The Simple Path to Wealth - Summary and review

The Simple Path to Wealth is about achieving financial independence (FI) in a straightforward way. Avoiding complex instruments or risky bets.

First, let us look into what this financial independence is about - and why it is something you might want to achieve.

So most of us have heard about financial independence (FI). It's basically achieving a sum of money - a portfolio goal - that allows you to finance your lifestyle to an extent where you don't have to think about money ever again.

You are then financially independent and free to do what you want.

Your portfolio goal, say $1M - means you can then safely withdraw 3-7% each year while STILL growing your assets. Collins suggets, you should rely on the 4% rule (backed by a few famous studies).

Financial independence has a lot of different layers. It totally depends on what type of lifestyle you require.

Two childhood friends, Ken & Mark, grew up and went their separate ways.

Ken became a powerful advisor to the king. Mark, become a monk.

When they meet years later, the minister feels bad for his friend. “If you learned to serve the king, you wouldn’t need to live on rice and beans..” he tries to advise him.

But the monk only replies, “If you learned to live on rice and beans, you wouldn’t need to serve the king..”

FIRE stands for "Financial Independence Retire Early" and is a popular next step to the financial independence, where you aim to retire from your full time job, when reaching a necessary portfolio goal.

Also, to the FIRE concept, there are a bunch of different varieties, depending on what type of lifestyle you aim for. These are becoming popular and drawing communities - for example different subreddits for LeanFIRE, FIRE, ChubbyFIRE, FatFIRE -> depending on the type of lifestyle you want.

FatFIRE is typically for those that don't want to work at all, and want to maintain a luxurious lifestyle. Some define it as "If you are in the top 10% of households by income and getting that PASSIVELY".

Where LeanFIRE is typically retiring part time or fully - but living frugally at the 25% income percentile.

Now that we defined some of the goals you might have - in terms of financial independence - let's look at how you can become financially free.

A three-step template is proposed (1) spend less money than you make, (2) avoid debt like the plague, and (3) invest everything that’s left over into index funds.

Your lifestyle matters. The beauty is - when you have a high savings rate - you learn to live frugally, with a controlled burn, even as you have more to invest. This is something The Millionaire Next Door talks about as well - analyzing the, often, quite modest lifestyles of the wealthy.

“If your lifestyle matches—or god forbid exceeds—your income, you are no more than a gilded slave,” Collins says.

He mentions Mike Tyson, one of history’s greatest boxers, who made over $300M (!) yet still wound up bankrupt.

Everyone knows how much they have. With a few simple calculations, everyone can know roughly how much they spend. Building wealth is about making sure there’s a positive difference between the income vs expenses and making sure it stays that way.

Aim to save 50% of the income you make.

Get as far away from debt as possible. Whatever debts you might have, you should get out of as quickly as you can.

As soon as you’re debt-free - the surplus you can invest into the stock market each month will start growing.

There are 3 kinds of debt we usually consider “good debt", ie. money we borrow to use towards productive ends:

• business loans

• student loans

• mortgage loans

Regarding housing - Collin suggests to buy “the least house to meet your needs rather than the most house you can technically afford.”

Index funds should be the backbone of your strategy to build wealth. Collins recommends the Vanguard Total Stock Market Index Fund (VTSAX).

As long as you’re in the wealth accumulation stage, ie trying to grow a portfolio 25X the size of your annual -> Collin recommends to allocate 100% of your investments into Vanguard, or index funds. Collins reminds us: “This will be much, much harder than you think”. Investing when the market crashes and everyone are in panic screaming "sell, sell, sell".

Once you reach your portfolio goal, say $1M, you can safely withdraw 3-7% each year while still growing your assets - with the sweet spot of the 4% rule.

“Spend less than you earn—invest the surplus—avoid debt.” That's the simple path to wealth.