ITF 59 | Financial Independence


Joining Craig and Zeona on the show is JL Collins, one of the founding fathers of the FI movement and the author of “The Simple Path to Wealth”. He is set to release a new book titled “How I Lost Money in Real Estate Before it was Fashionable”.

In this episode, JL explains the concept of “F-You money” and the virtuous circle that occurs when people go down the path to FI. He then talks about his books, what it was like to teach his daughter what he knows about finances, and how he achieved FI as an active investor who later went passive.

Listen to the podcast here


Achieving FI Through Savings, Real Estate, And Index Funds With The Legendary JL Collins

Zee, how are you doing?

I’m doing great.

We’ve got a legend coming on the show, JL Collins, who is known as one of the Founding Fathers of the Financial Independence Movement, the author of The Simple Path to Wealth and another book that is coming out. What was the name of the book?

How I Lost Money in Real Estate Before It Was Fashionable.

You have given it a read and I’m jelly and I have not. I’m the minority here, which is cool. This show is so fascinating to hear what financial independence looks like to someone who’s a little older than our typical guests. He has been doing this financial independence thing since index funds came out in 1975.

There is a lot of good stuff here and it lays out a simple path to wealth. If you’re saying, “I like the idea of real estate, but maybe that’s not going to be my only investment vehicle.” Index funds can be an easy play. Go out and get his book.

Just a heads up. This episode, in particular, is not super real estate heavy and this is very much index fund heavy. We touched on real estate a little bit, but we provide an alternate way to achieve financial independence. That is through a super passive way in index funds. Index funds will be the most passive way to achieve financial independence, I think that real estate can get you there quicker, but it is a little more work, management, research and knowledge, and all that. If you love your career and what you’re doing and you want to throw some cash in an index fund, it could be a way to do it, too.

Let’s bring him on the show.

JL Collins, the man, the myth, the legend. Welcome to the show. How are you doing?

After that introduction, how can I be doing anything other than excellent?

We’re super excited to have you on. It’s been a long time coming. I feel like we’ve been trying to get you and snag you for a while, but you’ve been traveling and enjoying your time in Wisconsin and all that, but let’s kick it off. Where and when did you first find out about financial independence?

That’s a tricky question in my case because if you’re asking when I started pursuing it, I started pursuing it before I knew what it was, which was the moment I got out of college. If you’re asking, when I became aware of the fact that there was a financial independence community out there, that wasn’t until after I started my blog in 2011. I started the blog somewhat famously at this point to archive this information for my daughter. I had no idea that I was starting something that would develop an audience. I didn’t care about that. Somebody said, “A blog would be a great way to archive this stuff.” Only after I started it, I realized slowly, but surely there was a community out there.

It makes sense that we take it way back. Whenever you graduated college, given that there was very little information about that out there, how did you think to start pursuing this?

We are going back to ancient times when I was riding around in my pet dinosaurs. I had never heard of anything like financial independence. It was only after I started accumulating what I came to think of as F-You money, which I did right out of college. It took me two years to get my first professional job. Once I had my first professional job, my motivation was that my father, who had been very successful developed emphysema because he was a cigarette smoker. I slowly saw our family’s fortunes go from being very solid to be very difficult. That put into my mind that the world’s a financially insecure place. I never want to be dependent solely on my ability to earn to meet my needs.

I want to go back to the concept of F-You money because I feel like not everybody knows what that means. It’s a fun FI term that we use in our community. Can you explain what that is?

I take credit for introducing it to the community. I’m the first one I saw that used it, but it’s not a term that’s original to me. I first came across it in the ’70s in a novel called Noble House. It was written by James Clavell. In the novel, there is the character and her ambition is to have what she calls F-You money. I’d already been accumulating this the moment I read that, but I didn’t have a concept or a name for it.

ITF 59 | Financial Independence
How I Lost Money in Real Estate Before It Was Fashionable: A Cautionary Tale

The moment I read that, it clicked, “That’s what I want.” There is a little bit of difference as to what exactly F-You money is in that book. Even more commonly, it’s the equivalent of being financially independent, which means that you have enough money that it is meeting all of your needs without you needing to work. You can say, by extension, FU with anybody you want.

In my world, I had F-You money when I had only $5,000 and I wanted to quit my job to go travel in Europe. F-You money was a stepping stone that gave me breathing space to make bolder decisions. Whereas financial independence is the time in which you have enough money that you’d never have to work again if you choose not to. That’s how I think of it.

It sounds like the way you think of it is F-You money is almost what we talk about is maybe even like a lean FI where you have enough money where you no longer are controlled by your employer. You can go in and demand a raise or different work hours or demand to work remotely. If they say no, you’re cool because you can go and travel to Europe or do whatever you want to do.

That’s a good way to put it. This is not an on and off switch that we’re talking about. From the moment someone starts saying, “I’m going to start buying my freedom.” You buy your freedom by buying assets. The moment a person makes that decision from the very first dollar they save towards that goa, they’re a little bit stronger than they were the day before. It’s a journey every bit as much, bringing more so than a destination.

The F-You money, in my mind, is the money and the stages of that journey whereas, financial independence is where you’ve arrived. It’s where you have enough that if you choose not to never have to work again. For me, F-You money first came when I had a grand total of $5,000 because that was enough in those days to take me to Europe for a year and buy me time to find another job when I got back.

Before Tim Ferriss’ time, he talked about these mini-retirements that resonated with me where you don’t have to fully retire. If you can take a year and travel through Europe in your 30s or late 20s, some people would say it’s much more fun and probably a different experience to travel through Europe in your late 20s, 30s than it would be in your 60s and 70s. Is that something that you did? I know you’ve been doing traveling before COVID. Can you relate to that?

I want to say in 2012, Mr. Money Mustache asked me to do a guest post where he and I got to know each other through our mutual blogs. The guest post title that I did for him was something that was something effective we did, but for me, it was never about retirement. I, to this day, while I like the acronym FIRE because it’s clever, I never personally use it because, for me, it’s about the financial independence part of it. It’s not about retiring early. I liked working. I didn’t like having to do it all the time.

I liked being able to step away from my job whenever I chose, either because I wanted to go travel or start a business or I got sick of working wherever I was and didn’t have another job to go to right away. I guess that would be what you consider mini-retirements, but I thought of it as a series of sabbaticals. I always knew with each of those that I was going to go back to work because I liked my career. I liked working.

There is something to be said about that. We always say, “You don’t have to quit,” but things change in your job. You may get a new boss or you may stop liking it. That way, you can take that time and have that runway to do whatever.

There is no requirement that you have to quit your job because you reached financial independence. Even if you quit a job, I don’t think I’ve ever met anybody who achieved FI who was sitting on the proverbial beach, drinking piña coladas and doing nothing else. I have known a lot of people who have done that for some period of time, but almost everybody knows who has achieved FI has gone on to do other interesting, productive things that may or may not pay money.

That’s what I wanted to add. First off, how rich could our world be if we all did what we were passionate about? There would be so much more art, vibrance, cool creations and inventions. You never stopped earning money. It’s a weird thing to say, but there are lots of opportunities that continue to come up over time when you have time and space. The concept of full retirement is not exactly accurate.

That’s a great and very important point. When I go to our Chautauquas, which are these annual retreats that we hold and people have an option to select one of the speakers for a one-on-one session. The people who select me frequently want to talk about approaching their FI number or slightly over it, but they’re a little nervous because it’s a big step to quit their job. Is this money going to last? That’s worth paying attention to and that’s where things the 4% rule are useful. Although I think of it as a guideline rather than a rule.

If you have the intelligence, drive, and discipline to become financially independent at a young age, suddenly stopping to do anything productive is nonsensical.   Click To Tweet

I also say to these people, “If you have the intelligence, drive and discipline that it takes to become financially independent, particularly at a young age, in your 30s or 40s, the idea that you’re suddenly going to stop doing anything productive is nonsensical.” I suppose you could, but as I say, I’ve yet to meet anybody who’s done it. For people who say to me, “I’m in the soul-crushing job, but I’m not quite there yet. I need $50,000 a year to live on and I only got $1 million.

The 4% rule says that’s only $40,000 and I’d have to draw 5% to get to FI.” I’m like, “Go for it. If you’re a soul-crushing job, I won’t spend another minute in that job. The odds are you’ll make more money. Do you think you can figure out how to make an extra $10,000 a year?” I don’t know anybody who is smart enough and savvy enough to accumulate $1 million who couldn’t figure out how to make an extra $10,000 a year.

I’ve got a little test to see if I was financially independent. What I did was I took a $0 paycheck for three months and put all of that money into my 401(k) and said, “In three months, if my checking account is larger than it is now, then I’m financially free. If not, then maybe I’m a little bit down and I maxed out my 401(k).” The worst-case scenario was not all that bad scenario. When I discovered that, “My checking account is bigger. I’m like, “I’m there.” I then felt super comfortable. Doing something like that as a test run may make you feel a little bit more comfortable.

Craig, your experiences mirror my own. Remember that I didn’t have any concept of financial independence when I was doing this. I didn’t come across that until 2011, 2012. In 1989, I quit a job and that was turned out to be the longest period I was unemployed. It stretched out for five years. Our daughter was born during that time, and my wife quit her job. We’ve got this new mouth to feed and we’ve got no income at all coming into the house. About three years in, I was doing my annual review of our finances and I noticed something remarkable. I noticed we paid all of our bills.

We were essentially living the same life that we had lived when we were working. We ended the year with more money than we started with. I knew that it was awesome and something remarkable happened, but I had no frame of reference for it. It certainly was not a goal that I’d set. The goal was to have F-You money that allowed me to have enough to step away. I never made the connection at that point that this meant I never had to work again if I so chose. I thought, “That’s an interesting thing.” I went on with my life.

That’s funny that you stumbled into it. It attests to the times where the information age hadn’t come to fruition yet, but I’ve got a question. It sounds like you started your journey unknowingly in maybe the mid-70s or so. You realize you hit that mark or it was interesting in the early ‘90s when your daughter was born. What did you do throughout that time? What was your job? How much were you making and how were you investing? I have a feeling you weren’t doing real estate if I know anything about you but in likeness.

I did do a little bit of real estate back in the day. That’s how I started. In fact, I have a new book coming out called How I Lost Money in Real Estate Before It Was Fashionable. Craig, you’re asking me a question that spans 40-plus years. It’s a little hard to say how much I did make. My first professional job, which I got in 1974, paid $10,000 a year. By the time I quit working professionally, I was making into six figures, so that’s quite a range. I tell the story of this condo I bought and I did everything possibly wrong, but that did spark an interest in real estate at that point.

I invested a little more and this would have been in the early ‘80s in some other kinds of rental real estate, which turned out much better and more profitably. It also led me to realize that real estate wasn’t for me because it was too much work and it was not the work that I wanted to do, but certainly, there is money to be made in real estate. In my new book, we’ll discuss the detail there’s money to be lost.

Real estate can be a faster way to FI. You can achieve higher returns in the traditional stock market, but it is more work than throwing money in index funds and whatnot. I do have a question based on your range of income. You went from $10,000 in ’74 to six figures plus. As your income increased over your career, how much did your expenses increase?

Let me make one comment on our previous discussion and then let me address that. I want to make a comment that real estate can certainly be more profitable than the stock market, but you have to be careful not to compare apples and oranges. Real estate’s a part-time job as well as an investment. Investing in index funds doesn’t take any effort or time at all. The comparison isn’t real estate versus index funds. It’s real estate investment part-time job plus index funds investment. What else could you be doing with your time? In my case, I was using that time to build my career. That was a pretty good trade-off. Other people might use that time to be with their families more to start some side hustle or business or whatever.

When I got my first professional job, I started saving 50% of my income. That was the number I pulled out of the air because I wanted a significant amount of my money to be spent on buying my freedom. In my mind, it meant at least half of it. Buying freedom is buying investments, which, as we discussed, was real estate at one point in my life. It’s also always been stocks and funds. That 50% savings rate stayed throughout my entire career. Two things happened. One is, as I made more money, I had more money to buy my freedom. Some of my investments increased, but I also had more money to expend on my lifestyle.

When I was making $10,000 a year, I was living on $5,000. When I was making $20,000, I was living on $10,000. When I was making $200,000, I was living on $100,000. The more I made at one point because I’m not very materialistic. My spending didn’t keep up. My savings rate probably went even higher, but it never felt like deprivation to me. My lifestyle always inflated, but the important thing is 50% was always skimmed off the top two by what was most important.

ITF 59 | Financial Independence
Noble House

I’ve got two questions surrounding savings because it’s super fascinating. I’ve talked to a lot of financial independence people and it doesn’t seem to matter how much you make. It seems to matter what percentage you save, whether you’re making $10,000 a year or $200,000. First, what is savings? Two, maybe expand in that concept of why can you achieve financial independence quicker by a percentage versus the dollars themselves?

The savings rate is what percentage of income you are saving and some people get in the weeds of it was this pre-tax or after-tax. I always did a pre-tax because there was more money going to what was most important to me. The thing about financial independence is it’s not a dollar amount. It’s proportionate. That’s where the 4% guideline is very useful. Whether you’re financially independent or not, it doesn’t depend on how much money you have solely. It depends on how much money you’re spending. If you’re spending $40,000 a year and you have $1 million, you’re financially independent.

If you’re spending $100,000 a year and you have $1 million, you have ways to go, either by reducing your spending or increasing your savings. The best way to illustrate that is for a very short time, I was in the financial business, which is a pretty lucrative business. I left after a short time, but a friend of mine in that business went on to do very well. His name was Ken. This would have been probably in the ’90s. He was in Chicago at this point and I happened to be in Chicago. We had lunch and it was around Christmas. In that business, you live and die based on your annual bonuses, which can be huge.

Ken has gotten his and it was $800,000. We talked about how he could live on $800,000 a year. That probably sounds ludicrous to most people reading this, but as I sat there and listened to Ken talk about his multiple houses, his kids, the private educations, the cars, and I started totaling it up. He was right. $800,000 was not enough to support the lifestyle he had created.

Ken was probably without major changes, either making a whole lot more money or spending a whole lot less was never going to be financially independent in spite of having a pretty enormous income by most measurements. By the same token, I have a good friend of mine who has never made more than $40,000 a year. He has been financially independent for quite some time. He doesn’t need nearly as much as Ken would need.

I go into a class maybe once a month and teach high schoolers about this concept of financial independence. The one thing I always say that’s the most important thing, especially when you’re first starting out on this journey, is keeping your expenses low because it not only allows you to hit financial independence sooner. If that equation is passive income is greater than your expenses, you have to reduce your expenses to satisfy that equation. Not only does it allow you to hit it faster, but that excess that you are saving gets to increase your passive income. It’s almost like a virtuous circle.

The only issue I have is a slight one with the terminology. Controlling your expenses sets people up to think about deprivation because I have to control my expenses to have this long-term goal of being financially independent for older me. When I’m young, who cares about older me? That older me will take care of myself. In my mind, it’s not about that. It was always about spending my money on what was most important to me. I spent every dime and I still do that came into my possession and I spend the moment I get them. It’s that a lot of those dimes, half or more of those dimes over the years went on to buy and we’re being spent on the single most important thing to me, which was my freedom.

That might not be the single most important thing to everybody. It’s hard for me to imagine how it would not be, but I’ve seen enough of the world and humans to realize most people don’t feel that way. Most people don’t even think about it as something they could buy, but that’s what I wanted to own and buy. It never felt like deprivation. I never felt like I was controlling my spending. I was channeling my spending where it was most important to me.

That’s such an amazing mindset to have where you’re not spending money when you’re buying index funds or buying real estate. You’re buying your freedom. Time and freedom are two things that do not depreciate. Your new car will become old. Your new house will become old over time. Do you need to think about what do you want out of your life? Don’t get me wrong. I want a nice house someday. I wouldn’t mind having a couple of million-dollar houses, but I’ll make sure that my passive income can afford that. On the other hand, my car, I don’t care about my car. I drive a $2,000 beater. As long as that thing runs and gets me from A to B, is decent, good on gas and is safe, that’s all I care about. You have to think about what you truly want and what you are willing to sacrifice.

When it comes to buying things like houses and cars, you want to buy from a position of strength. What I mean by that is you’re not stretching to buy it. It’s a relatively small part of your income to buy it. You mentioned you drive a $2,000 car. The reason you drive that is compared to your income and your net worth, that’s a negligible amount of money. If you were Jeff Bezos, you could be driving a Bugatti Veyron, which is $3 million or something. It would be the equivalent of your $2,000 car. It would be negligible.

Money is fungible. It depends on how much you have. When we bought our beach house here on the shores of Lake Michigan, I bought it from a position of strength. That meant that when the lake was rising, thankfully, it started to go back down again, but for several years, and shortly after we bought it, the lake kept rising. There was a real possibility that it was going to take the house. That would have been a bad day. It would have been a negligible effect on my net worth, but it would have been a bad day, nonetheless.

You could dive right out the living room window into the lake. That sounds amazing.

There were days where the waves were coming up within ten feet of my door.

I want to go into this position of strength a little bit more. How did you assess that for a house? If someone was looking to buy a house.

I have this reputation of being anti-house and this new book I’m going to bring out is probably going to add to that. It’s unfortunate because I’m not anti-house at all. I’ve owned and lived in houses for most of my adult life. I see them as being expensive indulgences and not investments. There is nothing wrong with an expensive indulgence. Craig said, someday he like to live in a multi-million dollar house. Maybe someday he’d like to drive a nicer car than his $2,000 car. There is nothing wrong with those things at all as long as you are buying them from a position of strength, which means that you’re not straining your finances in order to afford the silly thing.

There is nothing wrong with buying expensive things as long as you are buying them from a position of strength and not straining your finances just to afford them. Click To Tweet

When I owned houses, I typically owned fewer houses than my business peers. People who had the equivalent jobs to buy an equivalent income because they were going out and they were following what the real estate agents and mortgage bankers who were telling them like, “You make X number of dollars. You can afford this much house.” That’s the house they went and bought it. When they said that to me, I said, “That’s nice to know, but there is no way in the world I’m going to buy that much house. That’s silliness. I’ll buy a house that was maybe half that price and half the mortgage and half as painful to deal with in terms of paying for it.” That’s how I thought about it.

Do you see that there is any formula or anything that you have? What puts you in a position of financial strength? Is it that half number where it’s, “Whatever the bank tells you, assume half?” Does it depend on the person on their comfortability levels? Have you seen anything like that?

I haven’t seen anything like that. I can only draw from my own experience. When you take half off the top to buy the most important thing you want, then the rest is what I lived on. If I was making $50,000 a year, which is probably what I was making in 1980, 1982 or somewhere in there, it meant I was living on an income of $25,000. I bought whatever house or car or whatever else I could afford on that $25,000 income. It wasn’t rocket science.

That’s a great way to measure it. I forgot about that formula. You are a 50% guy. I like it.

I like simple things.

That’s a perfect segue because I wanted to talk about your books a little bit. Your first book is called The Simple Path to Wealth. If I understand it correctly, it’s an adaptation of maybe the best hits of all of your blogs translated into a book. When I read it, I knew that even as a personal finance geek, I thought it was very easy to read and accessible for the average person. I wanted to hear a little bit about that book and your other book so that the readers know a little bit about you.

I started this blog in 2011 to archive this information for my daughter because I had managed to turn her off to all things financial because when she was young, I pushed it too hard. Who knew that the four-year-old didn’t want to go through The Wall Street Journal with you. In any event, because I turned her off to it, I wanted to make sure that the information was available to her when she was ready for it, whether I was around to tell her about it or not. That’s what inspired me to start writing it down and that’s what started the blog.

At one point in the blog, I created what’s become known as the stock series and the stock series and a few other posts like you put it well as the greatest hits. I molded it into the book, The Simple Path to Wealth. At the same time, I created these annual events called Chautauqua, who my daughter now, by the way, is the only person I ever tried to persuade about any of this stuff. Mission accomplished. She’s now well on her own successful financial journey, but she never tires of reminding me that, “Dad, if I had listened to you when I was young, there would be no blog. There’d be no, Chautauquas and there’d be no book. The only reason any of these things exist is because I didn’t listen.” She is right.

Why don’t we dive in a little bit on what it was like raising a daughter and trying to teach these things and maybe some things that you did that didn’t work? What made her have that switch to now be on her own financial journey? Usually, those teenage years are pretty rebellious, so it probably wasn’t then, but when did she make that switch? Did you have any play in that or was it like, “Here it is? You lay the stock series out on the kitchen table every time she came home.”

She was in college by the time I was writing the stock series. I started her very young. I started pushing this stuff very early and I did more things wrong than right. For instance, her memory of an allowance. I must’ve read this somewhere. Her allowance at the time was $1 a week or something. Every week, I’d sit down with her and I’d have coins and I say, “Here is your dollar allowance.” There were three quarters, two dimes and a nickel and say, “We’re going to take two of these quarters and we’re going to put them in the envelope marked savings with a 50% savings rate.

We’re going to take one of these dimes, which is 10% and that goes to charity. You have this other$0. 40, which is yours to do whatever you want to do. You might want to think about saving some of that long-term for bigger things what do you can do whatever you want to do.” Jessica, as an adult, explained to me that from her point of view, it was like, “Here is your dollar allowance and then I take away $0.60. My allowance was $0.40.” She didn’t think of saving money in the journal. The money is hers.

You forgot about taxes, too.

I didn’t make her pay taxes or rent, for that matter, but I did talk about these things all the time because I can’t help myself, I guess. She tells me now and I’ve heard her when she’s spoken to groups. She tells the story that it sank in for her when she was in college because suddenly, she was surrounded by all these other young people who, like her, were all off on their own for the first time. They are trying to figure this money out and taking on tremendous student loans in many cases. She said, “I was stunned that they didn’t know anything about money and I was also stunned that I did.” She absorbed it against her will. She said that’s when I realized that not everybody knows this stuff and it’s important. She graduated, started earning her own money, and went to the races.

It seems like everyone grows up in their own little bubble or you feel like the way your family does things is the way everyone does things and you get to college and everyone is different. It sounds like your daughter was surprised in a good way like, “I get why my dad took $0.60 from me for every dollar.” Maybe she does the $0.60 or $0.40 or $0.30 thing, but either way, if she is starting to save when she is twenty, a sophomore or junior in college, by the time you’re 30 or 40, you’ve got to be pretty set. I don’t know how that math works exactly.

It helps a lot.

ITF 59 | Financial Independence
Financial Independence: How rich the world could be if everyone just did what they are really passionate about? There would just be much more cool creations and inventions.


JL, to recap your journey of financial independence. It was like in the ’70s when you got your first job. You always felt to save 50% and you always did that as your salary came up. Did you always invest in an index fund? I know you did real estate, but what did you do first before index funds came about?

One of my dirty little secrets is how late I came to index funds. There is a great irony in that I started investing in 1975. It was the year Jack Bogle founded Vanguard. It’s the year that he created the very first index fund. He is the father of index funds. He passed away now, but he created the very first index fund based on the S&P 500 in 1975. Theoretically, had I been aware of Jack Bogle, Vanguard and index funds from the moment I started investing, I could have been invested in index funds, but I wasn’t aware of it.

Equally important, even if I hadn’t been aware of it, I was way too arrogant to have embraced indexing. How do I know that? I know that because in 1985, when index funds were brought to my attention, I was way too arrogant to embrace it. It’s amusing to me when I hear people who argue against index funds and are in favor of active investing with such certainty. I laughed at myself because I heard my own voice making those arguments. I made all of those arguments back in the day. I’m arrogant enough to say I made better than I hear them made by most people. I was more skilled at defending those things.

My other dirty little secret is that I achieved financial independence as an active investor choosing individual stocks and actively managed funds. It is a fund that’s run by individuals who try to choose stocks that would be more successful than the norm. One of the things that make that so seductive is it does work. It’s a whole lot more effort and works. The research is particularly clear that it is not as effective. It doesn’t mean it’s not effective. It means that index funds are not only easier, but they’re also more powerful.

When did you make that switch? When were you convinced that the active way was no longer the right way and the passive way made a whole lot more sense?

It’s hard to draw a definitive line in the sand about that because it was a gradual progression. One thing I’ll give myself credit for is I always remained willing to engage in the conversation about it. Even though I was arguing against them, I was listening and paying attention. Over time, I became slowly more and more convinced. I didn’t immediately sell all my stocks and actively managed funds and moved in the entirety of index funds. That was a slower transition. You’re testing my memory a little bit, Craig, but it probably started in the late ’90s, early 2000s. I probably had last my individual stock as maybe 2013.

You may not know the answer to this, but do you know the difference in your return on investment from a passive portfolio versus an active portfolio?

I don’t. Even these days, I don’t measure it that carefully. I can’t give you a definitive number on that. That would be interesting. I would like to know that myself.

I have no idea of your portfolio, but Tony Robbins wrote a book and advocated for fiduciary advisors versus people in actively managed funds. An actively managed fund has a percentage that someone is earning, which is not always obvious. A fiduciary advisor is someone who has a fee upfront, but they don’t take anything out of your investments.

He said that people who use actively managed funds over 30 years in the market could lose up to 30%. Knowing there is a big spread, it might not have been that for JL’s case, but for those people reading, that’s one of the great things about index funds is they have a very low expense ratio if you choose the right ones and then you don’t lose as much money.

There are two reasons in my mind that index funds over time outperform actively managed funds and, for that matter, tend to outperform people who pick their own stocks is cost. An actively managed fund has active managers and those guys are expensive and use the shareholders owning shares of that fund who are going to pay that cost. That’s one reason and that’s the reason you were alluding to. That drag of, say 1% over time, is huge. If you think about the 4% rule, which says that you can draw 4% of your portfolio to live on and it will last for an extended period of time. If you’re paying 1% to investment fees, that’s 25% of your annual income to investment with fees.

A different way to think about it, people are like, “1% is nothing,” but especially accumulated over time, Zeona, as you pointed out. The other thing is it’s extraordinarily difficult to pick which stocks are going to do better over time than others. It seems so counter-intuitive. This is what kept me an active investor as long as I did. I kept thinking, “All I’ve got to do is avoid the docs and I’m going to do better than the index. All I’ve got to do is pick the good stocks.”

Various people pointed out that if you look at the return of an index, the vast majority of that return is based on the results of a relatively small number of stocks within that index. The problem is that while it seems like it should be easy, it’s extraordinarily difficult to know what those few stocks will be because this day’s obvious winners are tomorrow’s Enrons. The obvious dogs now are tomorrow’s exciting turnaround stories.

That’s the one good thing about the index funds, too, is that they are self-cleansing. I’ve heard you use that word before. It’s where the worst guys drop out and then you’re no longer invested in those worst guys. If you’re invested in an S&P index fund, you’re not invested in the 501st company. Once they drop out, you’re no longer invested and the new company you are invested in is. Do I understand that correctly?

Self-cleansing is the term I coined. I take a fair amount of pride in it because that’s exactly what happens. It means that investing in index funds, in a sense, is a rigged game, but it’s rigged in your favor as an investor because when companies start to fade away and all companies do, all companies have a life cycle. There is no company on the Dow Jones Industrial Average, which is 30 of the largest stocks. Not a single one of those companies was on the original Dow Jones many years ago.

If you don't understand money, life's incredibly hard. Click To Tweet

GE would have been the holdout until maybe years ago. The stock market is always changing. The fortunes of companies within the stock market are always changing. As companies fade away, they drop off the index, but at the same time, as new companies are formed and succeed and grow and prosper, they join the index.

When you have a company coming up, there is no limit to what percentage of growth it can have. It can grow 10%, 20%, 100% or 10,000%. The worst it can do is 100% when it’s going down. When you have a game that’s rigged, your winners can do 1,000% plus and your losers could only lose 100%. That’s why the stock market keeps grinding relentlessly up, not to say it doesn’t have its bad days.

As we continue this conversation, I’m reminded of something that happened in my college days when I was in a finance class and we were split up into groups of 4 or 5. We were supposed to try to figure out what stocks to invest in. Over the course of the semester, whoever got the biggest return won some prizes. I remember we had the option of being passive investors and active investors. I was in a group full of go-getters and people that wanted to please the teacher.

We all thought that the active investment was what we wanted to do because it was more fun. Out of the 5 or 6 groups, one group picked the passive style. They did no work the entire semester and they ended up winning the reward. For some reason, I am remembering this now, despite the fact that JL, I’ve known you for a while. I know your thoughts. I’m like, “I could have done no work and have still got the prize. I did all this work and didn’t get anything.” I thought that was an interesting anecdote. It popped in my head as I’m listening to you.

One of the backhanded compliments I get that bothers me a bit, at least I assume it’s meant to be a compliment. It goes something along the lines of The Simple Path to Wealth or the JL Collins blog is great advice for somebody who doesn’t want to do any work and doesn’t want to learn how to invest. The implication is that if you want to do the work and learn how to invest, you will do better. I have said many times in response to that, “If I thought there was a way to do better than the index, that’s what I would have written about. I spent decades trying to figure that way out.

I’m a reasonably bright guy. I spent decades resisting the index, trying to figure out the better way and with some success, as I say, I bet your financial independence, but I don’t recommend index funds because it’s easier, although it is. I don’t recommend them because it’s simpler, although it is. I recommend them mostly because it is the most powerful way to invest. The fact that it’s the easiest and the simplest, that’s fringe benefits.

I’ve got one more question for you to relate to real estate because index funds are great. Just like you did, you wanted to work on your career, and money is still working for you in these index funds in a very passive way. The most passive way to invest in real estate is going to be syndication or maybe investing in a REIT or something like that. Can you draw that comparison or have you ever made that argument as to why not invest in syndication or why not invest in a REIT versus an index fund?

I’ve never invested in one, but I’m familiar with the concept. Two things, when you get into that thing, now you have another whole layer of expense. If you turn your properties over to a manager, that will make your life easier, but you have another layer of expense. When I first started writing on my blog, my portfolio was 50% stocks, 25% REITs and 25% bonds. In around about 2014, 2015 or something like that, I wrote a post called stepping away from REITs. I stepped away from them because they’re all real estate, but I had included REITs to be in the portfolio as an inflation hedge. They are a relatively good inflation hedge, but when I realized more, the basic stock index is a pretty good inflation hedge in and of itself.

I didn’t need REITs to form that function. Once I came to that conclusion, I realized that what I was doing in owning 25% in REITs is this particular sector of the economy, real estate is going to outperform all other sectors of the economy because a REIT is a sector fund. It’s like buying a precious metal fund or a financial services fund. There are all kinds of funds that focus on certain sectors and that’s what a REIT is. I sat back and I said, “I don’t particularly think that real estate is going to outperform the rest of the economy. I don’t need it as an inflation hedge and therefore, it left my portfolio.”

The syndication is a bit of research required. It is maybe one of the more passive ways to invest. Syndication is separate from a REIT because a REIT, you can go on to Vanguard and not know anything about it and invest in it. Syndication is a group that comes together and offers either some value add in mobile home parks or apartment buildings or self-storage. It’s something like that, but they’re buying an actual product and making this big project of it and then everybody makes money off of that individual project.

Maybe not a REIT with 100 projects in it, but the problem is that you have to first trust the operator. Second, trust that product that they’re buying in that specific situation. It does take a lot of research and depending on what that is or what the vehicle they’re buying. You’re going to be taxed differently. That’s a whole another layer of research. Index funds are the lowest hanging fruit of not having to get super into it if you’re not a geek like all of us.

I lied when I said one more question because I thought of going more last question. We keep firing them at you, JL. It seems too good to be true that I can put my money in an index fund and then never worry about it again, except maybe when I want to withdraw it once a year. Is there any maintenance that you do to your index funds each year or each period of time?

Yes and no. There is no maintenance that I do to the funds themselves at this point in my life. What I recommend for someone like my daughter and probably for a lot of people who are reading to this who are younger, they’re still working and they have some savings rate. Hopefully, it’s a significant one. I suggest dumping that money into the index fund every month. Don’t pay any attention to what the market’s doing. In fact, celebrate if the market happens to have dropped because now you’re buying your shares on sale. A market crash is the biggest gift that a young investor can possibly ask for. Not so good for somebody my age, but for a young person like my daughter and for probably one of the people reading this, the market crash is a gift.

All you need at that point is one fund. I prefer the Total Stock Market Index Fund, which is VTSX. What smooths the ride, the volatility of stocks, which is, of course, the bogeyman in the mix, is the fact that you take advantage of those drops by buying more shares on sale. When you start living on your portfolio, most people are going to want something else to smooth the ride the way that earned income cashflow did and that’s typically bonds. You set an allocation of bonds. Bonds have the advantage of being much less volatile than stocks.

They have the disadvantage of not having the growth that stocks have. You pay a price to get that smoothing effect of lower performance over time. It’s nice to have bonds when the market corrects because then when you adjust your allocation, that means you are selling bonds, which have now become a bigger percentage of your portfolio and you’re buying those now cheaper stocks. From that point of view, there’s maintenance involved in maintaining your allocation. Typically, we do that on my wife’s birthday once a year if it needs to and maybe if the market were to move up or down 20% plus, I might make an adjustment midstride.

ITF 59 | Financial Independence
Financial Independence: One of the great things about index funds is their very low expense ratio. If you choose the right ones, you won’t lose as much money.


I can think of the only other thing is tax-loss harvesting, but I will admittedly and shamefully say that I never figured that out. I spent all my extra time learning how to invest in real estate, so I probably never did that right. I probably paid more taxes because of it. That’s something that you have told me in the past, JL that you also do on your wife’s birthday. I have no idea what it is, but if people want to look at one thing that you can do to maintain, it’s probably once a year of figuring out what tax loss harvesting is.

Tax-loss harvesting is something that depends on what you’re investing. If you’re investing in index funds the way I described, you’re never going to have to think about it or worry about it. If you’re buying individual stocks like I used to, some of those stocks are going to be up and some are going to be down. It pays to solve the ones that are down to take the tax loss and put it against gains you might have that year. You can then carry it forward to put against future gains and even up to $3,000 in earned income.

If you’re doing what my daughter’s doing, which is you’re buying VTSX in your IRA and in your taxable account because your savings rate allows for both of those, you’re never going to sell that. It’s going to keep accumulating and it’s probably not going to have a loss for very long. You get to the point where it’ll go down periodically, but it’ll still be in plus territory. You can overthink that.

I feel like I did nothing wrong. That’s what I love to hear.

We have to move on to the final part of the show. Before we do, do you have any parting words of wisdom for all the readers?

Buy my new book.

What is that book called?

It’s called How I Lost Money in Real Estate Before It Was Fashionable. It tells the sad, tragic tale of my first real estate purchase, which was a Chicago condo. It didn’t go well. Years later, I can see the humor in it. Hopefully, I will share that humorous story with some important lessons. It’s a very different book than The Simple Path to Wealth, not for the least reason that it’s illustrated. I found an outstanding illustrator, a Nicolette by name and I love her illustrations. Just not my daughter, but a different woman by the name of Jess did a brilliant cover. It’s one of the coolest book covers I’ve ever seen. It’s a fun project and it’s almost done.

I’ve read it and it’s a quick, easy read. I feel like there are lots of good lessons in there. It’s like what not to do. It shows you what you should be doing instead. If you’re looking to get into real estate investing, like many of you are, it’s a good book.

Let’s head into the final four. Zee, kick us off.

JL, we’re going to ask you the final four questions. Hopefully, you’ll do well. Question number one is what are you reading now?

I usually am reading several books at a time. I try to read non-fiction and fiction because I like both. On the fiction side, both what I’m reading and what I just finished are books that I’m rereading because they’re two of my favorite ones. I just finished Lonesome Dove. It is 800 plus pages, but it’s an 800-page book that I opened up. I started and I got 800 wonderful pages. By the time I was done, I was like, “It was only 800 pages.” It’s a wonderful story and entertaining. The other one that I’ve always loved, one of my favorites is called Mountain, which I’ve begun to reread.

The third one and I think in many ways, are my three favorite fiction books. I reread this one in the spring. It’s called Mr. American by George MacDonald Fraser. That’s a little harder to find these days. I mentioned these two books in my last blog post. One of my readers in the comments said, “You should read Shogun by James Clavell, which is another great book. I do need to reread that and then Tai-Pan, the first of the trilogies that led to Noble House, which was where the F-You money concept. The non-fiction that I have is sitting on my desk. It’s Rationality by Steven Pinker. I read his book. Pinker’s a great writer. He is very insightful. The subtitle of this book it’s called Rationality: What It Is, Why It Seems Scarce, Why It Matters. Everybody should read Rationality. I’m probably 150 pages into it.

What is the best piece of advice you’ve ever received?

Probably when I first learned of index funds in 1985, to invest in index funds. That was, again, certainly the best piece of financial advice I ever got. It only took me years to follow it.

A market crash is the biggest gift that a young investor can possibly ask for. Click To Tweet

Hopefully, it doesn’t take all these readers’ years. We’ll see.

They will be well-served if they’ve learned from my mistake.

Question number three, what is your why?

I suppose it depends on what we’re talking about. My reason for writing The Simple Path to Wealth and starting the blog and that stuff was to convince this one person that I had managed to turn off all things financial. Kristy Shen, who is a friend of mine, wrote Quit Like A Millionaire has a great line. I’m going to butcher it, but it’s something to the effect of, “If you understand money, life’s incredibly easy. If you don’t understand money, life’s incredibly hard.” As with all parents, I want my child to have a great life.

I knew firsthand from watching what happened to my family and my father how critically important money is and getting it right is. That’s probably why I pushed it too hard. That’s the why of creating and writing it down on the blog, on paper and the book, which, as Jessica likes to point out, wouldn’t if she listened, to begin with. The why behind that was to convince one incredibly important person to be that mastering money was worth the effort even if her father was a klutz in introducing the concept.

JL, last question. What is the most embarrassing thing you have ever worn?

The most embarrassing thing I’ve ever worn was a dress.

Is the Vanguard tattoo showing?

A very tight, clingy red dress.

Is there a picture of that somewhere?

At least not that I know of it. Years ago, when Jessica was a little girl, we took a family vacation on Eleuthera, which is an island in The Bahamas. It was one of those all-inclusive resorts. The one we went to was the Sandals, maybe. It’s been a long time, so I don’t remember it exactly, but it was a fun time. Everything is included and they have all these different activities. One night, they had a show where the kids all put on shows and the emcee pulled me out of the crowd to come on stage and put on this clingy red dress. I could’ve balled it up in my fist.

Where can people find out more about you? There is your book, but where else?

The easiest thing is the blog and that’s From there, there is the link to The Simple Path to Wealth, if anybody is interested. When How I Lost Money in Real Estate comes out, there will be a link to that one, too. I’m on Twitter @JLCollinsNH and on Facebook.

If you want to see more of JL stuff. It is very good. JL, thanks so much for coming on and shedding your knowledge of the financial independence space and the next ones and all of the mistakes you’ve made. I’m sure there is so much to gain from this. I appreciate your time.

It was a blast. I enjoyed every minute of it. Thank you for the invitation. I’m honored to have been asked.

That was JL Collins. Zee, what did you think of JL?

I know that was a great show. It was meaty. There were lots of cool philosophical ideas and weighing options. I like how he showed that there is not just one way to financial independence and there can be some easy ways. Most of that is around controlling what you spend and how you save.

We talked about the savings rate. It doesn’t matter how much you’re making. It’s all a function of how much you’re saving because keeping your expenses is the true function of financial independence. One thing I love about JL, I don’t know if you feel the same way, but when he talks, I feel like the whole world should listen. It is like the guy spews wisdom with every word he says and the way he says it. Do you feel that way? He feels like an owl to me. That’s his spirit animal for sure.

ITF 59 | Financial Independence
Rationality: What It Is, Why It Seems Scarce, Why It Matters

I feel like I need to settle in. I feel like I’m by a cozy fire and I need to get my blanket and it’s storytime. It’s about to be this whole idea. He lays out a whole story and all the wisdom behind it.

JL is a phenomenal human being. He is one of the smartest people I know. If you haven’t read The Simple Path to Wealth, that is one of the cornerstone books of financial independence. Go pick that up. I’m sure you can get it right on Amazon and take a look at his new book, too. Real estate is not all unicorns and rainbows. It’s interesting to see how people lost money. I’m coming out with a book here in the next few months about how I lost a bunch of money in real estate and what not to do because sometimes knowing what not to do is even more important than knowing what to do.

Zee, how can people help us out?

We love more people that are reading to us. If you could leave a comment, rating, review, that would be helpful. Like us, go to iTunes and help us out.

Hit us up on Instagram @TheFIGuy and @ZeonaMcIntyre. Let us know how we’re doing. I respond to 99% of all of my messages that are real messages from real people. I’m sure you’re the same way. Hit us up. We love to interact with the community. Leave us a rating and review if you can. It helps us out. With that being said, Zee, I’ll see you on the next episode.


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