Quick Summary: The Simple Path to Wealth offers a three-step guide to achieving financial freedom, shared by a wealthy father through letters to his teenage daughter.
Favorite quote from the author:
Introduction
Two childhood friends chose very different paths: one became a powerful advisor to the king, and the other a monk. When they met years later, the advisor felt pity for his friend and said, “If you learned to serve the king, you wouldn’t have to live on rice and beans.” The monk replied, “If you learned to live on rice and beans, you wouldn’t need to serve the king.”This story, shared by J. L. Collins in The Simple Path to Wealth, highlights a key idea: true wealth is about freedom, not power, luxury, or idleness. Collins believes that financial freedom is the most valuable thing you can buy, and his book lays out a simple, effective plan to achieve it.
Originally written as letters to his teenage daughter, Collins’ advice turned into a bestselling book, with over 400,000 copies sold. The appeal lies in its simplicity, as Collins outlines three essential steps to build wealth:
- Spend less than you earn.
- Avoid debt at all costs.
- Invest your savings in index funds.
Ready to explore this simple path to wealth? Let’s dive into Collins’ approach in more detail!
Step 1: Spend Less Than You Earn
“If your lifestyle matches—or worse, exceeds—your income, you are nothing more than a gilded slave,” Collins warns. He uses Mike Tyson, one of the greatest boxers in history, as an example. Despite earning over $300 million, Tyson ended up bankrupt.We all know someone who should have plenty but still struggles with financial stress. Collins explains, “You own the things you own, and they, in turn, own you.” Possessions require ongoing mental and financial upkeep, which can weigh heavily on us over time.
Collins doesn’t focus on budgeting tips or cutting back on small expenses. Instead, he appeals to common sense: everyone knows how much they earn, and with simple calculations, they can estimate their spending. The key to building wealth is ensuring that you spend less than you make and maintaining that gap.
“The beauty of a high savings rate is twofold,” says Collins. “You learn to live on less, even as you have more to invest.” Collins himself lives modestly and has never had a car payment. This allows him the freedom to choose how he spends his time and who he works with. He saves 50% of his income and encourages others to aim for the same.
As soon as you start earning more than you need, make it a goal to spend less than you earn.
Step 2: Get Out of Debt Quickly and Stay Debt-Free
Opinions on debt vary widely. Some see it as a useful tool, while others view it as something to avoid entirely. Collins falls into the latter camp, and so do I.“Carrying debt is like being covered in leeches—it drains you,” Collins writes. He advises paying off any debts as quickly as possible so that you can start investing your surplus in the stock market.
Collins also addresses three types of “good debt”—business loans, student loans, and mortgage loans. He advises caution with business loans, believes student loans should be avoided altogether, and recommends buying the smallest house that meets your needs rather than the biggest one you can afford. The more house you buy, the longer it will take to achieve financial freedom.
If you’re currently debt-free, stay that way. If you’re in debt, focus on paying it off quickly, then start growing your wealth.
Step 3: Invest in Index Funds Until You’re Financially Free
I know it might sound repetitive, but there’s a reason index funds are emphasized in so many finance books—they work. Collins is no exception, recommending investments in index funds as the backbone of a wealth-building strategy.He suggests the Vanguard Total Stock Market Index Fund (VTSAX) or its equivalent exchange-traded fund (VTI). As long as you’re in the wealth accumulation phase, where you’re building a nest egg 25 times the size of your annual expenses, Collins advises allocating 100% of your investments to this fund, which tracks all U.S. stocks.
“This will be much harder than you think,” Collins warns. Even if you automate your investments, during market downturns, you’ll be tempted to sell as panic sets in. But if you stick with it, you’re likely to succeed. Historically, the stock market has rewarded those who remain patient and committed.
Once you reach your financial goal—say, a $1 million portfolio—you can safely withdraw 3-7% each year while continuing to grow your assets, Collins says, citing the well-known 4% rule. At this point, you can enjoy your newfound financial freedom.
Final Thoughts: The Simple Path to Wealth
“Spend less than you earn, invest the surplus, and avoid debt.” This is the simple path to wealth, and I hope you’ll follow it all the way to financial freedom.Review of The Simple Path to Wealth
Like The Wealthy Gardener, this book was written by a parent for their child, which gives it a personal and powerful touch. If you appreciate straightforward, conversational advice with a bit of humor, I think you’ll really enjoy this book.Who Should Read This Book?
I would recommend The Simple Path to Wealth to anyone looking for a clear, no-nonsense guide to financial freedom.
Recommended Reading
If you like The Simple Path to Wealth, you may also enjoy the following books:
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