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

by J.L. Collins

Being independently wealthy is every bit as much about limiting needs as it is about how much money you have. It has less to do with how much you earn—high-income earners often go broke while low-income earners get there—than what you value. Money can buy many things, none of which is more important than your financial independence. Here’s the simple formula: Spend less than you earn—invest the surplus—avoid debt

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.

VBTLX—Vanguard’s Total Bond Index Fund—most

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.

VTSAX.

Principles Next, let’s look at some of the guiding principles behind the approach we use. First, notice that in constructing our 75/25 allocation, we look at all of our funds combined, regardless of where they are held. Second, we have all our dividends, interest and capital gains distributions in our tax-advantaged accounts reinvested. I am not captivated by the idea of “living only off the income” (that is, dividends and interest) as many are. Rather, I look toward drawing the ~4% the research has shown a portfolio like mine can support. Third, we have the dividend and capital gains distributions from VTSAX in our taxable account sent directly to our checking account. Since the payment of these is a taxable event, it makes no sense to reinvest them only to turn around and withdraw the equivalent amount of money shortly thereafter. Fourth, I want to let my tax-advantaged investments grow tax-deferred as long as possible. Fifth, as I am within ten years of age 70 1/2, I want to move as much as I can from our regular IRAs to our Roths, consistent with remaining in the 15% tax bracket. You’ll recall this strategy from our discussion on RMDs (required minimum distributions) in Chapter 20. Sixth, once we hit age 70 1/2 and are faced with RMDs, these withdrawals will replace those we had been taking from our taxable account. The taxable account will then be left to grow again.

Avoid debt. Nothing is worth paying interest to own. Avoid fiscally irresponsible people and certainly don’t marry one.

Spend the next decade or so working your ass off building your career and your professional reputation. This is not meant to suggest you must be some sort of office drone. Think of your career in the most expansive of terms. The possibilities are endless. Take those low-cost college living skills you’ve honed and use them to pursue any number of new adventures. Don’t get trapped by an expanding lifestyle or unwind it if you already are. Save and invest at least 50% of your income. Put this in VTSAX or one of the other options we’ve discussed in this book. Fund any 401(k)-type employer tax-advantaged plan you are offered. Fund your Roth IRA when your earnings and the income taxes on them are low.

Fund your Traditional IRA once your earnings and the income taxes on them begin to rise. Do this for the next ten years or so and you’ll be well on your way to financial independence. Save more than 50% and you’ll get there sooner. Save less and it will take a bit longer. If you get lucky with the market you’ll get there sooner. If not, it will take a bit longer. During this accumulation phase, celebrate market drops. While you are in the wealth accumulation phase, these are gifts. Each doll...

Sometime in your early to mid-thirties (or 10-15 years after you start) two things will happen: Your career will be hitting its strongest surge and you will be closing in on financial independence. Once 4% of your assets can cover your expenses, consider yourself financially independent. Put another way, financial independence = 25x your annual expenses. That is, if you are living on $20,000 you have reached financial independence with $500,000 invested. If, like our friend Mike Tyson used to, you are living on $400,000 a month/$4.8 million a year, you’re going to nee...

Once you are financially independent, begin living on your investments. At the point you become financially independent, you can decide if you are still having fun and want to continue your career or try something new. If you keep working, invest 100% of your earnings. You are living on your investments now. This will dramatically accelerate the growth of your assets. Note: You don’t have to implement these last three points literally. Rather, this is a way to think about your assets and income. Most likely, in executing this concept you will want to spend from your earned income while keeping...