Do you want to become wealthy?
I know you are thinking that the path is probably tough and complicated.
What if I tell you that there is a book that makes it easy to understand how to become wealthy?
The Simple Path to Wealth by J.L. Collins is a great introduction to money management and financial independence.
It covers debt, savings, investing, and strategies for retirement in a way that’s clear and easy to understand.
Each topic is laid out in a very basic and straightforward way. I found it to be a quick read full of thoughtful insights.
The interesting thing is it originated from a series of investment posts Collins initially wrote on his blog, which originated from a series of letters to his daughter, when, Collins, a self-described financial geek, was trying to teach her about money and she replied, “Dad, I know money is important. I just don’t want to spend my life thinking about it.”
It is mostly an investing book focused for American readers, but also has tons of general personal finance tips.
Whereas, you might get bored by most of the finance books out there, with esoteric equations about measuring a stock’s alpha and comparing it to its beta, the author completely disregards that style of writing and comes out as a great story-teller, adding fun anecdotes from his own life, some colorful metaphors and parables in the book.
So here are 5 takeaways I got from reading it:
1. Be a boss for your money:
The author advocates a self-directed approach to investing and money management.
He places a huge emphasis on avoiding debt, saving over 50% of your income, investing your savings in low-cost index funds and ignoring what the TV says.
He believes that the investment industry has a vested interest in making the process seem complex.
Investment pros want you to believe that saving for retirement is complicated and that you need help to be successful in the stock market. Plus, there’s the problem that many advisers profit from encouraging you to move your money around.
“Too many investment advisers have only their own interests at heart,” Collins writes.
“By the time you know enough to pick a good one, you know enough to handle your finances yourself. It’s your money and no one will care for it better than you.”
You all should read at least a few personal finance books early in your career so you become wealthy.
2. Do it yourself:
Most people that achieve financial independence are the kind of people that take responsibility for their career, their work, their income, their budget, etc.
Those who aren’t ready to take 100% responsibility are set up for failure.
Only by taking full responsibility for your life can you make positive changes.
This approach means no finger pointing, no playing the victim, and no blaming your life on your circumstances.
One of the myths of our generation is that we are entitled to a great life.
We think we are entitled to have beautiful partners, uncountable wealth, and great achievement in all areas of our life: somehow, somewhere, someone is responsible to make our life unbelievably successful.
If you want to be successful and financially independent, you must take responsibility for everything that happens to you. There are many people who are apprehensive about investing.
People are willing to act as the family CFO when it comes to generating a personal profit – but they don’t know what to do with the money they begin to accumulate.
Sometimes they turn to “professionals”. The truth is, you
can (and should) learn to manage your own investments.
A lot of new investors are timid. They don’t want to make mistakes.
They believe they need to pay somebody to help them, that the stock market is complicated, or that they can pick winning stocks.
None of this is true.
Go to the library. Borrow some books on smart investing. Read and learn more, as much as possible.
Learn what stocks and bonds are and how the markets work.
Teach yourself to invest in low-cost index funds. Ask questions. Don’t jump all in at once into investing as there is a chance to make a few early mistakes.
Take charge of your financial future! For your entire life!
3. The Stock Market is like Beer:
This is how Beer is compared to the Stock Market in the book:
“Imagine [somebody] has poured [a beer] for you, out of sight, and into a dark mug, you can’t see through.
You have no way of knowing how much beer is and how much is foam. That’s the stock market.
See, the stock market is really two related but very different things:
It is the beer: The actual operating businesses of which we can own a part.
It is the foam: The traded pieces of paper that furiously rise and fall in price from moment-to-moment. This is the market of CNBC.
This is the market of the daily stock market report.
This is the market people are talking about when they liken Wall Street to Las Vegas.
This is the market of the daily, weekly, monthly and yearly volatility that drives the average investor out the window and onto the ledge.
This is the market that, if you are smart and want to build wealth over time, you will absolutely ignore.
When you look at the daily price of a given stock, it is very hard to know how much foam is.
That is why a company can plummet in value one day and soar the next.
That is why CNBC routinely features experts, each impressively credentialed, confidently predicting where the market is going next — while consistently contradicting each other.
It is all those traders competing to guess how much beer and how much foam is in the glass at any moment.
While this makes for great drama and television, for our purposes, it is only the beer that matters.
It is the beer that is the real operating money-making underlying businesses, beneath all that foam and froth, that over time drives the market ever higher.”
The more attention you pay to the stock market, the worse your performance is likely to be.
You will be fearful and anxious.
The author offers specific recommendations for self-directed investing, and carefully explains the rationale behind his conclusions.
He also translates studies and stats into easy-to-understand English, which is no small achievement!
4. Frugality is freedom:
There’s this beautiful and eye-opening story in the book:
Two close childhood friends grow up and go their separate ways.
One becomes a humble monk, the other a rich and powerful minister to the king.
Years later they meet.
As they catch up, the portly minister (in his fine robes) takes pity on the thin and shabby monk. Seeking to help, he says: “You know, if you could learn to cater to the king you wouldn’t have to live on rice and beans.”
To which the monk replies: “If you could learn to live on rice and beans you wouldn’t have to cater to the king.”
There are those that view frugality as a sacrifice.
They feel like they’re giving more than they get.
The author would argue that the opposite is true: A high saving rate grants you freedom.
As counter-intuitive as it seems, learning to live on less allows you to get more out of life.
You can invest and prosper in life as long as you stick to the simple path:
Avoid Debt –> Spend less than you earn –> Invest the surplus
5. Index Funds:
The author explains why investing in shares is not gambling.
You are instead buying an ownership percentage of a company and that company is working to succeed and all those people working within it are working to make a profit to share with investors.
But he is also clear in saying that none of us is the genius stock picker that Warren Buffett is and we should not even try to pick winners because we might succeed occasionally, but mostly we will fail.
Rather his advice is to own a cross-section of companies, and you can do this by buying a broad-based Index Fund.
He explains that the beauty of index investing is that we don’t have to care about the details of each business because we own every company and every company is trying their absolute hardest.
Remember that the index is made up of actual companies creating employment and products to make a profit.
But still, some will succeed, and some will fail, but the thing is when you own them all, the index is self-cleansing and if they fall off the index they will be replaced by an up and coming company.
Mr. Collins himself wasted not just years but decades trying to guess the market by buying and selling and he actively resisted the idea of Index Funds when he says he should have followed the advice he is giving you and me now!
And his advice is to buy over your lifetime and enjoy the ride because there are going to be peaks where everything is awesome and lows when the market drops 50% or more.
He shows how to be resilient and enjoy the ride and why investing in Index Funds will reward you for your patience.
He tells you how to remain calm and stay the course when the stock market plunges; because it will always recover, it always has, and it will go up again.
The market always goes up over the long term.
It is a great book to read. Grab one on Amazon if you want to learn a lot more than what is given here.