In this interview with Googler Rachel Smith, JL Collins discusses money and investing, including: how to think about money and investing to build wealth, how to avoid debt, how to simplify the world of 401(k), 403(b), TSP, IRA and Roth accounts, TRFs (Target Retirement Funds), HSAs (Health Savings Accounts) and RMDs (Required Minimum Distributions).
RACHEL SMITH: Please welcome J.L. Collins.
J.L. COLLINS: Thank you.
RACHEL SMITH: You’re welcome. So my first question for you, the title of your book is “The Simple Path to Wealth.”
J.L. COLLINS: It is.
RACHEL SMITH: And it’s a roadmap to financial independence and a rich, free life. So what does wealth mean to you, and how is it tied to a free life?
J.L. COLLINS: Well, I suppose we could look at that in two different directions. So if we think about the psychological part of it, to me, personally, what wealth represents is security and freedom. So security to protect you from what the world can throw at you, and freedom to chart your own path in a way that you couldn’t do without the resource.
On the financial point of view, I suppose when I think about what the benchmarks are for are you wealthy or not, have you achieved financial independence or not, what has come to be called the 4% rule is a good guideline. That comes out of a thing called the Trinity study.
And without belaboring that point, it simply suggests that if you have enough assets that 4% of that amount can cover your annual expenses, you can consider yourself financially independent. So you can work at it from two different directions. You could say, well, I have a million dollars, so 4% of that is $40,000. Can I live on $40,000 a year or not? And therein lies the answer to your question.
Or you can look at it from the other direction. You can say, you know, I need $40,000 to live on. So how much do I need to be financially independent? You multiply $40,000 by, as it happens, 25, you get a million dollars, and there’s your answer. So it really depends on what your needs are.
RACHEL SMITH: And why is it important to keep the path simple? I think there are a lot of folks tuning in or folks in the audience who have read financial independence books, and maybe their eyes roll back in their head, because they just can’t make sense of it all. So why is it important to keep it simple?
J.L. COLLINS: Well, that’s one good reason. But the reason that I prefer keeping it simple is simple is simply more powerful. Simple is what gets you the best results. And in this case, when I talk about simplicity, I’m talking about index funds and specifically broad-based stock and then bond index funds when you bring them into it.
There are a lot of reasons that simplicity is an advantage. It keeps your costs low. It keeps your life simpler. It makes things, when the time comes, easier on your heirs. But the most important thing is it is the most powerful way to reach financial independence. People who come to my blog are always –
I get two kinds of readers of my blog. People who are really into this stuff and they always want to tinker, and that’s not who I’m really writing for. I’m writing for people like my daughter who knows that it’s important, but she has other things that she’d rather do with her life than fixate on finances and investing.
And so when you have a simple path, you can just get a couple of things right. You’ll have a very powerful performance. You will outperform the vast majority of professionals out there. And I am fond of saying to those people who want to tinker, if I thought there was a way to successfully tinker and do better, then that’s what I would have written the book about. And in fact, I wasted a couple of decades trying to find that.
RACHEL SMITH: So you have a blog, jlcollinsnh.com. If folks are interested in your content, should they begin with your blog or your book?
J.L. COLLINS: I would suggest that if you don’t know anything about me or this concept, I would go first to the blog. And I would go to — there’s a button at the top called Stock Series, and the blog is best known for my stock series of posts. And when you click on that button, that will take you to an introduction.
And in that introduction is a link to what I think is the best review of my stock series that’s been done — and not best because it’s most favorable, but in my view most accurate. So you can click over to that and read that brief review. And after reading it, you’ll know very clearly whether this is going to resonate with you or not and whether it’s worth your time.
So I’d start there, and then I would read a couple of the posts. And then if you like what you read, you can consider going on to the book. There is nothing in the book that’s not in the blog, so you can get all the information just by staying on the blog.
The book is more concise. It’s better organized, because the post and the blog came organically as they occurred to me or were suggested. And the book has the advantage of being better organized. It’s more concise. I spent more time polishing the writing so, I hope that the writing is more polished. But you’ll make the judge of that.
RACHEL SMITH: Got it. And thinking back to the early days of your own investment history, how did you learn all this stuff? How did you learn to invest?