It starts with nine basics. She doesn’t have to read any further than these to make it work. Just do it.
- Avoid fiscally irresponsible people. Never marry one or otherwise give him access to your money.
- Avoid money managers. It’s your money and no one will care for it better than you.
- Avoid debt.
- Save a portion of every dollar you get.
- The greater the percent of your income you save and invest, the sooner you’ll have F-You money. Try 50%. With no debt, this perfectly doable.
- Put this money in the Vanguard Total Stock Market Index Fund (VTSAX) This is the fund you already own, so just keep adding to it.
- Realize the market and the value of your shares will sometimes drop dramatically. People all around you will panic. They’ll be screaming Sell, Sell, Sell. Ignore this. Even better: Buy more shares.
- When you can live off the dividends VTSAX provides you are financially free.
- The less you need, the more free you are.
Willing to go a step further? Notice what you are not doing:
- No expensive money managers
- No fancy strategies
- No exotic, hard to understand investments
- No weekly, monthly or even yearly management
- No effort; just keep adding to the pot.
More? I thought you’d never ask!
1) Avoid fiscally irresponsible people. Nothing will destroy your wealth faster than letting someone else have access to it. Fiscally irresponsible people have squandered their money and will happily squander yours. They will try every dirty trick possible to get their hands on it. Kick them to the curb. Look for people who will add to your efforts. This applies to more than just money.
2) Avoid Money Managers. They are expensive at best and will rob you at worst. Google Bernie Madoff. Seek advice cautiously and never give up control. It’s your money and no one will care for it better than you. But many will try hard to make it theirs. Don’t let it happen.
3) Avoid debt. Never borrow money. Never carry a credit card balance. Almost everyone else you meet will be borrowing money to buy this or that. It will look normal. You might be mocked. You don’t want to run with this crowd. People still refuse to believe I have never had a car payment.
- The only exception might be for a house. But don’t be in any hurry. Think long and hard before taking out that mortgage. If you are a disciplined saver, renting is damn near always the better fiscal choice. (If you are not, a house can act as a forced savings plan. A poor one, but at least a plan.)
- A house is not an investment. In fact it has the very worst characteristics of an investment. It is only place to live and an expensive indulgence. Buy one only if you can easily afford it and want that particular lifestyle.
- Most people will argue this strenuously. They are wrong. This is why. This guy got it right too:
4) Save a portion of every dollar you get.
50% is good. With no debt, this perfectly doable. Think this is too extreme? Check out the conversations here: Early Retirement Extreme and Mr. Money Mustache. The most valuable thing you can buy with money is not cars or clothes or vacations or houses. It is your financial freedom. So pay yourself first. Most people spend every cent they make and borrow to spend even more. This is nuts. Those who do are slaves to their employers and slaves to their debt holders. You weren’t raised to be a slave.
5) The greater the percent of your income you save and invest, the sooner you’ll have F-You money. The obvious reason this works is that the more you save the more you’ll have. The less obvious reason is the less you learn to live on the less you’ll need to be financially independent. See point #9 and The Monk and the Minister
6) Put this money in the Vanguard Total Stock Market Index Fund (VTSAX). You want the money you save to work hard for you. In VTSAX it will.
- This is an “index fund.” You can learn more about exactly what that means anytime (The Stock Series is a good place to start), but for our purposes here it means very low cost so you keep more of your money.
- VTSAX is an index fund that invests in stocks. Stocks, over time, provide the best returns.
- Vanguard is the company that operates the fund and it is the only investment company you need (or should) deal with. Vanguard’s unique structure means that its interests and yours are the same. This is unique among investment companies.
- You might find a fund in another investment company that is a bit cheaper. But you can’t trust these other companies long-term. Their interests are not your interest. If you play with snakes, to quote Dave Ramsey, you’ll eventually get bitten. Don’t bother. Stick with Vanguard.
- You will hear occasionally how “actively managed” funds beat index funds. It will seem obviously better to switch to one of these. It’s not. Don’t. Very rare is the manager who can consistently outperform the index. While who they are it is obvious after the fact, it is impossible to know who it will be out of the thousands trying at the start. Even if you were to get lucky, they retire, quit, die or simply lose their touch. Plus they are more expensive. Don’t bother.
- We choose to invest in stocks because, over time, stocks outperform everything else. They give you the best returns with, using an index fund like VTSAX, the lowest effort and cost. Never try to pick individual stocks unless you turn pro. Even then you likely will underperform the index. The vast majority of pros do.
Owning 100% stocks like this is considered “very aggressive.” It is, but you have decades ahead. Market ups and downs don’t matter as long as you avoid panic and stay the course. Perhaps 40+ years from now you might want to add a Vanguard’s Total Bond Index Fund to smooth out the ride. Worry about that 40 years from now.
7) Realize the market and the value of your shares will sometimes drop dramatically. No worries. You’ll be holding this fund for 40-50+ years. During that time the stock market will very likely drop dramatically 4 or 5 times. There will be real and serious problems that cause it. Each time people will panic. Each time they will predict this is the end. Each time you’ll be hearing Sell! Sell! Sell! If you are smart, you will ignore this. If you are very smart you will use these times as an opportunity to buy more shares at bargain prices.
As I write this in June 2011 the S&P is trading around 1300. Two years ago it was at 670 and people were predicting with certainty it would go to zero. Oops. It doubled. By the way, there will also be times then the market soars and people will begin to say this is a new age. Things are different this time. Things will never go down again. They, too, are wrong. Warren Buffett, the greatest investor of my age, said “When others are fearful be greedy. When others are greedy, be fearful.” Sound advice. The wheel always turns. Things always recover. If someday the end really does come, it won’t matter anyway.
8) When you can live off the dividends VTSAX provides you are financially free. Actually a bit sooner. VTSAX typically pays a dividend of ~2%. Sometimes this will be higher, sometimes lower. Anytime you can live off it you are financially independent. But when you can live off of 3-4% per year of your net worth you are also free.
There you have it. Remember, this advice is for my 19-year-old daughter. (We do things a bit, but not much, differently) Now, if I can just get her to read it…..
Addendum 1: The case study: putting-the-simple-path-to-wealth-into-action
Addendum 2: What if you can’t buy VTSAX? Or even Vanguard?
Addendum 3: When the time comes and you want to know more about this investing stuff, here you go: Stock Series.
Addendum 4: My Path for my kid: The first 10 years
Addendum 5: Some suggest my 50% target savings rate is too aggressive. Others that it is too wimpy. That for you to decide. But if reaching financial independence is important to you, the chart below will give you a good idea as to just how powerful your savings rate can be.
The numbers in the chart above assume an 8% annual investment return and that you’ll live on the classic 4% withdrawal rate which implies assets of 25 times your annual needs. So, this is not a gospel, but a guideline.
“… if I were like him, I’d watch my account balance grow to $1,000. Then watch it move to $2,000 and upwards…once I had a balance of $10,000, each successive $1,000 milestone would pass more quickly than the last. Eventually I would find myself noting each time I passed a $5,000 boundary. He enthusiastically explained the “fun” of being able to measure balances by crossing the tens of thousands threshold: seeing twenty thousand turn to thirty. And thirty thousand on to forty, and on and on to financial freedom.”
Source: https://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth loaded 22.03.2021