The Simple Path to Wealth: a TDD Book Review

  • Category:  Personal Finance
  • Author:  JL Collins
  • Published:  2016

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Introduction

The Simple Path to Wealth is probably the top book I’d recommend if you are interested in long term investing success.

With this book, JL Collins cements his status as a pillar of the personal finance world.  His accessible, well reasoned investing philosophy provides a clear path to success for every investor.  

Below, I’ll outline the key concepts of his book. Here they are:

  • The concept of “F-You Money”
  • What to do about debt
  • How to think about money
  • Why to invest in stocks
  • How to invest your money
  • Why VTSAX?
  • How much can I withdraw in retirement?

These following sections will give you a flavor of his writing and his conclusions, but for this book, I’d really recommend buying the book and reading it yourself.  It could mean the difference between literally millions of dollars down the road.

The concept of F-You Money

Collins defines “F-You Money” as having enough money saved to stop working for a time if desired.  (You can tell your boss: “F-You.”) Perhaps you’ll stop working for a few months, or perhaps it’s a permanent retirement.  

With his natural saving tendencies, Collins writes how he saved up F-You Money early in his working career, and used it to negotiate his benefits from a position of strength.  Later, his wife used F-You Money to become a stay at home mom. More recently, Collins used his wealth to retire early as a financially independent writer, speaker, and blogger. 

The remainder of the book explains how you can get your own stash of F-You Money.

What to do about debt

An early chapter is dedicated to debt, because to him, debt is the single biggest obstacle to building wealth.  In fact, he warns against using debt at all.  

Longtime readers will know that I disagree with him about this, and am using debt to more rapidly grow my real estate investments.

But I completely agree with him that debt does these things:

As a rule of thumb, he recommends paying off debt if the interest rate is ≥ 5%.  If it’s ≤ 3%, pay it off slowly and divert the extra money to investments. In between 3-5%, you decide.

How to think about money

Collins recommends viewing $100 as actually being worth more than just $100. 

Instead, think about it as a tool to add momentum to your compound interest stash of F-You Money that will one day let you do whatever you want with your time. 

Why to invest in stocks

Collins presents some startling conclusions here that are vital to understanding his investing philosophy:

  • The stock market always goes up, eventually.
  • The market is “the single best performing investment class over time, bar none”
  • Market timing is a loser’s game

He backs this all up with historical data and great images.  It’s very convincing.  

My only nitpick here would be that he doesn’t get into the ways that taxes affect things down the road.  For those of us going for moFIRE, taxes will indeed be an issue, which is why I espouse a more balanced approach that includes tax advantaged real estate.

How to invest your money

Here it is, the simple strategy that leads to investing success:

  • Buy VTSAX (Vanguard Total Stock Market Index Fund)
  • Keep on buying it through all market fluctuations
  • Mix in up to 25% VBTLX (Vanguard Bond Market Index Fund) as you get closer to retirement
  • Keep a cash cushion

Why VTSAX?

JL Collins gives the most coherent argument for why most investors in the “accumulation phase” of their lives should just put all their money into VTSAX (Vanguard Total Stock Market Index Fund)

  • VTSAX historically beats 82% of actively managed funds
  • VTSAX is much cheaper to own than actively managed funds due to super low fees
  • VTSAX is “self-cleansing”
    • Companies may rise in value 1000%, but the most they can ever lose is 100%
    • Companies that fail are “cleansed” out of the index

The point about how the total stock market index is “self-cleansing” was especially powerful for me. To reiterate this point, a small company might rise to become the next Apple, and it’ll bring the index along for the ride. If the company flames out, it’ll just drop out of the index and be replaced by another, more worthy company.

How much can I withdraw in retirement?

In the last part of the book, he goes over the withdrawal rates that can guarantee a smooth retirement.

Here is the answer:

  • Shoot for a 75% stocks / 25% bonds asset mix by retirement
  • Withdraw between 3-4% a year
  • You will have almost a 100% chance of dying with much more money than you started with

This is backed up with hard numbers from the famous Trinity study, with more detail than I’ve seen elsewhere.  

Conclusion

JL Collins succeeds in delivering exactly what he promises:  a simple, clear strategy for long term investing success.

He’s a talented writer, and the book reads like a conversation you might have with a friend over coffee.  He makes a strong, coherent argument for his investment strategy that is beautiful in its simplicity.  

I’ll say it again.  If you’re going to read one book on personal finance and investing, this should be it.  

— TDD

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Wealthy Doc
3 years ago

Nice review of an excellent book.
JL Collins has the knowledge, experience, independent thinking, and writing ability to make complex points clearly.

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