutely loved this book and it is now immediately in my top 3 personal finance books of all time. Not only is the advice simple and to the point, but the actual mechanics of investing and what he’s recommending is simple and to the point.

Would highly recommend this book in conjunction with I Will Teach You to Be Rich by Ramit Sethi and The Psychology of Money by Morgan Housel.

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One Takeaway / Putting into practice:

There’s really only one main takeaway from this book:

• The great irony of successful investing is that simple is cheaper and more profitable

I think if people understand this about investing, they’ll understand that the path to wealth is indeed simple.

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Nutshell:

JL Collins teaches us that the path to wealth is simple: spend less than you earn, invest the difference, and avoid debt.

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Similar books:

• Same as Ever by Morgan Housel
• The Psychology of Money by Morgan Housel
• The Almanack of Naval Ravikant by Eric Jorgenson
• Unshakeable by Tony Robbins
• Essentialism by Greg McKeown
• Principles by Ray Dalio

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Rating:

4.5/5

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