Simple Plan to Wealth: A Beginner's Guide to Financial Success

Building wealth is a long-term game that requires patience, discipline, and a solid plan. A key principle of achieving financial success is to live below your means, as demonstrated by the 50/30/20 rule, where 50% of your income goes towards necessities, 30% towards discretionary spending, and 20% towards saving and debt repayment.

To start building wealth, it's essential to have a clear understanding of your financial goals and create a budget that aligns with them. By prioritizing needs over wants, you can free up more money for saving and investing.

A crucial step in achieving financial success is to pay off high-interest debt, such as credit card balances, as soon as possible. This will not only save you money on interest payments but also free up more money for savings and investments.

By following these simple principles, you can set yourself up for financial success and achieve your long-term goals.

Financial education is key to building wealth, and there are many great resources available. The 20 Best Finance Audiobooks for Amateurs and Masters Alike features a list of top audiobooks on personal finance.

Some audiobooks are narrated by their authors, such as Wes Moss in "The 20 Best Finance Audiobooks for Amateurs and Masters Alike", which is narrated by Wes Moss and Scott Merriman. Others have professional narrators, like Erik Synnestvedt in "A Random Walk Down Wall Street".

The length of these audiobooks varies, but some are quite long, like "The Intelligent Investor" at 17 hours and 48 minutes. This can be a significant commitment, but it's a valuable investment in your financial education.

Here are some notable audiobooks on personal finance:

These audiobooks offer a wealth of knowledge on personal finance and investing, and can be a great way to learn on-the-go.

A simple plan to wealth is all about keeping things straightforward and avoiding unnecessary complexity. The author of The Simple Path To Wealth recommends keeping our investing strategy simple.

Index funds outperform actively managed funds in large part because actively managed funds require expensive active managers, resulting in higher fees.

The author suggests using the 3 Tools To Wealth: Stocks, Bonds, and Cash. Stocks provide the best returns over time and serve as our inflation hedge.

Bonds provide income and tend to smooth out the rough ride of stocks, serving as our deflation hedge.

Cash is good to cover routine expenses and for any unforeseen emergencies. It's essential to have an emergency fund in place.

The author recommends using VMMXX (Vanguard Prime Money Market Fund) for cash, and having separate accounts for emergencies, travel, and investing in passive real estate.

The Simple Path To Wealth spends most of its time discussing stocks, mainly index funds, but also includes an entire chapter on bonds.

The more complex an investment is, the less likely it is to be profitable. Index funds outperform actively managed funds in large part simply because actively managed funds require expensive active managers.

Simple is good, and Collins' 3 Tools To Wealth are a great starting point for building wealth. Stocks provide the best returns over time and serve as our inflation hedge.

VTSAX (Vanguard Total Stock Market Index Fund) is a core wealth-building tool, as it offers a broad diversification of stocks.

Stock investing can be a powerful way to grow your wealth over time. One of the key benefits of stock investing is that it provides the best returns over time, serving as an inflation hedge.

The chart from Macro Trends shows how the market has performed over time, illustrating the potential for long-term growth. By investing in stocks, you can take advantage of this potential for growth.

One of the simplest and most profitable ways to invest in stocks is through index funds, specifically VTSAX (Vanguard Total Stock Market Index Fund). This fund has historically beaten 82% of actively managed funds.

VTSAX is also much cheaper to own than actively managed funds, with a very low expense ratio of 0.04%. This means you get to keep more of your money, rather than paying high fees to a fund manager.

The process of the market constantly changing, with new companies replacing old ones, is what makes the market (and VTSAX) self-cleansing. This means that even if a company performs poorly and loses value, it will eventually drop out of the market, making way for new and potentially better-performing companies.

Here are the three main reasons Collins lists for why most of us in the "accumulation phase" should invest in VTSAX:

When analyzing the performance of a portfolio, it's essential to examine the monthly returns over time. This helps us understand the distribution of returns, including positive and negative fluctuations.

The JL Collins Simple Path to Wealth Portfolio showcases a range of monthly returns, with some months experiencing significant gains and others experiencing losses.

One notable aspect of the portfolio's performance is the inclusion of Vanguard Total Stock Market (VTI) up to December 2001. This suggests that the portfolio had a long-term focus, investing in the stock market for an extended period.

The portfolio also includes Vanguard Total Bond Market (BND) up to December 2007. This diversification into bonds helped to reduce risk and stabilize returns during times of market volatility.

Here's a summary of the portfolio's investment history:

When choosing an account to invest in, it's essential to consider your options carefully. There are different types of accounts to consider, each with its own benefits and drawbacks.

A Health Savings Account (HSA) is a great place to hold investment money, allowing it to grow indefinitely without taxes or penalties. You can use the account to pay yourself back for health expenses without any taxes or penalties.

A 401(k) is a retirement account provided by an employer, often with matching contributions up to a certain threshold. These offer tax-free growth, but taxes will be due when the money is withdrawn.

A Roth 401(k) is similar to a Roth IRA, where tax is paid immediately, but the money can grow tax-free, and no taxes are due on the withdrawal. This can be a great option for those who expect to be in a higher tax bracket in retirement.

A Deductible IRA is an individual retirement account created for personal investments, with a limit on the amount you can invest per year. You can often roll over 401(k) accounts into your IRA accounts if you leave your employer.

A Non-Deductible IRA has no income requirements, but taxes are due on the account's earnings when money is withdrawn. This can be a good option for those who don't meet the income requirements for other accounts.

A Roth IRA is where you'll pay taxes as you fund the account, but it can grow tax-free, meaning you pay no taxes when you withdraw it later. Eligibility to fund these accounts depends on your income.

Here are some key account options to consider:

You know, building wealth isn't rocket science, but it does require some smart thinking about money. JL Collins, author of "The Simple Path to Wealth", nailed it when he said "Stop thinking about what your money can buy. Instead, start thinking about what it can EARN." This mindset shift is crucial to saving millions over your career.

Investing in the right way can make a huge difference. A reader shared their experience with investing in VIX, a "fear index" that involves betting against the market. Unfortunately, they lost money on this investment. On the other hand, they found success with Index Investing, which breaks down to simple steps and puts passive investing at eye level.

Debt can be a major obstacle to wealth-building. Mike Tyson, a former boxer who earned $300,000,000, ended up bankrupt due to his spending habits. Warren Buffett's approach to money is worth noting: "Rule #1: NEVER lost money. Rule #2: NEVER forget rule #1."

Here are some key takeaways from JL Collins' book:

By following these simple principles, you can build a solid foundation for wealth and achieve financial freedom.

Building wealth doesn't have to be complicated. In fact, the featured article on finance audiobooks lists a book titled "Why Personal Finance Doesn’t Have to Be Complicated" by Helaine Olen and Harold Pollack.

The book is narrated by the authors themselves and clocks in at 3 hours and 43 minutes. It's an unabridged version, so you get the full story without any cuts. This book is a great resource for those looking to simplify their approach to personal finance.

If you're looking for more audiobooks on the topic, the featured article lists several other titles, including "The 20 Best Finance Audiobooks for Amateurs and Masters Alike" by Wes Moss, which has a total length of 7 hours and 1 minute.

By building wealth, you can achieve financial independence and freedom. Collins, a financially independent writer, speaker, and blogger, calls this "F-You Money", where you have saved enough to stop working for a few months or even permanently.

Having a 20/75 split in your investments, with 20% in bonds, 75% in stocks, and 5% in cash, can help level the playing field in your wealth preservation stage. This ratio can be adjusted based on your risk comfort level.

You can spend up to 4% of your money in retirement, depending on your financial state. Withdrawing 3% or less is considered the safest bet, but the 4% rule is still relatively safe.

Retiring early and becoming financially independent is a goal that can be achieved through disciplined saving and investing. Collins was able to retire early and pursue his passion for writing, speaking, and blogging.

Wealth building is a journey that requires patience, discipline, and a clear understanding of how to navigate the complexities of investing. JL Collins' concept of "F-You Money" is a great starting point - it's having enough savings to stop working for a few months or even permanently, giving you the freedom to work on your own terms.

Having F-You Money requires saving early in your career and being intentional about investing your wealth. Collins himself used this strategy to retire early as a financially independent writer, speaker, and blogger. This is a testament to the power of starting early and being consistent with your investments.

One of the biggest obstacles to investing is the fear of complexity. Many high-income professionals feel overwhelmed by the idea of investing, but the truth is that it doesn't have to be complicated. JL Collins' book, "The Simple Path to Wealth", offers a straightforward strategy for long-term investing success.

Here are some key takeaways from the book:

By following these principles, you can build wealth and achieve financial independence. As Warren Buffet's example shows, even in times of economic downturn, investing patiently and waiting for the market to recover can lead to significant gains.

Bonds can help smooth out market fluctuations and provide income when needed.

They're considered a more reliable investment than stocks because they're less volatile.

Bonds can also serve as a hedge against deflation, making them a valuable addition to a portfolio.

Collins' family includes bonds in their portfolio for these very reasons.

Bonds provide regular income through interest payments, which can be a welcome addition to a portfolio.

This income can be used to cover living expenses or invested further to grow wealth.

Bonds typically offer lower returns than stocks, but they also come with lower risk.

We've discussed the Health Savings Account (HSA) before, and it's a great tool for reducing health care costs.

An HSA is a tax-advantaged savings account for medical expenses, and as of 2020, you can set aside up to $3,550 for an individual and $7,100 for a family each year.

You can fund an HSA with pre-tax money, making your contribution tax-deductible, just like an IRA.

As long as you save your medical receipts, you can withdraw money from your HSA tax and penalty-free anytime to cover them.

Once you reach the age of 65, you can withdraw your HSA for any purpose penalty-free, although you will owe taxes on the withdrawal unless it's for medical expenses.

The best part? You can turn an HSA into a tax-free investment account, just like a Roth IRA, by fully funding it and investing in low-cost index funds.

This strategy, suggested by Collins, allows you to get the best of both worlds: tax-deductible contributions and tax-free withdrawals.

You can even pay any medical expenses out-of-pocket and save the receipts, letting your HSA grow and compound tax-free.

The maximum contribution limits for an HSA are $3,550 for an individual and $7,100 for a family, with an additional $1,000 allowed for those 55 or older.

By following this strategy, you can create a nest egg that's not only tax-free but also helps you cover medical expenses in retirement.