Author and blogger JL Collins’s book “The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life” was published in 2016 and has since sold more than 1 million copies. It’s hands-down one of my favorite investing books.
Drumroll. He has now returned with a second edition of the book, which his daughter, Jess, collaborated on.
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I asked Collins to share some insights. Here are edited excerpts of our conversation.
What has changed since your first edition in terms of your philosophy? Anything you tweaked in this new edition?
JL Collins: Nothing. Zero. I designed the simple path to wealth to be something that you implement over decades. If it were to require major modification after a single 10-year period, I would not have designed it very well. The basic philosophy is the same, and that’s important. What has changed is all the little details — the government regulations around income limits for investing in 401(k)s and the amount of money you can put in individual retirement accounts and all that kind of stuff.
You kick off the book with your three key principles. Can you share?
Avoid debt, live on less than you earn, and invest the surplus — if you’re following my simple path, you’ll be doing that in low-cost index funds.
Avoiding debt, or getting out of it… is critical. You can never achieve financial independence if you’re dragging that particular ball and chain around. I’m a little appalled that in our culture, carrying debt has become (so) normalized that people sort of assume, well, of course I’m going to borrow money to buy this, that, or, or the other thing.
“Avoid debt, live on less than you earn, and invest the surplus,” author JL Collins, pictured here, says are the keys to financial independence. (Photo courtesy of JL Collins)
How should we spend our money?
Spend money on what is most valuable to you. For me, there is nothing more valuable than buying my freedom, my freedom of time, my freedom of choice. You do that by having money and investments that ultimately pay all of your expenses.
How do you define financial independence? How is your approach aligned with the FIRE (Financial Independence Retire Early) movement?
I love the FIRE acronym. It’s very clever, and it’s a great goal if that’s your goal. Retiring early was never my goal. I like working. My goal was, and is, to have enough money to allow me to make bolder choices. Being financially independent means that you have enough money invested to throw off enough to cover all of your expenses and then some — a little bit of a cushion.
You write that 25 times your annual expenses is the amount you need to be financially independent. Explain.
There is the concept of what’s called the 4% rule. And what the 4% rule suggests, and I think it’s a great guideline, is that when you have enough money invested, that 4% of it will cover all of your expenses. Let’s suppose that you have a million dollars invested. Well, that throws off at 4%, $40,000 a year. So if you can live on $40,000 a year comfortably, you are now financially independent. If you need $100,000, you multiply it by 25, you’d be at $2.5 million.
You advocate saving 50% of your income if you want to become financially independent. Isn’t that a tad unrealistic for most people?
This is one of the things I probably get the most pushback on because, well, it depends on how you construct your lifestyle. And I’m sympathetic to people who feel that way, but there are people who are doing it very successfully. The more you can set aside, the greater the percentage, the shorter your journey will be to get to that financial independence thing.
You are all in on owning stocks, but what advice or do you have for people when it comes to dealing with rocky uncertainty in markets?
The single thing that determines whether the market will make you wealthy or leave you bleeding at the side of the road is what you do when it drops. Because market corrections, which are 10% and bear markets, which are 20%, are all normal. They are to be expected. If you’re going to be investing in the stock market, you have to be prepared for those things to happen. And they are unpredictable in spite of all the people out there who are claiming they can predict it.
I’ve been doing this for 50 years, and the answer to what do you do when you know these things are going to come and you can’t predict them? Well, you just stay the course. You don’t panic and sell, which is the worst thing you can do because that will leave you bleeding at the side of the road. And not only do you stay the course, but if you’re building your wealth, and you’ve been adding money on a regular basis, which is what the simple path calls for, these things are a blessing because now you’re accumulating those shares at a lower cost.
This is the simple path to wealth. It’s not only easier, but it’s also more powerful. So when you’re building your wealth, you hold one index fund, and in my case, that’s Vanguard’s Total Stock Market Index Fund.
The key thing is it’s a total stock market index fund. And caveat here is I hear from people all the time who say, you know, I’m at Fidelity, or I’m at Schwab and they have total stock market index funds. Are those okay? The answer to that question is, yes, those are fine.
You own virtually every publicly traded company in the United States of America, and everybody from the factory floor to the CEO is now working to make you richer. That keeps me warm and comfortable at night when I go to sleep.
When you stop having earned income to flow into that total stock market index fund, then you want to add a bond fund. And in my case, that’s Vanguard’s Total Bond Market Index Fund. I also hold some money in a money market fund.
Frequently people will go to their 401(k) and they won’t find a total stock market index fund, but they will find an S&P 500 fund, those are fine.
I’m a little bit alone in this position. I simply don’t see the need because those largest companies… which make up the bulk of my total stock market index fund, are by definition international companies. An enormous amount of their sales and profit comes from all over the world.
What’s your take on target-date funds? They arethe primary investment vehicle for people in employer retirement plans these days.
They’re effective. One of these target-date retirement funds is a great way to go. That fund will handle all of the rebalancing when it comes time for adding bonds. For those people who want ultimate simplicity, you never have to think about it at all. I don’t think it’s going to perform quite as well which is why I don’t personally use it, and by the way, it will give you that international exposure.
What’s your take on crypto creeping into investment portfolios as well as private equity and such? Still stick with the index funds?
I’m not a fan of the multiple income stream school of investing. Simple is better. So no cattle, gold, annuities, crypto, or the like. For the most part, so far, cryptocurrencies are a speculation. Sometimes speculations work out very well, often these speculations don’t work out. That’s what makes them speculations.
I’m not a speculator. I’m an investor. An investor buys assets that have operations that can generate cash and growth — stock in a company or rental real estate, for example. Such things grow in value because of the underlying activities that earn money.
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