Saturday, April 6, 2019

A short parable: The Monk and the Minister

Two close boyhood friends grow up and go their separate ways. One becomes a humble monk, the other a rich and powerful minister to the king.

Years later they meet. As they catch up, the portly minister (in his fine robes) takes pity on the thin and shabby monk. Seeking to help, he says:

“You know, if you could learn to cater to the king, you wouldn’t have to live on rice and beans.”

To which the monk replies:

“If you could learn to live on rice and beans, you wouldn’t have to cater to the king.”

Most all of us fall somewhere between the two. As for me, it is better to be closer to the monk.

Credit goes to JL Collins and the Simple Path to Wealth for this one.

The path may look different for everyone. Reaching financial independence is all about choices. You can grow your passive income to match your lifestyle or you can change your lifestyle to match your passive income. In the end, it usually ends up being a balance between the two.

Friday, March 29, 2019

The Simple Path to Wealth - Book Review

The Simple Path to Wealth by JL Collins

The Simple Path to Wealth is an easy to read book that outlines one of the best plans to get to financial independence that I have seen. If you could read just one book about investing and gaining financial independence, it should be this one.

This book outlines a simple plan that anyone can follow to build wealth and work towards financial freedom. There are several personal stories and a few from readers showing the benefits of buying your freedom. More vacation time, time with your friends and family, and the ability to work for who you want when you want to are just a few examples of these benefits.

Financial independence isn't about retirement. It is about freedom. It's about having enough money to be free from the demands of other people.

Its all about freedom and having options. Collins talk about building his net worth through his career and having freedom to take extended trips to Europe and take time off after his daughter was born. When he and his wife took 3 years off to spend time with their newborn daughter, their net worth grew over that time. This is financial freedom. It is more than having some extra security from your savings.

JL Collins simple formula for building net worth:
          Spend less than you earn - invest the surplus - avoid debt

Not sure how to get there? The author outlines each step of the plan in detail. He includes reasons and steps to reduce debt, how much you should try to save, how to invest and what to invest in.

This is one of the best books that I have read about how to invest and why. If you have been investing for years or are just starting out, a lot of "what if" questions pop up in your mind. The author goes through several chapters addressing most of the concern investors have and why they should invest in the stock market. 

Interested in getting a copy of this book? It is available here on Amazon:

The Simple Path to Wealth by JL Collins

Want to know even more about this book?
Interested in reading even more about this book? Keep reading below. I included a few more notes 

Some thoughts on financial independence, simple living, and savings
There are many things money can buy but freedom is by far the most important thing. Freedom to do what you want and work for whom you respect.

Can anyone become financially independent? Yes

Financial independence is as much about limiting wants as it is about how much money you have. High income earners often go broke while low income earners increase their net worth. It has less to do about how much you earn than what you value.

You own your things but your stuff also owns you. The more you let into your life, the more time, attention, and money you spend on your things. Make sure you are spending your limited resources on things you actually like.

JL Collins has some interesting thoughts on keeping your lifestyle simple:
  • "If your life style matches your life style... (if you spend as much as you earn each month)... you are no more than a gilded slave."
  • "The older I get the more I hold each day precious. I've become steadily more relentless in purging from my life things, activities, and people who no longer add value while seeking out those that do."

 If you control your lifestyle and your wants, you will find that you have more than enough. Appreciating what you have will help you set aside money each month to buy your freedom.

The author recommends saving a portion of every dollar that you get. He recommends saving 50% of your income. With no debt, saving this much is doable.

If you can learn to want and live on less, you will appreciate what you have more and also have more to invest.

People who work paycheck-to-paycheck are slaves to their lifestyle. People who have debt are slaves to their debt. Neither one has freedom to walk away and do what they want.

The mantra for this book is "avoid debt at all costs":
Debt destroys wealth and it destroys freedom. If you have debt, your lifestyle is reduced. Even if you are trying to live the maximum consumer lifestyle, a portion of your income is wasted with debt interest payments. You are a slave to what ever source of income you have. Your options are limited. Your debt must be serviced.
If you are going to achieve financial independence, you are going to have to think differently about debt.

If your goal is financial independence, you should try to have a little debt as possible. This goes for "good debt" like mortgages as well. This means you should try to buy the least house that meets yours needs instead of the most house you can technically afford.

Mortgages are far to easy to get. This encourages people to take on monthly payments that they can barely afford.
The more house you buy, the higher the cost. Not just in mortgage payments but also in real estate taxes, insurance, utilities, maintenance, repairs, landscaping, remodeling, furnishing, and opportunity cost of all the money tied up in the house. Houses are expensive indulgences not investments.

More house also means more stuff to worry about.  The more and greater things you allow in your life, the more of your time, energy, and money they demand. 


The financial industry will try to convince you that investing is too difficult and complicated for you. This is how they charge high fees and how they make their money. This is not true. It is a lot simpler than most people think.

The author recommends avoiding investment advisors. Too many have their own interests are heart. Commissions and fees make sure that their interests do not line up with your. At best, it isn't their money so they won't worry about it. At worst, they make money by trying to get you to make choices that end up making the most money for them. By the time you know enough to pick a good one, you know enough to manage your finances yourself. It's your money and no one will care for it better than you. 

How to think about money
If you got a new bonus paycheck what would you do with it?

You have a few options:
  • Spend all of it (buy nice things. new shoes, dinner, etc)
  • Invest and spend it all later when it has grown
  • Invest and choose a Safe Withdrawal Rate to spend
One option will keep you poor, one will make you middle class, and one closer to financial independence

When you think about spending money, consider the opportunity cost. Once you have spent it, you have given up the chance to invest that money, and to invest the money that money earns, and the money that money earns, on and on - forever. 

Safe Withdrawal Rate
The author makes a very compelling case that, when you can live off of 4% of your investments per year, you are financially independent. This means that you can safely withdrawal 4% of your investment money per year to live off of.

There is a whole chapter dedicated to explaining this concept in great detail. At the moment, I would do the author a disservice by trying to paraphrase it. I'd suggest reading Chapter 29 of this book. 

Investment strategy
The author uses a simple strategy of buying low cost index funds to invest. A simple strategy is easy to follow and he has found it actually out performs more complex investments.

Some of his comments about the market:
  • It is impossible to time the market
  • The market is the most powerful wealth building tool of all time
  • the market always goes up and it is always a wild, bumpy ride along the way
  • We can't predict market swings and can only ride them out 
  • We want money working for us as hard as possible, as soon as possible
  • Its not timing the market that counts. it is time in the market 

Market Timing
Don't time the market. Understand that index funds (like VTI) own a fraction of all the publicly traded companies in the US. These are thousands of companies who compete and are focused on prospering in the changing world around them. When the market dips, you still own the same number of shares in all of these companies.
Indexes are self cleansing. Some companies will fail and lose 100% of their value. These will be replaced by companies that will succeed in spectacular fashion, growing 200%, 300%, 1000%, There is no upside limit.

In order to time the market, you have to be right twice. when do you sell? when do you buy back in? get either wrong and you will lose out. You also have to be right every time you try to time the market, again and again.

The market is the most amazing wealth building tool in history. But people still manage to lose money in the stock market.

Why is that?
  • People think they can time the market... they cant
  • People think they can pick winning individual stocks ... they cant
  • People think they can pick winning mutual fund managers.... they cant
  • People think they can predict if the market is fairly values or not... they cant

Vanguard released a study in 2013:
Between 1998 and 2013, over 15 years, off all 1,540 funds in existence, only 55% survived. On top of that, only 18% beat index funds. That means that 82% failed to beat an index fund. All of these funds charged fees and paid fund managers to try.

Stock market and volatility
The stock market is a powerful wealth building tool and you should be investing in it. But realize the value of your shares will sometimes drop dramatically!

This is absolutely normal and should be expected. When it happens, ignore the drops and buy more shares.

This will be much harder than you think. People around you and the media will panic. Again, remember, nobody can predict when market drops or gains will happen. 

Interested in getting a copy of this book? It is available here on Amazon:

The Simple Path to Wealth by JL Collins

Sunday, January 13, 2019

The Automatic Millionaire - Book Review

The Automatic Millionaire by David Bach
The Automatic Millionaire is a simple, easy to read, and easy to follow.

What is the book about? Here are some of the author's own words:
[This book provides a] powerful one step plan to live and finish rich... A system that would slowly but surely transform you into a millionaire… a system that you can set up in just an hour or two that would require no budget, no discipline…
The main message in this book is that automating your savings and investing makes things easier. If you set up your automatic plan now, and pay yourself first, you are free to live the rest of your life how you want while you sit back and watch your accounts grow.

David Bach shows how setting aside only a couple dollars a day can turn into a large amount of money. Over time, your money will start earning money. The money that money earned will earn money... you get the idea. Small amounts can compound to large amounts over time.

Not sure how much you should be setting aside? David Bach provides some guidance on savings rates depending on where you want to end up in life.

He also discusses how it is important to not try to keep up with the Joneses. Most people rich people don't actually look rich. They live a modest life. They are also not overextended and deeply in debt. That is how they got rich and stay that way.

I'd recommend this book to anyone starting out with investing. It presents a step-by-step approach to getting started. Most importantly, the author keeps this process as simple as possible.

Interested in getting a copy of this book? It is available here on Amazon:

The Automatic Millionaire by David Bach

Want to know even more about this book?
Interested in reading even more about this book? Keep reading below. I included a few more notes.

Rat race
We are all running in the rat race. What is the rat race? It sounds like a terrible, unending event:
If you live paycheck to paycheck, spending everything you make, what you’re really doing is running an unwinnable race... Go to work… earn money… spend money… go to work… Endless treadmill… people bust their butts 40-50 hours or more… wind up with almost nothing to show for it because at the end of the month their paycheck is always spent... It’s an unfair, vicious cycle, and you don’t want to fall into it.

So how can you avoid this? The trick is that you have to avoid debt and pay yourself first. If you don't set aside money for yourself, you will never start getting ahead. Now is a good time to start.
Chances are you are earning more than you were ten years ago. But are you saving more? Are you getting ahead or running harder just to stay even? Is your income helping you become more free or less free?

The good news is that it’s not how much you earn, but how much you keep.
Regardless of the size of your paycheck, you probably already make enough money to become rich.

Pay yourself first
This is all great but how much should you be setting aside to invest? This book recommends paying yourself first at least 10% of your income. If you work 8 hours a day, this comes out to roughly 1 hour worth of pay (if it is invested before taxes). You would be paying yourself first 1 hour a day.

Looking for more specific advice? The author lists a series of savings rates based on where you want to end up:
  • Poor: Spend everything you make each month
  • Middle Class: 5 – 10%
  • Upper Middle Class: 10 – 15%
  • Rich: 15 – 20%
  • Rich Enough to Retire Early: 20% or more

The Latte Factor
Where will you find the money to save these amounts? The good news is that the secret to growing wealth isn’t suddenly making more money. “Ask anyone who got a raise last year if they saved more money”. The more we make, the more we spend. How much someone earns has almost no tie to how much wealth they build. The trick to getting ahead is to watch the little stuff. The spending habits you have that you would be better off without.

This book outlines how to easily track your spending to identify your small things you spend money on that don't actually add value to your life. The author calls these the "Latte Factor". After eliminating small purchases that don’t add much value to your life, you will start seeing real results. A few dollars a day can add up to some serious money over time.


No discipline needed, just automate your financial plan. Something that takes a conscious effort and self control and a decision to do every month will eventually breakdown. Take the decision out of your hands and set up an automatic system. Arrange to have things you know you should do happen automatically. No chance to forget about it or deliberately not do it. No need for a budget.

Account types
Where do you put this money? Should you use a tax-advantaged account like a 401k or an IRA? Should you use a normal brokerage account? This book discusses different investment account types and provides simple guidance for new investors.

Asset allocation
After you open your account, how will you know what to invest in? You will do this by deciding on an asset allocation. This book provides basic guidance on asset allocation based on age and stage of life. It also goes over using robo-advisors and other low cost ways to automate balancing your asset allocation.

Home ownership
Should you buy a house or rent? What makes the most sense? This book suggests that everyone should work towards home ownership. As the author puts it:
You can’t get rich renting… landlords get rich and renters stay poor... The first landlord you should become is your own... You aren’t really in the game of building wealth unless you own some real estate.
Paying rent really adds up over the years. Paying $1,500/mo for 30 years comes out to $540,000 in rent paid.

The author points out that nothing gives you freedom and security like owning a home. But the trick is to own the real estate free and clear. This book recommends debt free home ownership and provides some simple advice to help pay off a mortgage years early.

For first time home buyers, this book provides simple guidance to get started.

Debt free
To put it simply: "Automatic millionaires don’t do debt."

The author recommends to never buy on credit. No matter how big the purchase is, never use credit. Pay for it in full or don’t buy it. The only exception is a house (which, the author says, you should pay off as quickly as you can).

If you use credit card for convenience or rewards, pay them off in full each month.
Avoid debt and you will be free from the stresses of worrying about money each day.

If you read this far, you may want to pick up a copy of the book. It is available here on Amazon:

The Automatic Millionaire by David Bach