The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life

by J.L. Collins

If you intend to achieve financial freedom, you are going to have to think differently. It starts by recognizing that debt should not be considered normal. It should be recognized as the vicious, pernicious destroyer of wealth-building potential it truly is. It has no place in your financial life.

There are many things money can buy, but the most valuable of all is freedom. Freedom to do what you want and to work for whom you respect.

(We’d invest in VTSAX—Vanguard’s Total Stock Market Index Fund)

Stop thinking about what your money can buy. Start thinking about what your money can earn.

“Opportunity cost” is simply what you give up when you commit your money to one thing (like a car) over another (like an investment), and it’s easy to quantify.

One of the beauties of being financially independent is that by definition, you have enough money such that the power of compounding is greater than the opportunity cost of what you spend.

Everybody makes money when the market is rising. But what determines whether it will make you wealthy or leave you bleeding on the side of the road is what you do during the times it is collapsing.

Willing to accept a lower long-term return and slower wealth accumulation? Just increase the percentage in VBTLX and/or cash. Want maximum growth potential? Hold more in VTSAX.

Bonds are in our portfolio to provide a deflation hedge. Deflation is one of the two big macro risks to your money. Inflation is the other and we hedge against that with our stocks.

When interest rates rise, bond prices fall. When interest rates fall, bond prices rise. In either case, if you hold a bond to the end of its term you will, barring default, get exactly what you paid for it.

With all this in mind, here is my basic hierarchy for deploying investment money: Fund 401(k)-type plans to the full employer match, if any. Fully fund a Roth if your income is low enough that you are paying little or no income tax. Once your income tax rate rises, fully fund a deductible IRA rather than the Roth. Keep the Roth you started and just let it grow. Finish funding the 401(k)-type plan to the max. Consider funding a non-deductible IRA if your income is such that you cannot contribute to a deductible IRA or Roth IRA. Fund your taxable account with any money left.

Suppose we fully funded our HSA and invested the money in low-cost index funds? Then we’d pay our actual medical expenses out-of-pocket, carefully saving our receipts, while letting the HSA grow and compound tax-free over the decades. In effect, we’d have a Roth IRA in the sense that withdrawals are tax-free and a regular IRA in the sense that we get to deduct our contributions to it. The best of both worlds.

If we ever needed the money for medical expenses, it would still be there. But if not, it would grow tax-free to a potentially much larger amount. When we were ready, we would pull out our receipts and reimburse ourselves tax-free from our HSA, leaving any balance for future use. Should we be fortunate enough to remain healthy, after age 65 we would be able to take it out to spend as we please, just as with our IRA and 401(k) accounts, paying only the taxes then due.

The bottom line is that anyone using a high-deductible insurance plan should fund an HSA. The benefits are simply too good to ignore. Once you do, if you choose you can turn it into an exceptionally powerful investment tool. I suggest you do.