Looking for economic independence? Follow the “Simple Pass”.
Author and blogger JL Collins’ 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 over 1 million copies. It’s one of my favorite investment books.
Drum roll. He’s back now Second Edition Of the books his daughter Jess cooperated with.
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I asked Collins to share some insights. Here is an edited excerpt of our conversation.
What has changed since your first edition from your philosophy perspective? Have you ever tweaked this new edition?
JL Collins: there is nothing. zero. I have designed a simple path to wealth so that it will be something you will implement for decades. If a large revision would be required after a single 10-year period, I wouldn’t have designed it very well. The basic philosophy is the same, and it is important. All the small details that have been changed. Government regulations regarding income restrictions to invest in 401(k) and amounts that can be placed in individual retirement accounts and things like that.
You kick off the book with your three important principles. Can I share it?
Avoid debt, live less than you earned, and invest your surplus. If you follow my simple path, you’ll do it with a low-cost index fund.
It’s important to avoid debt and get out of it. If you are dragging that particular ball and chain, you will never achieve financial independence. In our culture, it’s a bit appalling that carrying debt has been normalized (yes) to people borrow money to buy this and assume it, or something else.
“Without debt, live less than you earned, and invest your surplus,” says author JL Collins, depicted here, as the key to financial independence. (Photo courtesy of JL Collins)
How should you spend your money?
Spend your money on what’s most valuable to you. For me, nothing is more valuable than buying my freedom, my freedom of time, my freedom of choice. You do that by making money and investments that will ultimately pay all the expenses.
How do you define economic independence? How does your approach match fires (early retirement of financial independence)?
I love the acronym for fire. It’s very clever and if that’s your goal, it’s a great goal. Retirement early wasn’t my goal. I like to work. My goal was to have enough money to make bold choices. Being financially independent means you have enough money to throw enough to cover all your expenses.
You write 25 times that your annual expenses are the amount you need to become financially independent. explain.
There is a concept of what is called the 4% rule. And what the 4% rule suggests is that it’s a great guideline. When you invest enough money, that 4% is to cover all your expenses. Let’s assume that $1 million has been invested. Well, it’s thrown away at 4% per year, $40,000. So if you can live comfortably for $40,000 a year, you are now economically independent. If you need $100,000, multiply it by $25 to $2.5 million.
If you want to become independent financially, we advocate for saving 50% of your income. Isn’t that a bit unrealistic for most people?
This is probably one of the things I push back most. Because it depends on how you build your lifestyle. And while I’m sympathetic to people who feel that way, there are people who do it very well. If you can put it aside, the larger the proportion, the shorter the journey to reach that economic independence.
You own all stocks, but what advice do people have when it comes to dealing with rocky uncertainty in the market?
The only thing that determines whether the market will make you rich or bleeding on the side of the road is what you do when it falls. Because all corrections to the market, which is a 10% and a 20% bare market, are normal. They should be expected. If you are investing in the stock market, you need to prepare for those things to happen. And despite all those who claim they can predict it, it is unpredictable.
I’ve been doing this for 50 years and when you know these things are coming and you can’t predict them, what do you do? Well, you just keep the course. You’re panicked and not selling. This is the worst thing you can do. That’s because you’ll bleed on the side of the road. And not only do you stay on the course, but if you are building your wealth and you are regularly adding money, that’s what a simple path is looking for, these things are blessings now as you accumulate those stocks at a low cost.
This is a simple path to wealth. It’s not only easy, it’s even more powerful. Therefore, when building wealth you have one index fund. In my case, it’s Vanguard’s stock market index fund.
What matters is the total stock market index fund. And the note here is what I always hear from people. Are they okay? The answer to that question is, yes, they’re fine.
You own almost every publicly traded company in the United States, and everyone from the factory floor to the CEO works to make you richer. It keeps me warm and comfortable on the night I fall asleep.
If I stop making income to enter the stock market total index fund, I would like to add a bond fund. And in my case, it’s Vanguard’s Total Bond Market Index Fund. He also makes money from money market funds.
Often people go to 401(k) and they can’t find the total index funds in the stock market, but they can find the S&P 500 funds.
I’m a little alone in this position. I simply don’t see the need for it, as these biggest companies that make up the majority of my total stock market index funds are, by definition, international companies. The huge amount of their sales and profits comes from all over the world.
What do you think about funding for your target date? they areMajor investment instruments for people in recent employer retirement plans.
They are effective. One of these eligible date retirement funds is a great way to go. The fund will handle all rebalancing when it’s time to add bonds. For those who want ultimate simplicity, you don’t need to think about it at all. I personally don’t use it because I don’t think it works at all, and by the way, it would give you that international exposure.
What do you think about encryption that creeps into your investment portfolio, such as private equity? Still sticking to index funds?
I am not a fan of multiple income source investment schools. The simpler one is better. Therefore, there are no cows, money, pensions, codes, etc. For the most part, so far, cryptocurrencies are speculation. Sometimes speculation works very well, but in many cases these speculations don’t work. That’s why it makes them speculation.
I’m not a speculator. I am an investor. Investors buy assets with businesses that can generate inventory for companies and rental properties, for example. Such things are gaining value due to the fundamental activities that make money.
