Interview With J.L. Collins, the Godfather of Financial Independence

0:01And 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 that money. 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 J.L. Collins, the bestselling author of The Simple Path to Wealth, which was updated and re-released in May. In this replay of an interview I did with J.L. 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.

0:44I 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 FU 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.

1:23But 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 FU 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.

2:04and 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. 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 F.U. money long before I heard the term. But I first came across the term in James Clavel's novel, Noble House. And great novel.

2:48And 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.

3:32And 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. 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. 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 a working on a landscaping crew. And it was significantly more than I'd been living on when I was in college.

4:14So living on 50 % of my income was a big step up in lifestyle for me. So this was not, 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.

4:52And 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, why, 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, So, you know, 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.

5:37The current savings rate in the U.S. 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.

6:11I'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.

6:54And there's no easy answer to that. It's simply you're going to have to reconfigure your life so you are living on significantly less than you're earning. 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.

7:32And 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 freedom is not the highest priority for most people. And it never will be. so you know i i coined a term and 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.

8:27And so I say to people, the more must-haves you have in your life, the less likely you are to achieve financial independence. And in fact, 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, you're not, if you are spending less to save more, it's not really you're denying yourself.

9:07You'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. Right. 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.

9:44Well, 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 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?

10:22And 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. I'm like, 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.

10:59And 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 inevitably, one of us will say to the other, well, it's free. And then we kind of laugh about it.

11:37And yeah, it is free. And then, you know, it's that money no longer becomes the, the option. So we, there's not a lot we want to buy, but we don't deny us ourselves anything that we do want. So 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. Bunny 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, FI, is the preferred acronym.

12:17And since you've been a part of it all along the way, you're considered the godfather of FI or of FI. 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. Yeah, I think that last thing is an important part of it. You know, I started my blog in 2011. And that's when Mr. Money Mustache Pete started his. And his rapidly became far more successful than mine, make no mistake. But he became aware of my work and he liked it. And he reached out and asked me to do a guest post.

12:57This would have been about 2012. And the title of that guest post was, it's never been about retirement. Because for me, first of all, when I was going through my career, I never heard the term early retirement. It wasn't even something that I considered. 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 your comment there, that it allows you to do whatever you want to do.

14:02So 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 they'll say something like, well, but I don't want to quit my job. 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.

14:43She stepped away from, 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 the job you have, the odds of you never doing something again are pretty slim. So, yeah, 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.

15:33I mean, I've met a lot of them who spent the first few weeks or even a 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. The Civil War and Reconstruction was a pivotal era in American history. When a war was fought to save the Union and to free the slaves And when the work to rebuild the nation after that war was over turned into a struggle to guarantee liberty and justice for all Americans I'm Tracy And I'm Rich And we want to invite you to join us as we take an in-depth look at this pivotal era in American history Look for the Civil War and Reconstruction wherever you find your podcasts

16:42So obviously a key component of the simple path to wealth is a high savings rate, but you don't think that money should just go in the bank, should be invested. And you think that for most people, most of that money should go into the Vanguard Total Stock Market Index Fund. And that's about as simple as it gets. So tell us about why most people really need just one fund. So I would suggest all people really need just one fund. So I'll be a little more dogmatic, I guess, on that. So first of all, the fund that I personally use that my daughter has used in following in my footsteps is VTSAX, which is Vanguard's total stock market index fund.

17:23I like that fund. I like Vanguard for a bunch of reasons we can get into. But I get a lot of questions around that. One of the questions is along the lines of, I'm with Schwab or Fidelity, and they have a total stock, and I like them. I've done business with them for a while, and I like these guys, and they have a total stock market index fund. Does it have to be VTSAX, or can I use theirs? And my answer is no. 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 bogel 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 And so the total stock market fund is largely the S &P 500 fund.

18:35I 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.

19:20It'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. 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.

19:57We 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 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.

20:34That's, in fact, how you achieved your financial independence. And you did it through a good part of your life. But eventually, you just said, why am I doing all this? Why don't I just stick with the index fund? Was it a matter of you just tracking your returns or was it a matter of just saying like the return on effort here is just not worth it? Yeah. So you covered a lot of ground and that's great stuff. So I will start by saying, you know, when you say 85, 90 percent, the index outperforms 85, 90 percent. That's like every year. But if you go out five years, it becomes even worse for the active side.

21:11In fact, if you go out 30 years, it's less than 1 % outperform, which is statistically zero. So I started investing in 1975. That's when I bought my first shares of stock, which were Southern Company and Texaco, if anybody cares. And that coincidentally was the same year Jack Bogle launched Vanguard and started the first broad-based low-cost index fund that us retail people, people, which is just you and me and the average person, could participate in. I didn't know that at the time. And even if I had known it, I wouldn't have been wise enough to embrace it. And the reason I know that is because in 1985, 10 years later, when I did first start hearing about index funds, I wasn't wise enough to embrace it.

22:03It still took me another decade, decade and a half to get there. And so the question becomes, well, why? Why does it take so long if it's such a good thing? And I think you touched on it. It's not like stock picking doesn't work. You know, if you do it well, and you and I talked offline before we began recording, and I mentioned that, you know, I came across the Motley Fool in the 90s and very much enjoyed the content, and I was still a stock picker in those days. If you do it well and with discipline, picking stocks or, for that matter, picking active mutual funds that are run by stock pickers, it'll get you there.

22:45It's not like it doesn't work. It does work. And by the way, and I'm sure you can relate to this, there are a few things in life more intoxicating than finding a company, looking at the stock, pulling the trigger, and then having it work. I mean, that is a wonderful feeling that I still miss. So I get it. The only thing is that it doesn't work quite as well as indexing. And it's not like the gap is huge, but it is there. And so while it took me a long time, I finally came to the conclusion, well, I'm doing a lot of work. And frankly, I enjoyed it. But it was starting to get old after a few decades of doing it.

23:30I'm doing a lot of work and I'm getting good results, but with no work at all, I could get better results. And so, you know, when that light bulb went off, then I slowly made the transition. One point you make in the book is that the value of just buying a total stock market index fund is it's not only helping you decide what to buy, but also to an agree what to sell because index funds are, as you say, self-cleansing. Explain what that means. So I'm very proud. That's a term I coined, actually, and I'm very proud of it. So if you, well, let's go back in history. Back in the late 60s, early 70s, there was a concept floating, and this is before index funds were around, and there was a concept floating around called the Nifty 50.

24:21And the idea behind the Nifty 50 is they were the 50 top companies in the United States. And the idea was you could buy these 50 companies, put your stock certificates in the bank, because back in those days, you got paper stock certificates, and then you were done. You didn't have to worry about it anymore. Well, the problem is that companies have lifespans. And so the Nifty Fifty were filled with companies like Polaroid and Xerox and Sears and companies that were absolute powerhouses in the day that probably a lot of people listening have never heard of. So if you're going to be in an active stock picker, the moment you buy a stock, you have to be thinking about when are you going to sell it?

25:08And you don't want to sell it too soon because you might miss the run up. And if it's drops, you know, well, that might just be a temporary dip and, you know, as it goes on to greater things, or it might be the beginning of the end. So that's a constant bit of monitoring that you have to do. Back in the day before index funds, the idea of a diversified portfolio, as I learned it, was you pick about eight industries, maybe 10 at the outside. And within those industries, you pick one or two companies because nobody can effectively follow more than 15 or 20 separate companies. And if you do that, you're across, say, eight industries and you're carrying 16 stocks, you're diversified.

25:56Well, now with a stroke of a keyboard, I can own VTSAX and I own a piece of every publicly traded company in the United States. And everybody from the factory floor to the CEO is working to make me richer. And some of them will succeed. And because it's cap weighted, they will rise to the top. And others, not so much. And if they don't, they will fade away. I don't have to predict which one it is that's going to do that. And it's kind of a rigged game in that, you know, the ones that fade away, the most they can lose is 100%. And they usually fade off the index before they get there. But that's the worst.

26:37The ones on the way up can gain 100 % or two or three or 1 ,000 or 10 ,000%. So, you know, and that's the self-cleansing process I talk about. And Robert, the other thing I'll add to that is it also applies, and this is a question I'm getting a lot these days, also applies to the sector that is leading. So right now, tech has been dominating. And one of the criticisms of these funds is, well, it's really just a tech fund because it's the Magnificent Seven are so dominant. And And that's true. But in the way I look at it, that's not a bug. That's a feature. Because it's that self-cleansing process that has brought them to the top.

27:22And one of the few advantages of being an old guy is that you remember different times. And I can remember when financials were at the top, when energy was at the top, when consumer staples were at the top. So not only do I not know how long Tesla, for instance, will do great, I don't have to worry about it. If they continue to do great, I'll benefit from that. If they slide away, then I'll own the replacement. I also don't have to worry about how long tech will dominate. As long as it dominates, I'll benefit. If it slips away, I also don't have to worry about what's coming up behind it because I'll own that.

28:04So I don't have to predict any of these things. In your book, you include charts showing the long-term upward trend of the US stock market. It goes up to the right. But if you're closely, there are times when stocks have gone up and down, but basically been flat maybe for a decade or more. We saw 2000, 2013, late 60s, early 80s. And then, of course, there was what you call the big ugly event, the Great Depression. Stocks drop in 1929, dropped 90 % and really didn't recover to the 1950s. So what's your advice for people who look at those periods and are anxious about putting all their savings in the U.S.

28:40stock market? Yeah, so let's look at the Depression first, and then let's look at the first decade of this century, because I think those are two good illustrations, right? So when people say that the market dropped 90 % and didn't recover to the 1950s, they are talking about the absolute peak in 1929 and then coming all the way back. But if you'd been investing throughout the 1920s, you weren't buying those shares at the absolute peak. So it's a little misleading. But let's just take that 90 % as the reality. And let's imagine that just before the crash, you had a million dollars invested. And then that million dollars has now become$100 ,000.