Speakers:
Clint Murphy 00:10
Today we have JL Collins on the podcast, a best selling author and financial independence blogger. JL’s first book, The Simple Path to Wealth: Your Roadmap to Financial Independence and a Rich Free Life, was published in 2016 and has become something of a Bible for people in the financial independence movement. He joined me to discuss his new book, Pathfinders: Extraordinary Stories of People Like You on the Quest for Financial Independence. We talk about FI, theoretically, but more we talk about stories of JL’s readers who’ve written to him or called him to tell him their story, people who’ve shared how his lessons on financial independence have changed their lives. And from that, my friends, I hope there are lessons that can change your lives. JL, welcome to the podcast. We’re going to talk about your book, Pathfinders today. And one nugget I found early on that I believe may have led to your blog in your first book, was you were having a conversation with your daughter once, someone who you were trying to always get across the idea of how money works. And she said to you, I get it. Money is important. I just don’t want to have to think about it all the time. How did that little nugget from her inform some of the concepts that ultimately led to The Simple Path to Wealth, which then led us down the road the future to Pathfinders?
JL Collins 01:48
Yeah. So first of all, Clint, thank you for having me on the show. It’s an honor to be here. And that was a pivotal moment, an epiphany for me when she said that, because I recognize not everybody is as interested in this stuff as I am. But most smart people, like my daughter, recognize that it’s important, and that’s one of the underlying principles of The Simple Path to Wealth. Is if you just pay enough attention to get a few simple principles and behaviors online and automate it, then you really don’t have to think about it all that much. And in fact, successful investing is one of the rare human activities where, when you do those basic things and start the ball rolling, the less you do, the better your performance will be. The more you tinker, the less well you are likely to do. So I refer to that now as her superpower, because she understands these basic concepts. She set her investments up on autopilot, and now she’s not because she’s not interested, she’s not inclined to tinker. She’s not following the market all the time, so she’s not going to be inclined to panic when it goes down. She probably won’t even notice when it goes down.
Clint Murphy 02:58
Something that you said there really strikes a chord, because I like to do the same thing with things in life, which is simplify it to a few basic things you need to do. You know, when I talk about personal finance, I simplify it to earn more, spend less, invest in ETFs as simple as possible. For your Simple Path to Wealth, you talk about three key things that you want to see people doing on that simple path. For those who haven’t read the first book, what is that simple path? What are your three little nuggets that you throw at people?
JL Collins 03:29
Yeah, so the most basic things are, avoid debt. If you’ve accumulated debt, of course, you have to get out of it. That’s job one. And then, as you alluded, to, live on less than you earn and invest the difference. And man, I am a proponent of broad based, low cost index funds, or ETF versions of those funds.
Clint Murphy 03:48
And when you look at it, so before we dive into the details, most of what we’re going to be talking about today, we’ve already probably thrown the word about it around a couple times, and that’s financial independent. And I mentioned to you before we started recording, I first started getting obsessed with financial independence about 11 years ago. And when you read the stories in Pathfinders, and for the audience, Pathfinders is JL, drops some great nuggets at the start of each chapter, and then the chapter is stories from people along the way who have implemented the nuggets that are in that chapter and how it’s impacted their life. JL, something that I find common from stories is similar to me, there’s an inflection point in someone’s life when they have a bit of an eye opening or an epiphany that something has to change. And for me, 11 years ago, it was when I quit a job or was fired, borderline how that played out, depending on how I look at it, JL. And at the time, my wife was pregnant, we were buying a new home, we hadn’t sold the old home, and I said to myself, I can never put my family in this situation again. And that’s when I found financial independence and consumed as much as I could. Unfortunately, talk about lifestyle creep. Later, I was already a little later in life. Side already creeped up, but we kind of froze at that moment, and our careers kept going. So we’ll talk about how that impacted in the future, savings rates, retirement dates and pivots, et cetera. But it’s this idea of an inflection point that changes someone’s view of, hey, now I need financial independence, and so for the audience, what is financial independence and why are we chasing it? Why do we think financial independence is so important?
JL Collins 05:29
Well, of course, I can only answer that from my point of view as to why I think it’s so important. Money can buy a lot of wonderful things, but for me, the most important thing I could buy with my money from the very beginning was my freedom. I had watched my dad, who was a pretty successful guy. He was a manufacturer’s rep, but he was a cigarette smoker, and has that progressed, he developed emphysema, and that debilitates you slowly over time, and along with that went his ability to earn income. He was independent, and along with that decline in income, of course, was a decline pretty dramatic in our in our living standards, because he was solely dependent on his ability to work. And I guess, had not considered that that might not last forever, and I knew at that point, and I didn’t have any idea how I would get there, or even a concept of financial independence. But I knew at that point, to the extent that it was possible, I never wanted to be solely dependent on my ability to trade my labor for money. I wanted to have money backing me up. That’s what I call FU money. So in my world, and some people think of FU money as the same as financial independence. That’s probably the more common way to think of it. But for me, I think of FU money as that intermediate step until you’re fully financially independent. So when you’re fully financially independent, the way I look at it, you have enough money that that money is earning enough to pay all of your normal expenses, and then probably a little bit extra. So that’s full financial independence. But if you’re starting from ground zero, or even if you’re starting from debt, that can feel like a very long journey. And I want people to understand that this is not a light switch where you know, you flick it on, and one moment you’re in the darkness and the next moment you’re in the light. It’s a journey. And each step you take along that journey, you’re building what I call your FU money, and you can have a lot of power and freedom in that FU money stage long before you reach full financial independence. So hopefully that makes sense.
Clint Murphy 07:36
Yeah, when you talk about FU money, you talk about financial independence. What always comes to me for those, JL, and I’d love your thoughts on it is the idea of choice, in the idea of optionality. And when I look at FU money, you know, a lot of people look at it and they think, well, that’s when I can say, f you and I stop working. And I more look at it is it doesn’t mean you have to stop working. It means you can work differently, right? It someone wrote a letter that said, now I only work for people I respect, and it gave them that choice to say, well, I’ve got enough money that I can sit on the sidelines long enough to make a choice to do what I want to do. Or, you know, I was a chartered accountant, and sometimes people might ask you to do stuff that’s a little gray, a little not in your ethics code. And for me, FU money was always that point where you could say no, not gonna do that, and you didn’t have to fear the repercussion, because you weren’t dependent on that job. In that moment, you might still need a job, but you didn’t need it that day, you could take some time. And can you share how this your first taste of FU money tied to this a little in that you wanted to go backpacking, and it was the first time you had FU money. What was that like for you, JL?
JL Collins 08:46
So when I came out of college, I came out of college in 1972 it was very tough economic time, and it took me two years to get my first professional job, and it was a job that I liked a lot, and it was hard to come by. But a couple of years into it, I had managed to accumulate the princely sum of $5,000 which in those days was more than enough to go to Europe for a year and backpack around, and that’s what I really wanted to do. But also, in those days, that kind of thing was not taking that kind of sabbatical, so to speak, was not at all common or accepted. I think it’s more so now than it was then. So I felt I had kind of a dilemma, and I was wrestling with whether I wanted to keep this job I liked that was hard to come by or or go to Europe for a year. And while I was wrestling with that, I came across a special airfare deal, where, as I recall, if you left a certain time and came back four months later on a certain day, he was an extraordinarily low airfare to get to Luxembourg, and that was appealing. Then I thought, well, maybe that’s the compromise that might work. So I went to my boss, and this was a small company, and I said, you know, I want to take this trip for four months and I’d like to come back working here at the end of that. And he said, well, no, no, you can’t. I mean, I’m sure he thought I was lunatic. Nobody had ever proposed this to him in his entire career, I’m sure. And but in those days, I also didn’t realize that things were negotiable. So no meant no. So I went back to my office, and I thought about it, and for thought about it for about a week, and thought, well, okay, now I’m back to my original dilemma. Do I keep the job, or do I go to Europe for a year? And after about a week’s thought, I said, you know, as much as I like this job, I’m never going to be in my 20s again. This is an opportunity I don’t want to let pass by. I can afford to do it. I’ll get another job when I come back. So with only $5,000 to back me up, I walked into my boss’s office and I resigned. And he said, why on earth are you leaving? And I and I explained, you know, I want to, I want to take this trip. And he, he said, this amazed me, because this was not a negotiating ploy in my party. He said, well, hang on a second, you know, let’s not do anything rash. Let me talk to the owner of the company. And I was a little bit stunned, because I thought he was going to say, well, you know, good luck to you, and don’t let the door hit you as you’re on your way out. And so a couple days later, he got back to me, and he said, basically, you know, if you will guarantee us that you will be back at the end of that four months, then we will hold your job open for you. And that was a stunning moment. It taught me so much. It first of all, taught me how negotiable no really was on a variety of things. It taught me how powerful it was to have even a little bit of money backing you up when you’re dealing with your employer. So that was my first experience with it.
Clint Murphy 11:37
And something so what I love there is you were able to save that in your first two years, which means you had a pretty absurdly high savings rate. And the savings rate is fundamental to financial independence. The higher we can get our savings rate, the sooner we can retire. So for our audience, who’s listening, who’s saying, what is the savings rate? Can you show what the savings rate is? Maybe some of the myopic details that go into it. For example, I’m in an area, JL, where I pay 53% tax on every dollar I earn. So when people say that I’ve got to do my savings rate on gross I’m like, well, that doesn’t seem fair. I’m already 50% out the door just to my tax so do you look at gross savings rate? Do you look at net savings rate? And where do we want to push people to target, not push like, where is an ideal target to get you to that FU money and then to eventually get you to that financial independence?
JL Collins 12:37
Well, I’m not sure there’s an ideal target that depends on what your saving rate ultimately becomes will depend on on how quickly you want to get to your goal. But in my case, you know, I never thought about was this pre tax or post tax, this savings rate percentage, because when I came out of college, that first job paid $10,000 that was my annual salary. That wasn’t bad in those days, but it was certainly not a salary that puts you in a high tax bracket. I think it’s the equivalent of about $50,000 today, something like that. So my savings rate was 50% and that was just an arbitrary number I pulled out of a hat. My thinking on it was, well, you know, I know that there are lots of people out there that are living on $5,000 a year. If they can do it, I could do it. And by the way, $5,000 a year was a whole lot more money that I’d been living on in college, or than I had been living on in the first couple of years out of college wen I was I was doing landscaping work to pay the rent, right? So it didn’t feel like deprivation at all, and I knew that it would free up a large amount of money that I could, I could save and invest. So that was my savings rate. And I did it without thinking about taxes, because, again, at that level, and in those days, taxes just were not that big an influence. But it was an arbitrary number. It turned out, I think, to be a pretty ideal number, and it’s the number that I recommend. What’s interesting to me is I get pushback on that, of course, and a lot of push gap back comes from people who say, that’s insane. Nobody can save 50% of their money. Well, I beg to differ. I’ve done it. Pathfinders is filled with stories of people who’ve done it. And the pushback that I get that comes from the other direction are people who say to me, J elf, 50% that’s nothing. You know, if you’re serious about this, people ought to be saving 60, 70, 80% that’s what we’re doing. So you know, between people telling me that I could have done and recommended more, and people saying, now you’re insane, you can’t do that, it’s it seemed, it begins to feel more and more like the sweet spot. But again, depending on what your savings rate is, your personal choice. It depends on how quickly do you want to get there, right? And I didn’t even, by the way, in those days, I had no concept of financial independence. I had no idea that there would be, it never occurred to me that there would be a level of invested money that would be so much that I would never have to work again. And that just wasn’t on the radar. I just wanted that FU money that allowed me to be bolder in the choices that I was able to make.
Clint Murphy 15:07
Is it fair to say, JL, part of getting to that savings rate of 50% it doesn’t necessarily have to mean a life of deprivation. It largely can come down to the choices that you’re making. And for those who are listening who say, well, 50% that’s impossible. I know that in my last role, when I first started reading about financial independence, and I started later in life, right? So I was probably about 35 when I started. 34 my savings rate was nowhere near that at the time, and over time, it became that or higher. And that was to your point, because that was the moment that I froze our lifestyle. It crept up a tiny bit, and we’ll talk about what that looks like, but it sort of got frozen at that point. And my career kept going. I was promoted to CFO, kept getting my pay raises, and those pay raises just got invested instead of spent. And so that was a way to say, hey, let’s keep that savings rate climbing. And there were at least two young women on my team who, the entire time I knew them, had a savings rate in that ballpark. And in one of them I knew for 14 years, one of them I knew for 7 years. And I saw them just sock away all their money, and while people were looking at the prices of homes and saying, I can’t afford this, one of them was buying two, three, four home as investments, and the other had a couple. And that was all because of their savings rate. So when audience is listening to us and we’re talking about savings rate, what are a couple of the key things that you get for them to say, hey, if I’m focused on my savings rate, and I’m coming out of college, what are the one or two little tips and tricks? Is it freezing my lifestyle? And what does that mean? Is it saving my raises? And what does that mean? Like, what are a couple of the key nuggets they can use to grow that savings rate over time?
JL Collins 16:55
Yeah, so I you know it all depends on when you come to this and your situation is an interesting one, because you had a lifestyle that you’d created that you had to deal with, and I like the way you dealt with it. Instead of trying to figure out how to unwind your lifestyle to get your expenses lower, to increase your savings rate, I’m guessing you recognize that you are on a pretty good growth path with your career, and then, if you just stopped inflating your lifestyle, the additional growth in income in your career would allow that to creep up. But I think that’s a great way to solve it, and you were already, I’m presuming, living a pretty nice and comfortable life at that level of spending. For somebody coming out of college who has not yet developed, has not yet inflated their lifestyle. I think that’s a much more advantageous place. That’s how I did it. That’s how my daughter has done it. Because you don’t have anything to unwind or even freeze, which is a huge advantage. And then, you know, if you’re like me, you’re going to look around and say, you know, half of my income now is actually pretty nice step up from from where I was. And so it doesn’t feel like deprivation at all. It’s never felt like deprivation to me. And I think the other thing I would say is when I hear a lot of talk, especially these days, about how, you know, maybe you should spend more when you’re young, and what have you to have a better life? And okay, I mean, I take that point, but I’m very uncomfortable with this idea of conflating how much you spend with a better life. You know how much you spend with driving your happiness? I mean, there’s all kinds of research, not to mention ancient philosophy that suggests that accumulating more and having more is not necessarily the key to happiness. Doesn’t mean necessarily that you shouldn’t buy and enjoy things. I mean, I certainly have over the years, but I think it’s a trap to think that, gee, if only I were spending more money, my life would be better or happier more fulfilling, because those two are not directly linked.
Clint Murphy 18:59
And there’s so many nuggets in there that I want to explore with you. And interestingly, you do talk about in the book, one of the stories someone shares is, the more they went down the financial independence journey, more they found Buddhism, the more they found Stoicism, the more they started to ask the questions, well, what is the purpose of money? How do I find happiness? What is happiness? And part of what you talked about, I think, is lately, a little bit of pushback on the financial independence movement, and part of it comes from the book Die with Zero by Bill Perkins, which there are a number of great nuggets in the book that I love. And Bill was on the show, and it was a great conversation. The only challenge I have with, and I’d love your thoughts on this JL, the only challenge I have with what Bill’s advocating is, what Bill’s advocating, to a large extent, is a similar approach to what I took because I knew where my earnings were going and they were going to a number that was, I’ll say, in the 1% or higher. And so that approach. Approach made sense. You know, I was saving along the way, but I was able to really start going hard at 35 and get to where I needed to get. But that approach jail for the average person that is listening to you, and for the 95% that approach won’t necessarily work, because they’re not going to get that really oversized earnings later in their career that can make up for setting the right patterns and behaviors along the way that we’re talking about now or advocating now. Does that resonate a little? Does that make sense to you?
JL Collins 20:32
Yeah. So I have read Die with Zero, by the way, and I think yes, it resonates very much, and I like the way you describe it. There are a lot of great things in that book, and there are a lot of things that trouble me. I think, interestingly enough, it’s a book that anybody who is in this financial independence community would benefit from reading, because in this financial independence community, what I find is that people are much too concerned about making it work in the future. They really should lighten up a little bit, right? And that’s kind of one of the messages of the book. But I think people in the end of financial independence community are unicorns. I mean, this is a very small group, and for the broad swath of Americans, the last thing they need is a message that’s that’s saying, don’t spend and don’t save and invest, but in spend. And you know, spend more, you spend the happier life is going to be and what have you. And then, you know, let your future self, who’s going to be making a lot more money, pay the bills. Well, couple of things with that. First of all, you have no guarantee that your future self is going to be making a lot more money. I understand that. Mr. Perkins, that’s way his life unfolded. I guess to a lesser extent, that’s the way my life unfolded. But you don’t know that. At the beginning of your journey, there is no way to know that. And so if you wind up at 35 or 40, and your life has not led to a high income, and you don’t have any savings to back you up, and more importantly, you don’t have the discipline of of saving and investing. You didn’t start that from the beginning, then you’re going to have a pretty tough road, it seems to me, and you’re going to be pretty vulnerable at that point as you get into your later middle age with no FU money to balance the scales when you’re dealing with employers, for instance. So I those are the kinds of things that that make me a little bit uncomfortable. But for people active in the fi community, who are who are saving and accumulating well, who are probably the ones listening to us, I think there are a lot of very useful things in there that’s basically saying, you know, if you get these things right early on, things are going to work out amazingly well for you. I can give you a great example. I have a couple of friends who, a number of years ago, bought a homestead in Vermont, and they wanted to have that kind of lifestyle and put down deep roots in a rural community to raise their family. And I was and they’re very much on this FI path, and I get a conversation with them. I said, why did you choose Vermont as opposed to New Hampshire, which was right next door, same, basically basic topography, same kinds of towns and lynn and living. The only difference is Vermont is a very high tax state, and New Hampshire is very low tax state. And they said, well, you know, we we’re not making that much money that we have to worry about taxes. They said, Well, yeah, that’s now, but you are saving and investing and you’re going to grow your wealth, and in not too far in the in the future, you are going to have significant wealth, because if you’re following The Simple Path to Wealth, it does lead to becoming wealthy. And at that point, if you’ve got deep roots in this state, which is what you want to have, and it also has a pretty hefty estate tax, when the time comes to pass on what you’ve what you’ve created to your children, well, the state of Vermont’s going to take a pretty big chunk of that. State of New Hampshire wouldn’t take any of that, not to mention the ongoing taxes during the decades, while you were building your wealth. So I think a lot of people don’t appreciate how well this works, if you just follow this basic path, and you will. And then that goes back to, well, you know, does buying things lead to happiness? And you mentioned in the book that a lot of people talk about how they’re led to Stoicism or Buddhism, and, you know, things that sort of keep material goods at arm’s length, so to speak. And I think that’s true, but you also wind up in a position where, like the book, the rich, richest man in Babylon talks about a purse that’s overflowing with gold, and no matter how much he spends, there’s more gold in the purse. Well, that’s your investment portfolio. You’ll get to a point where essentially everything’s free, as Mr. Money Mustache once said to me, and what he mant was, and when you have a certain level of invested assets that are making a certain level of income for you every month, then almost no matter what you spend, that hole is filled immediately by by your investments. And that’s a pretty sweet, sweet place to be. The irony is, if you’re like me, you wind up in that place, but you also have less and less interest in those material goods.
Clint Murphy 25:22
Yeah, it’s interesting. As I’ve gotten older, JL, I realized, like, if I could design my ideal day, I’d probably just go play pickleball for six to eight hours. Have a nice, long walk with my wife and dog, play a play a board game with my kids and and read a book. Have have one nice, big meal, read a book and go to bed. And it’s like, what is how much money do I actually need to do that? Like, we’re probably past that number already. I could probably do that exact day for the rest of my life without working another day. I might not be able to do it in the city I’m in. It’s a little expensive, but we could relocate to somewhere where that would actually be possible. But you know, I keep on the as one of your readers described, I keep on the hedonic treadmill for what purpose? But anyway, it’s different story for a different day. What one of the key concepts that you talked about there, and you’ve talked about a few times throughout our conversation, that I want to dive into, because it’s the fundamental piece to financial independence, or even to not going into debt. And that’s the idea that you simply have to spend less than you make, right? Which, when you say it on the face of it would seem, it would seem pretty obvious, right? You make a certain amount of money, spend less than that, but you look at the broad populace, and I would say that the people who spend less than they make are probably in the vast minority, and people who spend more than they make are in the majority. So that obviously leads to some challenges. One, credit cards, debt, and we’ll talk about debt later, but, but before we get to debt, you get there because you’re spending more than you make. So the question becomes, and we can use, use America, specifically, if you want, is, is, what are the things that you’re seeing, whether it’s social media, and how have they changed over time that are that are creating this little bit of a YOLO lifestyle that has so many people spending more than they make like, what are some of the drivers that you hear of the most, and how do we get those under control so that that very first fundamental step can happen where people start to spend less than they make.
JL Collins 26:59
So, you know, one of the pushbacks that I get periodically for this financial independence thing is, you know, what, if everybody does it, you know, then where are we going to be if everybody retires? And my response to that is, well, that’d probably be an issue, but it’s never going to happen. Because, as you just alluded to, you know, people who are doing this, who are spending less than they earn, investing the difference, or are on the simple path, or something similar to it, we’re unicorns. And we are probably always going to be unicorns, because our voice promoting this kind of approach to living is a teaspoon in the ocean of the bigger culture that is focused on spending more. And this is not some great conspiracy, by the way, but when you have a lot of companies, all of which I own a part of, by the way, through my in depth, one who are touting their products. You deserve a break today. You know, if you drive this kind of car, you will be more appealing in the world. People will look up to you, whatever it is you. You know, of course, you want to have this bigger, fancier house to impress your friends and neighbors and maybe even your your boss at work. I mean, all there’s all of this marketing that that is just overwhelming the voices in the financially, financial independence community, and what we’re advocating goes so much against that grain that it’s a very uncomfortable thing for a lot of people. When you read a book like Pathfinders, or you just talk to almost anybody in the FI community, one of the things you’ll hear is, you know, nobody in my world understands what I’m doing. You know, nobody gets it, you know. And a lot of people, it makes a lot of people in my world, my friends, my family, very, very uncomfortable when I try to talk about it. And that’s what I mean when you’re in a unicorn. What I used to do the Chautauquas is we take small groups of people, you know, to some cool place, and they were all by definition, on this path, because that’s how they found Chautauqua, and why they’d be willing to spend the money to go hang out with me and some of my friends. The single, biggest, most powerful thing for them was they get, they got to hang out for an entire week with people who got it, who are like minded. So, yeah, I don’t, I don’t think that’s ever going to change. I mean, I think it’s, we are always going to be a small, a small voice out there, but it’s a, it’s a great way. It’s a great way to live. And I can’t imagine the kind of stress living paycheck to paycheck must engender, and the kind of dependency that’s going to create on a job you have. And you know, I’ll have people have this conversation, and people will say to me, Well, you know, but JL, I love my job, and I want to, I want to keep doing it, and I think that that’s wonderful. If you love your job, you’re very fortunate, and you should keep doing it, whether you’re financially independent or not. But keep in mind that can change. I mean, one of the key reasons you probably love your job is you’ve got a good boss. Well, that good boss could move on, take another job or get promoted, and you could wind up with a boss that you hate, then on a dime, your job satisfaction could change. So it never hurts to deal with the world from a position of strength, and this is dealing with a world from a position of financial strength.
Clint Murphy 31:17
You raised a couple things that really resonated, you know. You probably recognize that the same way you talked about money with your daughter. For a lot of us who become it all equate it with being a born again Christian. You know, you’re a born again Christian, and all of a sudden, for a period of time, you’re trying to convert all your friends. You’re like, hey, I found this thing, right? And with financial independence, it’s the same. When you find it, you think, holy crap, why didn’t I know about this? How come no one taught this? And I need to tell everybody I know about financial independence. And you quickly realize that not only do they not get it what they don’t believe you right? Yeah, they don’t want to. Because if you’re right, then, yeah, it’s it’s not what they want to hear. Because if you’re right, then the entire lifestyle they’ve been living is wrong. And you’re willing to say, Well, no, no, the lifestyle I was living was wrong, and I’m willing to change it. And I found, for the first two years, I was really excited to share, and people just thought I was crazy, JL. But there were a few people, there were a few people, and you would start to see each other, right? And it comes down to what, what you talked about and what we talked about earlier, with the savings rate. You started to see those people who you knew had a high savings rate. And you may know they had a high savings rate because they were buying an investment property or a second investment property, and you’d say, oh, hey, I noticed you’ve bought a few investment properties. Can we talk about that? You knew what they were making in salary, and you just started to find that group of people that you could have that conversation. In your life, you’re in a bit of a different situation as a public figure who does always talk about financial independence. But did you find in your personal life that there was that similar vein of at some point you couldn’t share it with everybody because they just thought, JL, that’s crazy talk.
JL Collins 33:33
Well, to be honest, I never tried to share it with anybody in my in my personal life, I’ve often said there’s only one person I’ve ever tried to convince of this stuff, and that’s my daughter. And by the way, mission accomplished, she’s, she’s 32 and about to take a long sabbatical. So she’s, she followed the simple path very successfully. But yeah, I never, in fact, remember when I was, when I was going through my career and developing this way that I think about things, and the way I invest in the savings rate this, this is a process of decade. And I recognize that it was completely different from the way most people live their life. So, you know, in my business career, I was always driving a much more modest car than my peers in business. I was living in a much more modest house than my peers in business. And I tried, I tried to keep that under wraps a little bit, because it’s never good to be the nail that that sticks up to, obviously, right, especially if you’re if you as I was in those days, trying to climb the corporate, corporate ladder, because I knew it would make people uncomfortable. And I also knew that there was really no upside to trying to persuade somebody of something that they had no frame of reference for, and particularly in those days when I was still sort of figuring it all out, so my own thoughts were not completely formed on on the subject. So when I started the blog in 2011 and then a couple years ago, in 2013 started writing The Simple Path to Wealth, which published in 2016 I was only archiving information for my daughter. I and I continue to be stunned at how how my work has resonated with so many people around the world. That’s the interesting thing about Pathfinders is there’s 100 stories in there from people of all different backgrounds all over the world. And that’s that’s still stunning to me, and it’s very gratifying, but candidly, that was never my goal. My goal was just to persuade my daughter because I knew it would make her life so much better.
Clint Murphy 35:59
I love that. When you look at those stories, we already talked about this idea that when you’re not when you’re spending more than you make, it usually leads to credit card debt. It leads to debt in general. And for you on The Simple Path to Wealth, avoiding debt is very important. And so you look at that and say, debt is bad. What’s one of those stories that someone shared about debt in the the challenges with it that really resonated with you, and when, when, when you’re writing about avoid debt for those people who are already in it, what are some suggestions that you throw at people to get them out of it?
JL Collins 36:46
Yeah, see, this is a tough question for me, because I’ve never carried debt. I’ve never even had a car payment. I’ve had mortgages over the years, but that’s the only kind of debt that I have ever carried. Ad what I was working on The Simple Path to Wealth, my editor said, you know, you we really need a chapter in this book about debt. And I said, well, it makes sense to me that they I can see where it fits, but I’ve never, I’ve never dealt with that particular demon, so I’m not even quite sure how to approach it. I said, but I’ll tell you and my editor had dealt with that demon. He had, he had come from, from a pretty, pretty significant debt, and clawed his way out of it. And so I said that, I think the only way this will work is if you outline for me what what you think ought to be in this chapter, and what it looks like from a perspective of somebody that’s that’s deeply in debt, and then, and then I can take that outline and massage it in into my way of thinking, that how it would fit in the civil path of wealth. And so that’s what we did. And I think the chapters are particularly powerful on one in the book. But that is such an anathema to me that it’s, you know, the analogy I use, it’s like being covered with blood sucking leeches and and yet, a large part of the population in in our culture, accepts it as normal. And you know my reaction is, if you’re covered with blood sucking leeches, you take your sharpest knife and start scraping the old blood suckers off. And it’s the same thing with debt. There is no simple way to get out of debt. I mean, there’s no and I cringe when I see these, you know, debt consolidation. You know, that’s all just ways. It seems to me, to extract more money from you by saying there’s some magic pill or magic potion that will get you out of debt easily and comfortably. You just have to start paying it off. And my suggestion is you should rank all of your debts based on the interest rate you’re paying and tackle the ones with the highest interest rate first, because that’s where your biggest return on the dollar is. Now I know that. I think it’s Dave Ramsey as a different approach. He says you should list all your debts and knock off the smallest debts first for the psychological boost of getting one done and going on to the next one regardless what the interest rates are. Okay, if you need that psychological boost, maybe that’s valuable. But I’m more of a numbers guy. I’m more of you know, go go. Get rid of what’s costing you the most money first, even if it’s the largest, largest debt you have, it will take the longest to get rid of it, because every dime you pay down, that’s like getting a guaranteed return on your money, or whatever the interest rate you were paying. So you’re paying 18% on credit card debt, and you start paying that down, that’s like getting an 18% return. What money? The only good thing I can think of by the way of digging yourself out of debt is the discipline that takes because you’re going to have to cut your lifestyle to free up money from your income, to pay off that debt. That process, that discipline will serve you well once the debt’s gone, because then all you have to do is start taking that same amount of money that went to your creditors and start investing it on your own behalf. And just like your debt blossoms, you know, exponentially, so do your investments when you turn that corner and start putting it in investments, Yeah, the you know, that last part really resonated. I’ll share a little story from a number of years ago now, JL. There was a close person in our in our life, who was in a bit of financial challenge, and they, they trusted my wife and I enough to share their numbers. And so we looked at, we looked at everything in mint, right? So we, we hooked it all up. We were able to say, hey, here’s here’s the money you’re making, here’s where you’re spending. We’ve kind of analyzed the last six months. Here’s your debts, and my wife was very good at being able to say, hey, here’s where I see you being able to cut back, and this is what it could look like. If you cut back in these ways, you’ll be able to pay off these debts in this order. It’s going to take this long. And what resonated with me was, if you do that, you’re teaching yourself financial independence, because as soon as those debts are gone, that if you could maintain what we’re saying now, that becomes investing. And I thought all of it like, what she’s put together is great, like, it makes a ton of sense to me. In the person on the other end thought to themselves, well, that looks really hard. I’m going to opt for bankruptcy. And you know what really struck me in that decision, in that choice, was by opting for that, aren’t you also opting for this probably happening again in the future? Well, I would say yes, but not only would I, would I say yes, but evidently lenders also say yes, because one of the things that was most shocking to me, because, again, I’ve never had that, but one of the things that was most shocking to me when I talked to people who had gone through bankruptcy is how creditors immediately started offering them new lines of credit. That seems so counterintuitive. You would think if, if I’m a if I’m a lender, and I see that somebody has failed to pay back their debts, why on earth would I lend them more money? Well, evidently, you can’t go bankrupt for another seven years once you’ve done it once. So creditors know that. So it’s a very predatory kind of thing. So yes, creditors know that if you’ve been in debt once, it’s probably going to be very easy to lure you back into debt, and this time you might pay it off, you know.
Clint Murphy 42:34
It’s so painful to watch and see.
JL Collins 43:07
And those bankruptcies, by the way, just to finish the thought, those bankruptcies, you say, well, you know, how can creditors absorb that loss? Well, that gives you an indication of just how enormously profitable selling debt to you is because their their level of profits are so large that they can afford to to not only lose to the occasional people who who do go bankrupt and leave them stuck, but be willing to take the chance on them again that it won’t happen. I mean, the the amount of money in for interest is just especially credit card debt is just in stunning.
Clint Murphy 43:33
Yeah, and the one that jumps out at you there as well, JL, is the ability for the credit card companies to send me and my family on flights every year. And probably a lot of your readers, a lot of your audience, maybe even yourself, is when you’re on the financial independence journey and you are consistent on never carrying credit card debt. You also start to say, well, wait a second. Like money, credit cards are a tool, and if I use them, well I’m actually going to net, net, net. Be better off because I never carry a balance. I only spend what I otherwise would spend. And I’ll take the points and I’ll fly around the world, or I’ll get cash back, whatever it is. And their ability to do that is because there’s someone somewhere paying them 20 plus percent a year, or in interest only making minimum payments, if they’re even making minimum payments. It’s pretty scary when you look at that.
JL Collins 45:21
Well that’s true, but in fairness, just to be clear, the other big revenue source for credit card companies are the fees that the merchants pay them.
Clint Murphy 45:30
That’s right, yeah.
JL Collins 45:31
So one of the things that that I’ve noticed recently is there a lot of restaurants that, more and more it seems that you go in and and when you get the bill, either they will say, if you pay in cash, there’s a 3% discount, or some of them, which I think is the smarter psychological way to present this to your customer, by the way, is a discount, or they’ll say, if you use a credit card, there’s a 3% surcharge, because that’s what the credit card companies are charging them. So the credit card companies are, it’s a hugely profitable business, both from, you know, from the fees that they charge merchants, which I think is actually the dominant part of it, but also the incredibly high interest rate that they can charge for people who are delinquent. I remember when I got my first credit card. First of all, it’s stunning to me that credit card companies it’s not stunning because I understand why they do it, but credit card companies will send credit card invitations to people in college who are broke and maybe even in debt with with student loans. And you think what lender would do that? When I was in college, it was not a single credit card offer made to me or any of my my peers in college, because it was a different world then. And when I got out of college, I got my first credit card, and I didn’t understand these things. I remember getting the first bill, and I’d bought maybe $300 worth of stuff, you know, and there was this minimum payment due, which was 10 or $15 and I looked at that and I and I said, what a deal. You mean? I can buy all this stuff, and all I have to pay is 10 or $15 you know, I’m gonna go buy more. Fortunately, my older sister was in the room when I was 10. They said, hey, look at this. And she and she explained to me, well, yes, you only have to pay the 10 or $15 but then the rest rolls over and they start charging you 18% that’s, that’s the catch, and that’s a pretty big catch. And fortunately, even, even in those days, I was smart enough to realize that. So I’ve never, never missed a payment.
Clint Murphy 47:54
Yeah, I would say I did miss payments in college. I remember I had no money back then I did, and I would exactly like you said, these these groups would come to college events, and they’d give us credit cards, and I would partially use it to afford food and lifestyle. And then I would be on the phone negotiating with them, saying, hey, you know, I’m a student. I don’t have income. I’ll be getting a job this summer. I’ll pay you back then, you know, can we work out a plan? And I would do that each year. And once I got out of college and started living with my wife, I’ll give her a lot of credit, she was so much better with money early in our relationship. her number one from that moment, as soon as I moved in with her, we’ve never we’ve always had joint finances. We’ve never carried, carried a balance other than our zero rate MBA, credit cards. But well, that’s a story for a different day. S let’s flip the switch a little. We’ve talked a lot about savings. We’ve talked a lot about spending less than we make. Let’s flip the switch to investing, and where I’d love to start is with a statement that you made once, which was the creation of index fund investing is the single greatest gift to the individual investor in history. So for those listeners who haven’t heard of index funds, what are they and why? Why are they so valuable on our journey of financial independence?
JL Collins 49:25
Yeah, so I I’ll make a book recommendation to begin with that I just read myself called Trillions. And I’m drawing a blank on the author, but it’s basically the history of how these these things evolved, where they came from, and who the players were, and even if you only have a modest interest in the subject, the book is so well written and the stories are so compelling that it’s that it’s worth listening to. But index funds, the first, the first index fund available to ordinary investors was created. There had been some earlier that were for created for institutions, but Jack Bogle created the first index fund. It was an S&P 500 index fund which tracked that index he created in 1975 I think it was first offered for sale in 1976 that was for us, little people, you know, and the retail investors and it came with a very low expense ratio. I to this day, I wish that I’d been aware of it at the time, but I wasn’t, but it’s almost impossible wrap your head around how expensive investing was before Bogle gave us this gift. And, you know, I started buying individual stocks. Well, in those days, if you bought a stock, you paid a commission of 5 or 6% buying it, and then if you wanted to sell it, you paid another commission of 5 or 6% to sell it. I mean, that’s 10, 12% round trip. And we talk now correctly, how big a drag a 1 or 2% annual expense ratio on a fund is, and it’s a huge drag, but this was, you know, 12% it was just, it was breathtaking. And then if you were going to buy a mutual fund, they were all actively managed mutual funds, so they all had expense ratios of around 2% sometimes more frequently they had what was called a load. Sometimes they had a front end load and sometimes a back end load as well front end meaning that was the commission you paid to buy this thing, and then the back end load was if you decided to sell it, they charged you again, just like buying or selling a stock. Oh, but the difference was in the middle, they also charged you about 2% to just manage your money. I mean, it’s, it’s not surprising that the financial world tried to strangle the idea of indexing in its crib. I mean, there’s enormous pushback against it, because these are smart people, and I think they recognize the threat to this amazingly lucrative gravy train that they’d that they developed. But yeah, it is the single biggest gift, financial gift that has ever been given to the average investor is, is The Index Fund, the way Jack Bogle created it.
Clint Murphy 52:23
When you think about investing, and I read the stories in the book, one of the things that jumped out a couple key challenges is buyer psychology, or seller psychology, and that when the market is in a really bad spot. Whether it was the 2008 financial crisis, whether it was covid, people get scared, and they pulled our money out of the index funds. They pulled our money out of the market. The market’s down. I gotta get my money out. And then when the market’s on fire, they jump in right a bit of the FOMO. I don’t want to miss out. All my friends are making millions. I’m going to throw all my money in and they throw it in at the peak. So, JL, how do people who are listening, how do we avoid, or how do we adopt a bit more of a Warren Buffett approach where we’re where we’re buying when they’re greedy and selling when they’re selling, or buying when they’re fearful, selling when they’re greedy. What are some antidotes to all of that?
JL Collins 53:31
Well, so I, my approach is a little different, because, you know, the the market can go much lower than the logic would dictate, and it can go much higher than logic would would dictate. It’s a very volatile animal in the short term. And so when you say, you know, so when others are greedy, well, how greedy at what level? That’s a tough call. Or when you say, you know, buy, when they’re fearful, well, how fearful are we talking about? And how much lower could it possibly go? At 2008 for instance, 2008 2009 you know, in the market, I think it got down about 50% of its lowest, lowest point. And people say, well, then, yeah, that’s when you should have been buying. But you have to understand that at that point, all of the smart money, all of the smart people, were saying it was going to go much, much lower. So nobody was saying we’re at the bottom. So figure out where you’re at the bottom is is impossibly hard. Same token about figuring out where you’re at the top, it’s impossibly hard. So what I say is you you buy and hold forever, because the market always recovers from these drops. And if you just keep putting money in, and you pay no attention to the level of the market, if you’re working and you have that cash. Cash Flow. I like my daughter, for instance, every month, a certain amount of money goes into her accounts, whether the market’s high or low, if the market happens to plunge, that’s just a benefit. That’s a great opportunity where that monthly check buys more shares, and over time, it is always going to go higher. So I try to explain to people that market corrections, which is about a 10% drop, bear markets, about a 20% drop, crashes, 30 plus percent drops. These are all perfectly normal parts of the process. The world isn’t ending when these things happen, it’s a perfectly normal part of the process. There will be corrections and bear markets and crashes in the future, especially for any of the younger people who are listening to us, who maybe have a 40, 50, year investing horizon, you will experience all of these things multiple times. You’ll never be able to tell exactly when they’re coming or exactly when they’re over. So don’t waste any of your time trying to figure it out. Just stick to your investing plan. Keep putting the money in, and decades later, you’ll be amazed at the accumulation. That’s how you get the outsized returns that the market can provide. The worst thing you can do is what Warren Buffett once said was try to dance in and out of the market, because almost nobody can do that. And it’s interesting, if you look at the research that mutual fund companies do, one of the things that comes up is the vast majority of investors in any mutual fund get a lower return than the fund itself creates. So let that sink in for a second. If you invest in XYZ fund, the vast majority of people investing in that fund are going to get a lower return than the return that XYZ posts. And the reason for that is people try to time the market. They try to jump in and out of it. The only way to get the return is to buy and hold so my favorite is VTSAX, which is Vanguard’s Total Stock Market Index Fund. I’ve owned it for decades, and I’m my holding period is forever. When I die, I’ll pass it on to charities or whatever, and they’ll do what they want to do with it, but there’s never going to be a reason for me to to sell it, other than maybe selling off a few shares for to live on
Clint Murphy 57:34
Perfect. JL, do you have time for a couple of quick, rapid fire questions?
JL Collins 57:38
Absolutely.
Clint Murphy 57:39
All right, what is one book that’s had a oversized impact on your life?
JL Collins 57:49
Well, probably, probably How I Found Freedom in an Unfree World by Harry Brown. It’s an old book. I think it’s probably out of print. I think it was published in the 70s, at least, that’s when I came across it, because my way of thinking about a lot of things is as we’ve talked about in this in this conversation, is different than most of the people in my life, investing just being in living below my means being, being a key example in this book How I Found Freedom in an Unfree World was the first book I ever read that said not only was it okay to think differently and to do things differently, but it talked about the advantages of living that way, living life on your own terms. So that was kind of the book that that told me I wasn’t crazy, that that these things that I, that I were, that I was doing, in spite of the pushback I might have gotten from the larger world, were actually not only valid, but maybe advantageous.
Clint Murphy 58:56
Yeah, I love that you you already mentioned Trillions. What else is on the bookshelf right now that you’re reading, that you’re enjoying?
JL Collins 59:05
Well, what else am I reading? Let’s see. Well, Trillions is that is a nonfiction one. One of my friends just sent me a book called The Bogle Effect, which I have yet started, but I’m looking I’m looking forward to that. One of the things that I like about Trillions is it’s a great description of Bogle’s role in all of this, in terms of nonfiction. I mean, this is maybe slightly interesting, but somebody suggested me, has suggested to me a novel called James. I forget the author’s name, and that novel is a retelling of the story of Huckleberry Finn, Mark Twain’s classic, from the point of view of Jim the slave. For people who may not have read Huckleberry Finn, it’s the story of this young white boy, Huckleberry and this slave who’s running away going down the Mississippi River and the advantages they have. And the novel James tells that same story from the point of view of of of Jim, the slave. Of course, Huckleberry , it’s the first person that’s, it’s Huck telling the story from his point of view. So I that got me interested in rereading Huckleberry Finn, which I’m in the middle of doing at the moment, to see how closely the narrative actually tracked, and what kind of liberties the author took with with James.
Clint Murphy 1:00:33
Well, when I love the sound of that one. the What is one thing in the last year that JL has spent less than $1,000 on that you’ve thought to yourself afterwards, wow, I really wish I’d bought that earlier. And I always loved this question with people in the financial independence community. It’s always, it’s always a little bit harder for them.
JL Collins 1:00:58
Well, yeah, you’re asking the wrong guy, because I’m hard pressed to think of any, anything that I bought in the last. You know, I think, generally speaking, and this kind of goes back to the book Die with Zero, you know, I think when you when you get to a certain point, as as my wife and I are financially, then the price of things doesn’t matter so much anymore. So when we travel, we fly first class. As an example, I am still horrified at how much more it costs to fly first class. It’s a terrible deal, and that goes against my grain, but it does make something that I really despise doing, which is getting on airplanes, a little more tolerable than it would be otherwise, and it’s something that I can easily afford and it just doesn’t matter. So I guess that’s the closest I can come to.
Clint Murphy 1:02:05
I love that answer. In your world, what is one habit, behavior change or mindset shift that’s significantly impacted your life?
JL Collins 1:02:16
Well, I you know, I think it’s this concept of everything’s free, which I alluded to earlier. Pete, who is Mr. Money, writes the blog. Mr. Money Mustache, for a number of years, was, was one of the speakers at Chautauqua when we were doing it in Ecuador. And he and I were at Chautauqua, and we were walking to a local bodega to pick up some wine. And as we were walking along, I said to him, so how much does the wine cost in this place? And he turned to me, he said, well, it’s free. And I said, Pete, come on. I know things are inexpensive in Ecuador, I get that, but it’s not gonna be free. The merchant is gonna want some money before we walk out of the store with our bottles of wine. He said, no, no, you misunderstand me. So what I mean is, when you get to a certain level of wealth, where your wealth is generating so much income, essentially everything becomes free. Well, that was an epiphany for me, because the one of the tools you need to get to that position, as we’ve talked about in this conversation, is you, is you need to spend less than you earn, right? So you’re freeing up that capital, and that’s critical, but it also works, and at a certain point you don’t have to worry about that anymore. And not only do you not have to worry about it, but essentially, everything becomes free. So now it’s kind of a joke between my wife and myself. She’s also always been very frugal. Whoever’s thinking about buying something and there’s any hesitancy at all, it’s she will say to me, or I will say to her, doesn’t matter, it’s free. You know, every because everything’s free. Now, to be clear for us, I mean, private airplanes and yachts are are beyond the bail. There are a lot of things we can’t afford. But truly, and maybe this is a reflection of how modest our needs are, but there is nothing that we want that isn’t essentially free if we choose to buy it, and that lose those first class air tickets.
Clint Murphy 1:04:33
I love that, and look forward to when we hit that hit, hit that spot.
JL Collins 1:04:38
I could just elaborate on that for just another moment, I think that also might be one of the message, key messages I’d like to leave people with, is that this works. I mean, following the Simple Path to Wealth works, living on less than you earn, and investing the difference works. And because of compounding, it’s, it’s slow to recognize it, because if you look at any compound graph, you see this, this line marching across the screen that is kind of flat, and then all of a sudden it takes a sharp rise up and hockey sticks. And it’s hard that’s that’s the power of compounding. It’s hard to wrap your mind around how powerful that is and where it will take you. So one of the exercises that I that I’ll give people occasionally is I’ll say, well, okay, let’s, let’s suppose you have $100,000 and just arbitrarily, let’s say you invested in VTSAX, and it returns 12% a year, which is actually a little less than it has over the last 50 years. But that’s a, not a tiny number, but a modest number. Well, that means your your money’s going to double every, every seven years. So you think about that. Let’s just do a quick exercise. If you’re, if you’re 30 years old, and you go out to, I don’t know, 70, what’s that 40 years? So what’s seven into, into, into 40?
Clint Murphy 1:06:22
Yeah, we get, we get six doubles along the way.
JL Collins 1:06:24
So we get six doubles the way. So let’s, let’s start with $100,000 so you double at once, that’s 200 and then it’s 400 then it’s 800 then it’s 1,000,006 then it’s 3.2 then it’s 6.4 and that’s if you don’t add another dime. So, and you can see how quickly you know, the first time it doubles, you only gain $100,000 by the last time you’re you’re gaining $3.4 million in that double. So compounding is a very powerful thing. If you started on this path, prepare to be wealthy.
Clint Murphy 1:07:01
Yeah. And, and I always, I always ask, I always say that we’ve gone pretty wide. We’ve gone pretty deep on some of the areas. Is there, is there one message you want to end with? And I think you may have, you may have nailed it right there, JL. Is there anything else though, that we missed, that you want to throw at, throw at the audience?
JL Collins 1:07:20
No, I mean, I think that’s, I think that’s not a bad way to end.
Clint Murphy 1:07:26
Perfect. Where can people find you?
JL Collins 1:07:28
Well, probably the easiest thing is the blog, which is www.jlcollinsnh.com and from there, I’m on you can find me on Twitter. I’m on Facebook. That’s the only social media I do. You can find the books. Find all three of the books on Amazon, if you’re inclined, Pathfinders, the last book I actually did through a publisher, so that’s found more readily in bookstores than the first two are. But you know.
Clint Murphy 1:07:59
Beautiful. Thank you, JL.
JL Collins 1:08:01
My pleasure. Thanks for having me.
Clint Murphy 1:08:06
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