Financial independence isn’t just about early retirement. It’s giving your future self freedom.J.L. Collins is the best-selling author of “The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life.” In this replay from earlier this year, Robert Brokamp caught up with Collins for a conversation about: -The challenges and appeal of being a super-saver-How to use the 4% rule-Lessons from past market crashes-The “self-cleansing” value of index funds Company discussed: VTI Host: Robert BrokampGuest: J.L. CollinsEngineer: Bart Shannon Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit megaphone.fm/adchoices
Chapter 1: What is the main topic discussed in this episode?
And he said, you know, when you achieve a certain level of wealth and that wealth is throwing off a certain amount of more money and that money exceeds what you need to live on and then some, everything essentially becomes free. And that's a wonderful place to be. It was an epiphany for me. I'd never thought about that.
I'm Robert Brokamp, and that was JL Collins, the best-selling author of The Simple Path to Wealth, which was updated and re-released in May. In this replay of an interview I did with JL earlier this year, we discussed the challenges and appeal of being a super saver, the quote-unquote self-cleansing value of index funds, lessons from past market crashes, and how to use the 4% rule.
Chapter 2: What does JL Collins mean by 'FU money' and how did he achieve it?
I really enjoyed my conversation with JL, who is often referred to as the godfather of financial independence, and I think you will too. So this is a family show. We'll start with a sentence from your book. Quote, personally, there is nothing I'd rather buy or own than FU money. So what is FU money and what was your path to having enough of it?
So it's a, because it's a family book, that's why I call it F-U money as opposed to spelling out the word. You know, Robert, kind of a little funny aside, I have had people object to that. I've even had people say, I stopped reading the book when I got to that, but I've also had people say, why don't you just use the word? And so anyway, for what that's worth.
But yeah, so in my mind, I think of it a little differently than I think most people do. So I think most people equate having a few money to being financially independent. And that's fine. I've always thought of it as the interim on your journey to full financial independence.
So full financial independence is when you have enough that your investments are throwing off enough to live on to cover all of your expenses. And FU money is the money you start having the moment you set foot on this path. And every step of the journey, you acquire a little more. It's like going to the gym. You get a little stronger, a little stronger financially, a little stronger financially.
Chapter 3: How can saving 50% of your income lead to financial independence?
And during the course of that journey, having that FU money makes you more able and more comfortable to take bolder decisions than you might otherwise. Maybe to step away from a job that's not really working for you. maybe to pursue something else and take a little bit of a risk. So I had started accumulating FU money long before I heard the term.
But I first came across the term in James Clavel's novel, Noble House. And great novel. And it's part of a trilogy. And in Noble House, there is a character and her stated goal is to have F-U money spelled out. And I thought that put a label on exactly what I was after.
So according to your simple path to wealth, the first step is saving 50% of your income, which is what you did. So tell us about how you came up with that percentage and how you managed to live on only half of what you made.
Yeah, so I came up with it pretty randomly. So I came out of college in 1972, and there are probably very few people listening to us who are old enough to remember what that, but that was in the midst of stagflation and it was a bad economy. And it took me a couple of years to get my first professional job.
And I spent those couple of years doing landscaping to put food on the table and pay the rent. And my first professional job paid me $10,000 a year. And I knew I wanted to have this FU money. So I just arbitrarily said, you know, I know I can live on 5,000 because other people can live on 5,000. There's no reason I can't do that.
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Chapter 4: What are the benefits of using index funds for investing?
And then I'll divert the other 5,000 to buying this thing that was most important to me. Plus $5,000 was more than I was making as working at a landscaping crew. And it was significantly more than I'd been living on when I was in college. So living on 50% of my income was a big step up in lifestyle for me. So this was not a problem. What's interesting about the 50% is I get pushback.
That's not surprising, but what might be surprising is it comes from both directions. So the pushback you'd expect would be the people who say, well, nobody can actually do that. That's just silly stuff. And to that, I respond, well, I did it. And I know lots of people who did it. I actually now have a book out called Pathfinders that's filled with people who've done it. So I'm sorry.
You can't tell me it can't be done. You can tell me you choose not to do it. And I respect that. It's your money. But the pushback also comes from the other direction where people say, 50%, Jay, hell, you're a piker. I mean, I do 60, 70, 80%. You know, what kind of slacker are you?
So 50% is just for me the sweet spot that gave me the best lifestyle along with accumulating fairly rapidly what I really wanted. And then, of course, as my income expanded, So did both the half that I was living on and the half I was investing. So years later, when I was making $100,000 a year, well, my lifestyle had expanded by five times to $50,000.
And of course, I was now putting $50,000 towards buying what I wanted.
The current savings rate in the US now is less than 4%, well below 50%. So I could certainly see many people hearing this 50% and saying, there's no way I could do that. But as you point out, you did it. And your Pathfinders book has stories of about 100 people who are achieving their financial independence by living below their means.
So given all the stories you've heard, what does the transition look like from being someone who saves maybe 5% to someone who's able to move up to 50%? What are the first few steps they have to take if they're listening to this interview and they're like, I love that idea. I'm not there yet. What do I have to do first?
Yeah, so first of all, I would say it is much easier if you start on this path just as you're coming out of school before you have created some lifestyle that you then have to unwind. Right. So that's what I did. And I wrote this book fundamentally for my daughter, who was in college at the time, who was also going to be at the beginning of her journey.
So I do have a lot of sympathy for people who come to it at a later stage in life and they have created a lifestyle that they become accustomed to, that if it doesn't allow them an aggressive savings rate will prevent them from ever being financially independent. And there's no easy answer to that.
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Chapter 5: What is the 4% rule and how does it apply to retirement planning?
And let's face it, as you just alluded to, most Americans are living on every bit of what they earn, and some of them are borrowing money to live on even more than that. So I get that it's hard, and I think it's also one of the reasons that people on this path and who achieve FI are always going to be unicorns. we're not going to take over the world.
And that's a controversial opinion in the FI community, because especially new people come to it. And it just seems so obvious that this is a great way to live and to have the maximum number of options in your life. Well, of course, anybody who hears about this is going to embrace it. But the truth is that buying your your freedom is not the highest priority for most people and it never will be.
So, you know, I coined a term at one of the talk was actually called the tyranny of must haves. So if you talk to people and you say, you know, would you be interested in being financially independent? I don't think you're going to get too many who say no, but then when you start talking to them about,
the savings rate they're going to need, then you hear things like, well, you know, we have to live in this house in this neighborhood and we have to have two least luxury cars and the kids have to go to these private schools. And, and so I say to people, the more must haves you have in your life, the less like you, less likely you are to achieve financial independence. And in fact, you,
If the number one or maybe the number two must have is not doing that, then you're probably not going to get there. But it's your life. It's your choice. I wouldn't presume to tell anybody how to live their life. But I do hope that if they read my work, at least they know there's something else they can buy with their money.
And that's a good way to frame it too. And you do that often in your writing. And that is, if you are spending less to save more, it's not really you're denying yourself. You're just choosing to buy something else. You're choosing to buy something, which is your freedom, your independence, your optionality.
This first occurred to me back when I was an elementary school teacher and I was listening to a radio show by a fellow by the name of Rick Edelman. And he talked about how He was talking to a woman who spent too much money drinking Diet Coke. And he said, you're spending your money on a depreciating asset. Instead, buy Coke stock. Buy something that appreciates in value.
At some point, you can stop work or take a break, take a sabbatical. And then, frankly, you'll have enough money to drink as much Diet Coke as you want.
Well, that is, you know, and that's a very, Robert, that last thing you said. Well, everything you said, I agree with. The last thing I think is particularly important because
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Chapter 6: How do market crashes affect long-term investment strategies?
This is the simple path to wealth. And by definition, that means if you follow it, you wind up becoming wealthy. And what does becoming wealthy mean? It means that essentially everything is free. That was a concept that Mr. Money Mustache shared with me. We were in Ecuador for Chautauqua. We were walking to a bodega to buy some wine. He'd been there before I hadn't. And
As we're walking there, I said, hey, Pete, how much is the wine in this place? And he turned to me and said, it's free. And I said, Pete, come on, man. You know, I know things are inexpensive in Ecuador, but the merchant's going to want us to leave some money behind before we walk out with his wine, you know. He said, no, no, JL, you misunderstand me. He said, for you and me, everything's free.
And now I'm really confused. What on earth are you talking about? And he said, you know, when you achieve a certain level of wealth and that wealth is throwing off a certain amount of more money and that money exceeds what you need to live on and then some, everything essentially becomes free. And that's a wonderful place to be. It was an epiphany for me. I'd never thought about that.
And it's also a lesson in that the frugality, if you will, that gets you there is not necessarily what you need to continue forever. So my wife and I don't really have interest in very many material things. So we don't inherently buy stuff just because even though we can afford it, we're not interested.
but we do still have this habit of thinking well you know this thing costs 300 should we buy it or not and and inevitably one of us will say to the other well it's free and then we kind of laugh about it and oh yeah it is free and then you know it's that money no longer becomes the uh The options. So there's not a lot we want to buy, but we don't deny ourselves anything that we do want.
For instance, we fly first class just because it makes flying slightly less miserable than it would be otherwise. And it's free for us at this point.
You mentioned Mr. Money Mustache, big figure in the financial independence movement. People have heard about this maybe several years ago. It was more FIRE, right? Financial Independence Retire Early. And it is now, it seems like FI is the preferred acronym. And since you've been a part of it all along the way, you're considered the godfather of FI or of FI.
Yeah.
What do you see as the reason of that transition? Was that people retired early and realized this is really boring? Really what I wanted was basically the optionality to do whatever I wanted.
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Chapter 7: What lessons can be learned from past market crashes?
Sometimes I wonder if I'd been aware of it, would I have made different choices? I don't think so. I liked my work. I just didn't like to have to do it all the time. So my career was punctuated by sabbaticals between jobs of, you know, I think the shortest was three months, the longest was five years. And that's what that FU money allowed me to do.
so that was that was my take on it and i've never used the fire acronym personally because i think it's very clever but fi is really what i was all about and what i write about and it's to that last part of of your of your comment there that it it allows you to do whatever you want to do so i i've had conversations with people who show me their numbers
and you know they are clearly financially independent they are actually could be spending more money given the amount of wealth they had and uh they'll say something like well but i don't want to quit my job i like i like my job and the same thing i say the same thing to them that was your last line that you know it doesn't mean you have to quit your job it just means you get to choose whatever you want to do and
The other thing is, and I think this is a really exciting for this new generation. And my daughter is a case in point. She's in her early 30s. She just stepped away from her corporate job last fall. I don't know for how long, but she's very engaged in doing other kinds of things that she very much is enjoying. And some of those things throw off some money. So if you are
well organized smart enough diligent enough to achieve fi or something close to it and you step away from from the job you have the odds of you never doing something again are pretty slim so yeah i i don't think it's about retirement i don't think i've ever personally met a young person who achieved financial independence and retired and literally spent the rest of their life on the beach.
I mean, I've met a lot of them who spent the first few weeks or even few months on the beach, but you know, I think most humans are kind of driven to do stuff. And the only problem with work is that frequently in the corporate world, you lack autonomy and that makes it unpleasant. But if you control your work,
If you don't need to do it to pay the rent, it suddenly becomes a much more engaging and joyful kind of activity.
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Chapter 8: How does the concept of financial independence evolve over time?
I mean, theirs is fine. A total stock market index fund is pretty much a total stock market index fund. The second kind of question I get around this is somebody will say, you know, I'm looking at my 401k and there is no total stock market index fund option. There is, however, this thing called an S&P 500 fund. Is that okay? And the answer to that is yes, absolutely.
That's the fund Jack Bogle himself started with, and that was the fund he used for all of his life. These things are cap weighted, which simply means the largest companies make up the greatest percentage of the fund. So the total stock market fund is largely the S&P 500 fund. I want to say it's maybe 80, 85%.
And if you track those two funds performance-wise over time, they track very, very closely. So then the question becomes, okay, why aren't you in the S&P 500 fund? And my answer to that is, well, for the same reason I put Tabasco on my eggs. I like a little extra kick that the small percentage of small cap and mid cap give me.
And then the third question out of this grouping is, well, what about the ETF versions, right? So ETFs are exchange traded funds and VTSAX, the ETF version of that, all these letters, I'm going to confuse myself, is VTI. Yes, that's absolutely fine. It's the same portfolio. It's just a slightly different way to own it. If I were coming into this today, I would probably be buying the ETF version.
I'm, as I say to people, I'm in VTSAX because I'm an old guy and that's where I started. And there's no compelling reason to change.
Obviously, one reason to choose the index funds is because they're hard to beat. Something like 85% to 90% of actively managed funds underperform a relevant index fund. So that's one thing. The other thing about it is whether you can do better by picking individual stocks. We here at The Motley Fool talk about that all the time. We think there's a possibility of doing it.
But even we at The Fool have said from the very beginning, The vast majority of people probably would be better off just in an index fund. We even went in our office. When we had an office, we actually had a room dedicated to Jack Bogle. We came and visited. We have a great picture of him standing in front of the Bogle room at the Motley Fool.
That's awesome.
And if you're going to invest in individual stocks, it certainly makes sense to track your returns. Because if you're not outperforming, why bother with all the time and effort? Now, you're someone who you have said, if I remember correctly, in past interviews, you were a stock picker. You did invest in actively managed funds. That's, in fact, how you achieved your financial independence.
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