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The Simple Path to Wealth by JL Collins is financial independence canon. The premise boils down to elegant simplicity: Spend 50% of your income and invest the other 50% in one specific index fund, VTSAX. We ask the Godfather of FI about it all—covering everything from his reliance on VTSAX and the American economy, to managing market crashes, to the debate over homeownership.

Reminder: This is not financial advice; please talk to a certified financial professional and do your own due diligence.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our Chief Content Officer and additional fact checking comes from Kate Brandt.

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Mentioned in the Episode

• The Simple Path to Wealth & Pathfinders by JL Collins

• The Perfect Save Rate is 40%

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Katie:

Reading JL Collins's latest book Pathfinders was it felt like hopping in a time machine and flying back to the neural pathways, connecting in my own brain in 2018 just overcome with joy and excitement to discover something as magical as financial independence. And I have a feeling that the Venn diagram representing readers of JL's first book, The Simple Path to Wealth and listeners of The Money with Katie Show is two mostly overlapping circles, but if you are unfamiliar with his work, JL is known as the Godfather of Financial Independence. The premise of his debut bestselling 2016 book, The Simple Path, was that you don't need gimmicks or shortcuts or a sophisticated understanding of markets to get rich slowly. He's the guy that we can thank for the fire movement's obsession with VTSAX, the Vanguard Total Stock Market Index Fund as he does something that very few financial writers do. He name drops a specific recommendation. You can probably trace any popular recommendation today to VTSAX and shill back to JL.

This means in financial nerd circles like mine, he's nothing short of legend. And his second book, Pathfinders, is a collection of about a hundred stories from regular people traversing the path to FI like you and me and JL laces it with best practices and principles too. So it's a bit of a show and tell in that way. I absolutely recommend it to anyone who feels like they just need a jolt of hope on their financial journey to pick this one up because as JL writes quote, “From the moment you step on the simple path, you are a bit stronger, a bit freer, and able to be a bit bolder in the choices you make. You don't have to be rich or even close to it to be freer than you were before.”

And beauty is really its just utter simplicity, its very elegant simplicity. One thing that leapt off the page at me when I was reading it was the speed with which most of the diarists realized they were on track to reach financial independence if they buckled down most often and just a handful of years, 15 at the most. And while many were working moderately high paying jobs like engineers and financial professionals, there were just as many tales of service workers and public school teachers as white collar laborers. And that's the beautiful thing about financial independence, right? It's all proportional.

And some of these stories are really amazing. Normal people working normal jobs, going from a hundred thousand dollars in debt to a million dollar net worth in a little over a decade. But what they all had in common was a burning desire that'll probably resonate with most people who listen to this show, a deep impassioned longing for the freedom to live your life on your terms.

Welcome back to The Money with Katie Show. I'm your host, Katie Gatti Tassin, and today JL joins me to talk about some of the can't miss tales from Pathfinders and how he feels about being our financial godfather. So let's dive right into it.

JL, welcome to The Money with Katie Show. It is an honor. You don't spend much time on it in Pathfinders, but your upbringing influenced your money mindset in a way that I don't think we should gloss over given who you are and what you have done for this movement. So tell us about that.

JL Collins:

Well, first of all, Katie, thank you for having me on the show. I'm a fan and it's an honor to be here. Yeah, I suppose in a lot of cases, the beginning starts with a scarring event in our youth. For me, my dad was a manufacturer's rep. He was self-employed and he was a pretty successful guy. And so we had a very comfortable life, but he was also a cigarette smoker. And the thing about cigarettes is not only do they kill you, which they tend to do ultimately, but they debilitate you along the way. And has that happened, his ability to work diminished, and of course that meant his ability to earn diminished, and that meant that our lifestyle went from being very comfortable to being very uncomfortable. That made an impression on me. I realized he was not a saver, an investor, and I realized that it was very risky to be dependent completely on your own ability to work, to trade your time and your effort and whatever skills you had for money. So I wanted to make sure that as soon as possible, I wasn't solely dependent on that, and that was probably the initial driving force that led to everything else.

Katie:

Do you think at the time that you were cognizant of that, was that conscious or is that something that you are only able to see now in retrospect?

JL Collins:

Well, I was certainly conscious of the change in our financial circumstance. And for instance, I have two older sisters and my parents put both of them through college. I put myself through college, and it's not because they were unwilling, but they were simply unable. So there was a real financial ramification for me right at the get go. By the way, I take great pride in having put myself through college. So I don't see it as a bad thing necessarily, although it was for the family. I don't think that I was sitting there strategizing saying, oh, I want to be in a position where I don't have to worry about this. But once I got out of college and got my first professional job, I immediately began saving half of my income with the idea of investing it and building up. What I came to think of is FU money.

Katie:

So it seemed to have an impact on you right away. It didn't take long. So obviously those who are familiar with your work now will understand the significance of that event and how powerful it was in ultimately the philosophy that you've kind of coined and packaged so beautifully. But for those in the audience who might be unfamiliar, can we define the simple path? Can you boil it down for us?

JL Collins:

Sure. In the simplest terms of it's to avoid debt, live on less than you earn, and invest the difference.

Katie:

Okay, so let's go a little bit deeper on the saving less than you earn. I think that that is a piece that if you're familiar with any sort of financial, personal, financial best practices, you'd go, yeah, live beneath your means. How hard could that be? But spending 98 cents of every dollar is still technically living beneath your means, and that's not quite what you're getting at with this.

JL Collins:

Not quite. First of all, it can be easy or it can be difficult, and I think a lot of it depends on where you start. So I started from the very beginning. My daughter who's now an adult, also started from the very beginning. So if you do that and you have not created some lifestyle that has been absorbing all of your income, and God forbid maybe even more as you borrow to maintain that lifestyle, it's a lot easier.

So when I came out of college, my first professional job paid $10,000 a year. In today's dollars that'd probably be about 60 grand. And I knew lots of people at the time who were living on $5,000 a year. So I knew that was perfectly possible, but maybe even more significantly, $5,000 a year was a whole lot more than I had been living on in college.

I was living on $1,200 a year in college. So immediately half of my income was a big bit of lifestyle. Inflation for me wasn't as much if I'd gone to the whole $10,000, but there was never a feeling of deprivation in that. And then as my income grew when I was making $20,000 a year, well now I'm living on $10k, so my lifestyle has doubled, but also my investment strength has doubled. If you have to unwind something that you have created in midlife, of course that that's a lot more challenging. And I don't think there's any easy way to do it.

But if financial independence is something that you want to spend your money on, if financial is something you want to buy for yourself, then you're going to have to simply choose to not buy other kinds of things. So you have the money to buy your freedom.

And for me, there's nothing that my money could have possibly bought that would've been more desirable for me. And I realized that's personal. Not everybody feels that way, but it's no different than if you're deciding to buy a new car and you say, well, I could buy a Chevrolet or I could buy a Cadillac. If I buy a Cadillac, I'm driving around in this fancy car and I'm getting all these admiring stairs. But if you buy the Chevy, you're still getting around everywhere you need to go, and there's a whole bunch of money you didn't spend on the Cadillac that you can spend on other things. It's simple, not easy.

Katie:

Simple, not easy.

We'll get back to it right after a quick break.

You started investing in 1975, and I do think it's interesting that you kind of came of age or professionally came of age in an era where things were very challenging because I think that people today, the youth of today can relate to that in some ways. But the 1975 was the same year that John Bogle introduced the first index fund. But for all of your cheering of VTSAX today, you have a dirty little secret that you put in this book that you were not an index investor. So tell us more about that.

JL Collins:

So not until later in life, you're right, I started investing the same year that Mr. Bogle created the first index fund, which is track the S&P 500. It's also the year he launched Vanguard. But I didn't know that, and I frequently think to myself how much better off I would've been if I had known that, but I would've also had have had the wisdom to embrace it at the time. And I know that I would not have had that wisdom. And the reason I know that with such certainty is it was 10 years later around 1985 when a friend of mine in the financial business introduced me to this concept. And I was a stock picker in those days, and I just could not wrap my head around this concept that buying the index could outperform and did outperform. So now when I hear people arguing, the point is my own voice in my head that I hear making those arguments.

I made them for way too long because I didn't have the wisdom to embrace it, and I actually achieved financial independence as a stock picker. And I was also picking actively managed mutual funds that of course were run by stock pickers. And so one of the things that I think is important to recognize is it's not like picking stocks or active funds don't work. They do, at least if you do it well, and I think I did it reasonably well, but they don't work as well as indexing. They take a whole lot more effort and you tend to get a less good result, but you do get a result. And I think that's what kept me going. I was reasonably good at it and it was working.

But yeah, I'd be so much further ahead. And to be clear, things have turned out pretty well for me, so I can't complain, but I'd be so much further ahead had I been wise enough to embrace it the moment I heard of it.

Katie:

Yeah, I'd say it sounds like you did pretty well picking individual stocks and working with brokers if it got you to financial independence despite the headwinds. But you did have quite an extraordinary save rate for the entirety of your career. And you mentioned in the book how you paid an expensive education fee back in 1987. So let's set the stage for everyone. The date is October 19th, 1987, and you pick up the phone to make a call. What happens next?

JL Collins:

In those days, I had a stockbroker as I think most people did, and I was friends with my broker, his name was Wayne. And so at the end of this kind of long day, I thought, I wonder what Wayne's up to. I think I'll give him a call and see what's going on. So I did, and Wayne picks up the phone and I'm like, Hey man, how's it going? And there's this long pause and he's like, you're kidding, right? And I said, no. He said, man, this has been the worst day of my life.

And moreover, it's been the single worst day ever on the stock market. The market had dropped like 23 or 24% in one day and it had never dropped that much in a single day, even during the Depression has never dropped that much in a single day since, and it came to be known as Black Monday.

So it was pretty horrifying. It was the first I heard of it and I knew what the right thing to do was. And of course the right thing to do was nothing. You stay the course. And I knew that at that point in my investing career, but I'd never really been put to the test. And so I stayed the course until about December of that year, and the market after that big crash just kept grinding down lower and lower and lower. It seemed like there was no bottom in sight. And finally I gave up and I sold. And if I didn't sell on exactly the low day of the exact low, it was close enough not to matter because of course then the market began to pull out of its funk and slowly climb. And by the time I got back in about a year later, it was higher than before the crash. But that taught me a lesson and I've never been tempted to sell in a downturn since.

Katie:

So an expensive lesson, but a very valuable one. And I imagine one that served you well, particularly in probably the early two thousands and right before 2010.

JL Collins:

Yeah, exactly. And I've often wondered, can you learn this intellectually or do you have to learn it through a brutal experience? And I think for me, I had to go through the experience, but having gone through the experience as ugly as the tech crash at the end of the nineties, 2000s, 9/11 and all that, and then the 08-09 debacle, as ugly as those things were, and as scary as they were and as painful as they were, there was never any doubt in my mind what the right thing to do was. And as I say in 1987, intellectually I knew what the right thing to do was, but I guess I didn't really know it in my gut. And I think you have to know it in both places.

Katie:

Well, I think I should be sending you a check in the mail because…

JL Collins:

Lemme give you an address.

Katie:

I know. I'm like, maybe I shouldn't offer that. I think I read The Simple Path, it couldn't have been too far before March 2020, so your words were fresh and poignant in my brain when that big drawdown happened in March. And I have to say, I don't know if it was honestly almost being too ill-informed to be scared, but I was like, oh, no, JL told me this was going to happen. I got this. I'm good. I didn't really feel shaken up. And as we know, that drop quickly rebounded. That was not, I mean, it was a couple months.

It wasn't until I think the second test that I've now seen since having significant assets in the stock market, the long drawdown of 2022, where I don't know, toward the end of the year I was starting to feel a little like, man, I'm not feeling tempted to sell, but it is getting harder and harder to steal that resolve, to keep putting more money in because the second I put it in, it just gets incinerated.

And it was wearing me down a little bit and I was like, man, I hope this turns around soon. And as we know it did, so I feel now doubly reinforced in my will, but I think it was probably your book alone and the reassurance and your story of 1987 that kept me thinking, no, he said, this is what was going to happen. He said, this is what people are going to say too. And so far things are going exactly the way that he said they were going to. So until something really feels like it's changing and deviating from what he told me was going to happen, I'm going to stay the course.

JL Collins:

A couple of interesting things about that. First of all, in the Covid crash in March that happened and rebounded so quickly, I think a lot of people didn't have time to panic. If that had happened in 87, I stayed the course. In fact, with that crash when it happened, I happened to have some cash sitting on the sidelines and I'm like, oh, goody, the market's down 30%, 35% or whatever was down at the moment. I'm going to get this money back in.

But I wasn't in a hurry. I didn't expect it to rebound instantly. So I didn't get around to doing that. And by the time I was ready to do it, the opportunity was gone. But I think it's that slow relentless grind that you experienced in 2022, that's a lot tougher to deal with. So for instance, and I'm sure this because you're a money nerd, but the first decade of this century from 2000 to 2010 was I think some people have called it the lost decade.

And overall there was almost no return on the stock market or a 5% decline or something like that. And people look at that as a pretty horrific time. In one sense it is. But if you were accumulating your wealth in that decade, what a golden opportunity because the price of shares stayed down and you went through two major corrections or crashes that made them even a bigger bargain. So a great time to accumulate wealth.

And I've often said the best thing that can happen to somebody young is exactly that The market crashes and stays down for a decade while you continue to put your money in. Now, of course, that requires that you have the fortitude to recognize that this is a temporary thing and to keep putting your money in. But I think yeah, declines if you're building your wealth declines are wonderful opportunities.

Katie:

I feel like we just need to clip that soundbite and just play it on a loop every single time things go into the red. Because I also receive messages that are like, oh, should I be pulling out or I feel like I should wait a little bit. And so I think that that's a marvelous reframing.

JL Collins:

When the Covid crash was happening, as short as it was. Like you say, whenever things go down, people like us get these concerned emails and contacts and what have you. And the feedback I was getting then is JL, I understand that what you're saying, that the market goes down periodically, but this is the pandemic, this is different this, and it was different in the tragically people were dying, but it wasn't different in terms of how it's going to affect the economy or the market. So every time the market crashes, it's something different. It was very rarely does the trigger that caused the crash. It's like trying to fight the last war.

It's always going to be something different. And I was saying at the time, no, Covid is no different. I mean, it's uglier because people are dying and I get that, and I don't mean to be insensitive, but economically it's no different and it will play out the same way and never thought for a second it would rebound as quickly as it did, but there was also never any doubt that it was going to rebound.

Katie:

I want to find our way back to index funds and VTSAX in particular, why it's so powerful. Would you mind hitting the high points for us of your philosophy?

JL Collins:

Well, VTSAX, which is the fund that I invest in, it's the fund that my daughter invests in, is what's called a total stock market index fund. And it happens to be the one that Vanguard provides, and I have a preference for Vanguard, but first point I'd make is that a total stock market index fund is the same regardless of whether you're buying Fidelity's version or Schwab’s or Vanguard. So a lot of people get confused and say, why do I have to buy Vanguard's? And the answer to that is no.

But a total stock market index fund essentially invests in every publicly traded company in the United States, and that's about 4,000 companies. And the most wonderful thing about that index is it's what I've come to call self-cleansing. And what that means is that companies are dynamic. So when you buy that index fund, you own a very small, but a very tangible real piece of those 4,000 companies and everybody in those companies is now working to make you richer.

Some of them will succeed and some of them will fail. The self-cleansing part is the ones that fail fall off the index and the ones that succeed rise to the top of the index because the index buys stocks based on their cap value, their cap weighting. So the bigger the company, the bigger a percentage of the index it is.

Some people see that as a bug. For me, it's a feature. One of the criticisms at the moment of the total stock market index fund as well as just a technology fund, because the biggest companies that make up the bulk of the fund are technology companies because right now technology companies are the most successful companies in the economy. But one of the advantages being an old guy is you remember different times, right? And technology companies were not always at the top of the index.

I remember at a time when they were energy companies and another time when they were financial companies, and the point is, I don't have to worry about how long technologies companies will be at the top or what will replace them if and when that happens because whatever it is, I will own it automatically. And that's the self-cleansing part of it that's so powerful. So that also means that I never have to think about when to sell VTSAX, because my holding period's forever. It's always renewing itself if you own an individual company, no matter how good the company is.

A number of years ago, I gave a talk at Google in 2018, of course Google was riding high then I think it's still riding high now. And one of the questions I got was, Hey, we're getting stock options and everything. Should we get out of those and go into the index or hang on to at some point Google will no longer be at the top.

I can't predict when, but you always, if you're going to own Google stock or any stock, you have to keep thinking about when's the tide going to turn against it. Sears is a company that probably people of your generation barely are aware of, but for a hundred years it was the Amazon and Walmart combined dominant retailer that nobody could compete with. But nothing lasts forever. If you own Sears, you probably didn't see that coming after such a huge track record. Just like people who own things like Google and Amazon, even Jeff Bezos has said he can see a time when somebody will figure out how to outcompete Amazon. But with owning VTSX, I don't have to worry about any of that.

Katie:

Yeah. So your work is rather famous for this kind of dependence on just one fund, and I think you make a really compelling case, particularly this self-cleansing argument. I find it very compelling. That is, I must admit that I do diversify outside of this cap weighted US world. I own things like small cap value and emerging markets and developed markets too, in part because—

JL Collins:

We can still be friends.

Katie:

Thank goodness, sweet relief. But I think not so much because I worry about the cap waiting though. I do think that Paul Merriman's case for small cap value is quite compelling for that reason. But because I think the US centricity, it feels a little bit like I am putting all my eggs in one basket, and I'm aware of this home country bias that you talk about. And I am struck when I read your work that it does feel quite, I'll say, optimistic about the future.

And I can imagine young people today looking at the state of things and going, well, the housing market's a mess, wages have been depressed for decades at the bottom and in the middle, and the healthcare system's a mess and all this stuff is wrong. There's so much going wrong. How can we assume that the US is going to continue on this kind of economic tear that it's been on in the last a hundred years? And I'm curious where that confidence comes from for you that that future will continue to resemble the past to a degree that kind of one concentrated US-centric bet will continue to pay off.

JL Collins:

So you've covered an awful lot of ground there, and so let me try to unpack it a little bit at a time.

First of all, I take great issue with this idea that things are so terrible today. I think that doesn't come out of reality. That comes out of the 24 hour news cycle that focuses on negative things. So for instance, in the seventies when I was young, there was a time of inflation mortgage rate. I remember buying a building in 1981, maybe something like that. The mortgage that I got on that building was 16%, and then I got seller financing to take the other third of it for 7%. So when people are horrified at 5%, 6% interest rates, it certainly is a shock from where interest rates were 2% or 3%, but historically it's nothing that is brand new and it's not a harbinger of doom.

A great book that I would recommend is called Factfulness, written by a Swedish guy who's since passed away. I can never remember his name on somebody, but Factfulness is a book that looks at the actual facts around the human condition over the decades. And the truth is, the world has never been better than it is right now. People have never been richer, they've never been healthier. Infant mortality has never been lower worldwide, poverty has never been lower. It's infinitely better.

And I think it's going to continue to get better, partially because you have all these incredible human minds that are linked together and sharing ideas in a way they have never been able to do before. So if you go back 10,000 years to when we were all hunter gatherers, if you were in your tribe and you figured out how to make a better stone X, well that might benefit your tribe.

It might benefit the tribes right next to you that you traded with, or it might very well die with you if you're the only one who has that skill. Well, now, if somebody invents a better way to do anything, it is instantly known around the world and the whole of humanity benefits from it instantly.

So this is why I'm an incredible optimist. I don't think we're on the verge of things getting worse. I think we're on the verge of things getting continually better. Now, a couple of caveats to that. There are a lot of people who are concerned about AI. For instance, AI has the potential to make things extraordinarily good, and evidently it might have the potential to destroy us, but if it doesn't, it's probably going to make things considerably better. And there's lots of technologies that are like that. My view of the future is either it's going to be far better than we can possibly imagine, or we're at end game, there's something existential that's just going to take us out completely, right? I don't see that middle ground.

I was reading Morgan Housel's new book, Same as Ever, and I'm at a part where he talks about what if I said to you that in 50 years everybody will be twice as wealthy as they are today? And you'd probably say, well, you're an idiot. You're a wild optimist. You've just taken leave of your senses here, JL. Well, what if I said to you instead: Okay, every year for the next 50 years, things are going to get 1.4% better. Well, you're probably going to say, I mean, it's not going to be that bad. Show a little bit of optimism here, buddy. And as Morgan points out, those are exactly the same thing. Those are exactly the same numbers. So a lot of this I think is perception.

Now, one of the other things you pointed out was the US-centric portion of my approach. And that's true, and some people have said, and I don't have an argument about this: JL, you're adamant about not trying to pick certain sectors of stocks or individual stocks anymore, but yet you are picking the United States as being the winner going forward. And that's true. I mean, if you buy VTSAX, you are basically betting on the United States of America. Warren Buffet has said nobody ever loses betting against the United States of America. My feeling is a little bit more nuanced than that.

So the way I look at it is if you come out of World War II, the United States is the only country that hasn't been bombed into ashes. So we are essentially a hundred percent of the world economy at that point or awfully close to it. And then of course, with a lot of effort from the Marshall Plan and support from the United States, the rest of the world begins to rebuild.

And as the rest of the world rebuilds, two things happen. One is the economic pie begins to grow, but that dominant slice of the pie represented by the United States starts to shrink. It's not a bad thing for the us. The fact the rest of the world is growing is great for our markets, great for our companies. So a smaller share of a bigger pie is a good thing, and that's been the history ever since World War II. The pie has gotten bigger and bigger and bigger. The US portion has gotten smaller, but overall our economy has gotten significantly better. I see that trend continuing too. I think the rest of the world is going to continue to get wealthier. The pie is going to get bigger, our share will get smaller At some point, it'll probably be too small for me at least to be willing to say, that's the only country I want to be in right now.

The United States is the only country where you can afford to just invest in that country. So when I am talking to people who are not in the United States, I sing a little different tune, and for them, I recommend a world fund because I'm not going to say to anybody in Europe, just by France or just by the UK or just even by the EU or Canada or Australia or wherever else, those economies aren't just just not big enough.

Plus, I think the trend is going to where at some point I won't be saying that even to people in the US. So that in my mind is the future. At some point, and I share this with my daughter, probably not going to matter in my lifetime. I think the US still is probably going to be the best place to be for the next decade or so. But for somebody like my daughter, for somebody like you and your listeners, that's something I would keep an eye on, and at some point I'd probably transfer to a world fund that includes the us. The other thing to keep in mind is that this dynamic I described occurs and the US becomes a smaller part of that pie. It doesn't mean that it's going to become a bad place to be invested.

People of your generation can probably very successfully continue to be only in the us. It might not be right now, it's the single best place to be. It might not be the single best place to be, but it'll still be pretty good. So it's not like it's going to go from being great to being terrible. It's going to go from being great to being just very good.

Katie:

Thank you. That's comforting to hear. Strangely.

 JL and I will get right back to this conversation after a quick break.

So now we'll move on to Pathfinders. There is a story, two stories in this book that I want to talk about. One comes from a guy named Paul who had to start over at 44 after a divorce. This jumped out at me because of the speed with which he reached financial independence despite basically having to press the reset button in middle age. So he was fully financially independent after just 15 years. And this was a trend that I noticed in the book. It was the speed with which many of these people were reaching partial or total independence after discovering the simple path, it routinely surprised me. So what did you make of that?

JL Collins:

I think what it illustrates is how bad humans are at understanding the power of compounding, right? Because the way compounding works is pretty much out of the normal human experience. For instance, when I did Chautauquas, which are the events where we would take small groups of people to some cool place and hang out, and I'd have one-on-one sessions with the attendees who wanted to do that with me very frequently in these sessions, people would bring their numbers, they'd bring their investments, and they'd show me how much they had invested, and then they'd talk about how much they were spending. And then they would ask, am I financially independent? Well, as you know, because heard you talk about it, that's a really simple formula. If you use 4% as a guideline, and these were smart people, they can do the simple math involved in calculating that. Give you a great example.

There was a woman, she was a banker, so she certainly understood math after the Chautauquas where she was about to go take a new job, who was going to pay her a million dollars a year. Well, obviously she is very smart, very successful woman, and we're looking at her numbers and she's got $5 million invested. I said, that's great how much she's spending. She says, well, I spend a hundred thousand dollars a year, okay, and next question was, am I financially independent? And I said, well, yeah,

Katie:

Many times over.

JL Collins:

Twice over, because it only takes two and a half million dollars at 4% to throw off a hundred grand. Again, this is not a woman who couldn't do the math. And this was not uncommon. There were a lot of people I used to puzzle over it.

And finally, I think what I recognized is because of compounding, which has this hockey stick effect. So it goes along and a fairly gentle thing, and then all of a sudden it spikes up. They can see the numbers, but they can't quite believe what they're seeing. And what they're really saying to me is, are you seeing what I'm seeing? They can't believe it. It is remarkable. And I think that's another thing that a lot of people that are on the path, particularly early on the path, don't fully appreciate is if they stick to it, how wealthy it'll make them.

Katie:

Oh, wow. Yeah. There was another guy in the book that he was an engineer and he was talking about how he's a born optimizer. And he said that when he first learned about this, he was kind of incredulous because he was like, well, I was never told this was an option. Surely if this was real or if this was actually an option, someone would've mentioned it to me by now because it does have that kind of two good to be true effect. And that definitely resonated with me.

But I want to ask you about another story that I found to be quite moving, Jay Gonzalez. So they write that they were a former child migrant worker, that they grew up in poverty and that by the time they were a teenager, they had to be self-sufficient. And then they were that they found The Simple Path. They focused on saving and investing, and they've accumulated more than $300,000 at the age of 31.

Now, this story jumped out at me because I know a fair number of people who had upbringings far more lavish than Jay's, and they have not made nearly as much financial progress. And so I can imagine stories like this can be almost as shame inducing as they are inspiring to some folks who feel as though they haven't done as well as they could have, or that they may have squandered a lead that they had. What would you say to those people?

JL Collins:

That's interesting. To be honest, I'd never thought about the shame inducing part of it.

Katie:

Maybe that's my negativity bias.

JL Collins:

But I can see the truth in it. I mean, when you say that it resonates with me that, oh yeah, there's truth there, but that story that you're referring to, it was one of my personal favorites. And I think one of the reasons, it's one of my personal favorites is since I've been writing the blog, which I started in 2011, there has been this pushback that I object to, which is, oh, that sounds nice. That sounds good. If you're an college educated, highly paid engineer making six figures.

And that was never my experience with the individuals I actually met in the community, the diversity of people doing this who would come to Chautauqua’s for instance, was just incredible. And so the story of Jay Gonzalez puts the lie to that idea that this is only for some elite. It shows that no matter where you are starting from, this is available to you.

If somebody who starts as a child migrant laborer can follow this path successfully, there is nobody who is listening to us who can't. Now, you can still choose not to. And I have said a couple of times, if you read Pathfinders, you are never going to be able to look in the mirror again and say, it can't be done. You can still look in the mirror and say, I choose not to do it. But that goes back to your point of this feels unreal to so many people. They've never heard of it. They didn't realize it was an option. And one of my goals in writing this stuff is to help people see that it's an option. I don't care about convincing anybody to do it. That's entirely up to them. It's their money, it's their life. So I consider mission accomplished from my point of view.

If somebody reads either of my books or both of them and they just realize that it's an option for them, and then whether they choose that option or not, that's entirely their call. But I guess that's a long-winded way of avoiding your question of what would I say to the people who feel shamed? I guess because that had never occurred to me off the top of my head. I would say, well, you probably weren't aware that it was an option. And just like in 1975, I wasn't aware that index funds existed. So I don't feel bad at all about not investing in them then. But 1985 now I don't have that excuse. Now I knew that it was an option and that I should feel shame about.

That's how I think about it. So if somebody comes to Pathfinders and they just didn't know this was an option, and obviously if you don't know you can't choose it, then you don't have anything to feel bad about, and it's never too late to start. On the other hand, if you read something like Pathfinders and then you don't choose to follow that path and to spend some of your money to buy your freedom, well 10 years later, I don't want to hear you whining and complaining about you don't have any money. You can choose whatever you want, but that's on you.

Katie:

It's kind of like the tough love approach.

JL Collins:

Well, the tough part anyway. Maybe it's lacking in the love.

Katie:

Well, no, because coming from a place that I think is very, I kind of conceive of you and the work that you're doing in the same vein that I would like a Jack Bogle, it's hugely impactful. And I know in the book you make a kind of commentary about how well, it's just a teaspoon in this consumerist marketing sea. But I do think that there's a ripple effect with this work because you have inspired so many people to walk this path. You've also inspired people like me to go try to recruit other people to walk the path. And so there's almost no way to calculate the impact.

But I do think it's interesting. I want to dig a little bit deeper here on this idea of choice, because one of these classic pieces of JL advice that we've already kind of touched on is to save 50% of your income.

And you admit that you stumbled upon this savings, right? Somewhat intuitively. It was not like you sat down with pen and paper and penciled out how long it was going to take you. No, you just were like that. That feels about right. Save one, spend one. But it did create quite a bit of flexibility for you. So you've stuck with it. And again, it's very elegant in its simplicity. You save more at the exact proportion that you are spending more. But as you allude to in the book, and as you've somewhat alluded to in this conversation, there's no shortage of people who are criticizing your method as being unrealistic. And we have covered save rates at length on the show before. We've suggested that 40% is kind of an ideal rate, the point at which you begin to kind of see diminishing returns in the time that that money is buying back for you later.

But the verbiage in the book seemed very intentional. The word choice was very intentional. It was that people were designing their lives such that a 50% savings rate was possible, or they were organizing their lives so that they could save 50%. And I clocked that because it kind of kept coming up, and I thought, huh. So there is a recognition here that there is quite a bit of intention that's going to be required and a series of decisions that are going to have to be made in order for this to be possible. I'm on the receiving end of emails like that too. So I can imagine people listening to this and going, well, JL doesn't have two kids in daycare. Or JL doesn't understand how much more expensive housing is now than it was in 2016 when he wrote that book. And so when you are faced with that dismissal, how do you perhaps with tough love steer back to this idea of intentional life design?

JL Collins:

So a couple of things. First of all, I think if somebody says he doesn't have two kids or whatever it is, I would now hold up Pathfinders and say, well, you're right about me. But you'll find stories in here of people who not only have that kind of challenge, but have significantly more challenges and they're doing it. The other thing is nobody accomplishes anything worthwhile without some intentionality. So if you're going to be financially independent, you're going to have to make some intentional decisions, and you are right. When I came out and I decided I was going to say 50% of my income, there was no analysis behind that. I just figured if I take 50% of my money and I use it to buy investments, that's pretty good and that's going to grow pretty quickly. That felt sweet to me. What's interesting about that is I get pushback from both directions.

I certainly have a lot of people whose initial, especially people who have no familiarity with the FI movement and the thought process that's involved here. Those kinds of people come across me saying, you ought to save 50% of your money. And they're like, this guy is a lunatic. As, I mean, nobody can do that. That's completely impossible. And that's nuts. I can understand where they're coming from, but I have done it. More importantly, I've known lots of other people who've done it, and I'm sure you have too. You are probably doing it. But the interesting thing is that the people in the FI community come back to me the other, and they're like, Jay, 50%, you can do better.

Katie:

You're like, come on, man.

JL Collins:

60%, 70%, 80%.

Katie:

That's wimpy stuff.

JL Collins:

You wimp, show a little gumption.

Katie:

Come on.

JL Collins:

Yeah, show a little grit. If you put your mind to it, you can do almost anything you want. And of course, that's a very personal choice. To me, 50% still feels like the sweet spot. So that's what I recommend. It's also a financial calculation because the more you save, the faster you'll become financially independent. And so if your goal is to be financially independent as soon as possible, well then you're going to want to save more than 50%. If your goal is to take it a little more gradually as I did, I guess with the 50% and have more money to enjoy other parts of your life, then 50% seems to me to be a pretty generous amount to spend on my lifestyle.

But if you want to only save 40 or 30 or 20%, that's your choice. Just understand the trade off you're making, and it will take you that many more years to get to financial independence. And of course, if you're saving 10 or percent or less, I mean, you're just going to be lucky to retire at 65.

Katie:

It's funny because when I first kind of discovered the financial independence movement, it was back in 2018 through Brad and Jonathan of ChooseFI, someone sent me their podcast, and it was just like this whole world opened up to me. And up until that point, I had been living pretty much paycheck to paycheck, not to the point that I ever felt nervous about paying my bills, but more so in that kind of just treading waterway that I imagine most people do, which is that you just spend the money as it comes in, and really by the time that you got another check coming your way, it's like, cool, it's about right. And I'm just going to spend that money until the next one comes. And there wasn't any intention or proactivity about it, but if you had asked me at the time, do you think that you could save 50% of your income?

I would've been like, that is absolutely unthinkable. I barely have any leftover at the end of the month. How could you even suggest such a thing? But once I found this movement and kind of started taking it more seriously and tracking what was coming in and out and being intentional about it, it was actually quite easy to save roughly 50% of it, which shocked me at the time. Now, granted, I was single living with a roommate in a pretty cheap two bedroom apartment and not a very fashionable part of town, and I didn't have a car payment. So my fixed expenses and my lifestyle, it hadn't had the opportunity to inflate or expand yet. So the fixed costs were such that just by tamping down the discretionary stuff, I was pretty much there. But you mentioned in the book how once you start to wind up the lifestyle inflation, then it becomes a bit of a gilded cage, and now you have something that you need to unwind, which is a little bit challenging.

And as someone who's, well, more than a little bit challenging, as someone who has increased her income substantially in recent years, I can see how this could happen pretty easily. I spend a lot more than I used to despite having a higher savings rate now just by the function of how the numbers work. But what resonated most with me was this story of this detective who realized that as he earned more and spent more and more mindlessly, that the little treats that he used to enjoy getting his favorite burrito from his favorite takeout place every week. Well, as he starts eating out once or twice a day, those little treats kind of become routine, and so they're not delivering that spike in happiness that they had previously. This jumped out at me and struck me as perhaps the more compelling reason to be intentional about lifestyle creep, not because you need to deprive yourself or it's more moral, not no, none of that. Just because, hey, the alternative is that you just kind of become so accustomed to having the nicest stuff or these little treats all the time, that they kind of lose meaning and that there's some value in avoiding that path. What do you think about that?

JL Collins:

Yeah, so again, you picked another one of my favorite stories. When he's a beat cop, he has to patrol a very finite section of the city where he lives in, and his favorite burrito place is outside of that part of the city. So he only gets to go there once a week when he's off duty, but then he gets promoted to being detective. He can go anywhere in the city he wants, and now he can eat at his favorite burrito place every day. And pretty soon those wonderful burritos just aren't special anymore. And that's the human condition.

We get easily complacent with whatever we accomplish. And you even see that generationally, your generation is at the stage of life that you're at. And I know a lot of members of your generation are going to probably not agree with this, but the facts are, you're wealthier than my generation was.

My generation was wealthier than my parents' generation, who in turn were wealthier than their parents' generation. And so at each stage of the game, what seems normal to us or sometimes even a struggle for us, well, if you go back a generation or two, they would've been amazed at where we're, so people say, for instance, back in the 1950s, you could have a family and one breadwinner and you could own a house and a car, and now it takes two. And well, you got to remember the house you're talking about was 800 square feet, three bedrooms, one bathroom. You're not talking about granite countertops and hardwood floors…

Katie:

The stainless steel appliances.

JL Collins:

Yeah, you're not talking about multiple bathrooms. The house I grew up in, there were five of us had one bathroom. Well, that's inconceivable today. So yeah, you're right. Today if you want a 2,500 square foot, two and a half bedroom granite topped luxury house, you're probably going to need more than one income. But if you want to own that 800 square foot house that people were buying on one income back in the fifties, you can certainly still do that. So there is that kind of thing.

Katie:

There are some elements of, I mean, we've kind of circled the housing thing a little bit here now a couple times, but there are some elements of this that I completely agree with, which is the fact that yes, interest rates were much higher in the eighties or that the type of house that people were buying. I mean, the average home size today is some three times larger than the average home size 50 or 60 years ago, despite the average family being, I think a whole person smaller. So there's pieces of this that I can look at and go, yeah, I think about when my parents bought their first home. I have no doubt that it was actually probably not as nice as the first place that I lived. There are some steps up in luxury and quality here that we might take for granted.

There are other pieces of this that I look at and go, well, the median home in the 1980s was I think some three and a half times median income, and today it's like six and a half times median income. So we can trace some of that back to the increase in quality and the niceness and the fact that there are fewer of these starter homes even available to purchase.

So I don't think it's entirely attributable to people just wanting nicer things. I think there are some legitimate, I guess it kind of goes back to wages in that sense. But I do think that it's important to remember this point that you're raising, which is that this hedonic adaptation doesn't just happen within an individual's lifetime, but intergenerationally, it happens that the kids that grow up middle class or upper middle class because their parents grew up working class, it's like, well, there's still that assumption that now this baseline is going to be higher. And I think that that's something interesting to be aware of and the types of expectations that we're setting for our own lives.

I actually saw something on Twitter about this the other day where someone was saying that in some ways the worst thing that you can be growing up is someone who's kind of upper middle class, but not quite rich, because it means that you're going to be accustomed to those granite countertops and stainless steel appliances and the vacations in Vail because your parents are relatively well off, but they're not rich enough to make sure that you get to continue to live that lifestyle when you get your first entry level job. So now you're in for a rude awakening. You can't provide that to yourself. Your parents don't have enough money to provide it for themselves and to you indefinitely as an adult. And that can be a hard pill to swallow.

JL Collins:

You're right. And my old college roommate fit that description to a T. His father was a banker. They had a very comfortable upper middle class lifestyle, but they weren't rich. There was no big inheritance coming my buddy's way, but he had developed an expectation of this certain kind of lifestyle, and he chose to be a school teacher, which is a noble profession.

Katie:

It’s not banking.

JL Collins:

Yeah, he is not going to pay as much as being a bank executive. And he really struggled with that because he loved toys, he loved fancy gadgets. He loved buying stuff that was always available to him when he was a kid. So I agree, that's kind of a tough thing to come up through, and I think you just have to change your expectations, which is hard because from my point of view, because again, as we talked about earlier, financially, I didn't have anything at that point. I was barely able to pay for school. So this looked like a lot of luxury to me. But to him, it wasn't. And it's not like I was right and he was wrong. It was just a different perspective.

Katie:

It’s relative.

JL Collins:

We were just relative different perspective. And to him it was just this is normal. And this was a problem for him because he was always, why is the world going to provide this for me? Why don't teachers make enough to provide this for me? If you want that kind of lifestyle, then you need to go be a banker or something simple. That's a dangerous thing. But humans adapt to any level of luxury will become commonplace if you have access to it for a while.

Katie:

The baseline, which makes lifestyle creep, one of the hardest things to unwind, which is something that I'm experiencing personally now where I say, well, I would've been if I had stopped spending more, but here we are.

So I do think that something that resonated with me in the book and just personally is that for certain personality types, for the obsessive overachieving, I'm going to take this and I'm going to turn it up to 11, it can be very easy to take this path to extremes. Once you see the math and you go, oh my gosh, it's clicking. I'm understanding now that freedom is on the other side of this number. And if I can just dial this up and turn this down, then well, let's see how far I can crank it. One entrant wrote about how they realized that they needed to optimize for long-term happiness, not optimizing for shortest time possible to retirement. But I don't get the sense from your writing and from the many interviews that I've heard you do, that you ever struggled very intimately with taking it to extremes. I don't know if that's, I mean, what do you chalk that up to you? Is that a personality type? Is that you almost didn't realize what you were doing until it was so far along that you're like, oh, I'm almost there. But how do you think about that in your own life?

JL Collins:

Well, I think it probably goes back to that random 50% savings rate that I chose. It certainly has the advantage of being balanced, and it allowed my lifestyle to inflate just in a very controlled fashion, right? So when I was making $10,000 a year, I was living on $5k and investing $5k. When I'm making $20k, it's $10k and $10k. When I'm making a hundred, it's $50k and $50k. And so they're both growing. And so it never felt like deprivation to me, and it also never felt all that extreme, even for those people who want those more luxurious things in their life. I think one of the things that people don't appreciate is if you follow the simple path to wealth, it will make you wealthy. I mean, it'll take a while, but you'll get to a point where unless you're talking about yachts and airplanes, you'll have more money than you can spend very frankly.

It's the point that I'm at. It's a point that a lot of people I know who are much younger than I am who followed this path or similar arrive at you, get to a point where you don't need to save money anymore because your money is making so much that it's just academic and that can be a tough thing to change and it can be throwing off so money that why change?

A great story is, I'm sure you've heard of Mr. Money mustache and his name's Pete. And Pete was the speaker at Chautauquas, he was in Ecuador, and he's a friend of mine, and we were walking to a local bodega during one of the [breaks] one time to buy some wine and he'd been there before and I hadn't. And I said to him as we're going to the store, Pete, how much is the wine here?

And he said, it's free. And I said, Pete, it's not free. I mean, I understand things are inexpensive in Ecuador. I get that, but the shopkeeper is going to want us to leave some money behind before we walk out with his wine. How much money is he going to expect?

And he said, no. He said, JL, you misunderstand me. He said, what I mean is when you achieve a certain level of wealth like you and I have, everything's free. And what he was saying is that when your wealth is throwing off so much money that it meets not only your day-to-day needs, but far more than that, then essentially anything you buy may be short of yachts and airplanes. That money is not only replaced by your investments, but then some. So essentially it's free. It doesn't move the needle at all.

One of the ways to think about this, by the way, because as your wealth increases when the stock market takes one of its periodic plunges, when you don't have very little, maybe you say, oh my goodness, I lost $500.

Well, a little bit later you may say, oh my goodness, my portfolio is down by half a million dollars. Or if you get wealthy in 07-08, Warren Buffet was reported to have been down, I want to say $30 billion. And I was running around saying, I wish I was down $30 billion. Because the implication is of course that he's got another 30 billion and it was down 50%. At that point, he's got another $30 billion.

Well, if your portfolio can drop $30 billion and you still have $30 billion, then no matter what you buy isn't going to move the needle. And by the same token, if you're at a level of wealth where the market can drop you by half a million dollars or increase you by half a million dollars, then everything within that range is free. I hope this is making some sort of sense.

Katie:

It's like it's a rounding error.

JL Collins:

Yeah, exactly. It was a rounding error and it was an epiphany for me and understanding, because I still had the mindset of do I really want to buy that shirt? Do I really want to spend the money on that shirt?

Katie:

It's hard to train yourself out of that when you spend your whole life seeing money in that way.

JL Collins:

And my wife is the same way. And now when we're together and we find ourselves falling into that trap, one or the other will say, well, it's free. Everything's free.

So that's where you can get to if you divert a certain portion of your money to buying your freedom, you're also buying your wealth. And ultimately that's where you'll get, I had a conversation with some young friends of mine a number of years ago who had just settled into a different state. They'd moved to a different state, and it happened to be a very high tax state that had an inheritance tax, and they had a couple of very young children. And I was saying, does it concern you at all that you've chosen this high-tech state with an inherit tax and everything? And they said, well, no, we're not nearly wealthy enough to worry about that. And I said, well, yeah, that's true now, but given the path you're on, by the time your children are adults, you will be, and by the time you pass away, you will be even more so in that inheritance deck as an example. We'll be taking a significant amount of money out of the pockets of your children. So it's not just where you are now, it's that compounding think it's where you're going to be with your children.

Katie:

T inheritance piece of this is interesting because even just thinking through that example of leaving children millions of dollars, do you worry about robbing your kids are now adults who might have to otherwise do this on their own if they're going to receive millions of dollars, do you worry that there's not that same drive or hunger or that feeling of like, well, what do I got to do this for? My parents did it. I think about that sometimes I have no idea what type of inheritance I will or will not receive, but I definitely have heard from people who are like, well, I know my parents are going to leave me a bunch of money, so I don't really think I need to concern myself with this. Have I internalized this idea that suffering is a good thing and everyone should have to work hard and that it's actually, it's great if you can leave your kids millions of dollars and like, okay, cool, now they don't have to do it too. How do you think about that?

JL Collins:

It's such a great question, and I do think about it. At Chautauquas, a number of years ago during dinner, I was sitting across from a couple who had some young kids and this guy was saying, we're not going to leave anything to our children. They were well on the way to being wealthy, so we're not going to leave anything to our children because we want them to work and own and earn their own, carve their own way.

And I said, not to be argumentative, but just because I was kind of curious, and I think as I recall, these guys were, I think they'd achieved financial independence and they were probably in their early thirties and what have you. So they put in the hard work to get to where they were for 10, 12 years or whatever. And I said, well, do you feel looking back on the 10, 12 years of work that you put to get here and the jobs that you did in that time were these jobs that you really loved? And I said, no, that were pretty much drudgery. And said, okay, and do you feel like it was a great use of those years of your life doing this kind of drudgery work? And they said, no, we really don't. And I said, well, why would you want to put your children through that then?

Now I'm not making the case that they should think differently because of course the answer to that would be, well, going through those 10, 12 years is what made them the people. They're and the people, they're were pretty cool people. So there's an old saying that steel is forged in fire and on an anvil, and that if you take away challenges and hardship from people, you make weak people. So that's the other side of that coin.

In my own life, when our daughter was young, I didn't really know how she was going to turn out in terms of fiscal responsibility, but I remember talking to a friend of mine at the time about this, and I said, if I have the sense that when she's older that she is not fiscally responsible, that she isn't going to handle the money responsibly, then I'm not going to leave anything to her.

Well, turns out she's very fiscally responsible, but the outcropping of that that I never anticipated is because she is and because she has her own savings rate, she doesn't need anything that I would leave her. Right.

And there's a real irony to that, but I think if you have kids, it is an issue that you need to think about. I have another quick story. I have a very good friend of mine. He's worth $18 million. So he's a pretty wealthy guy, no longer works, and I think he's probably in his fifties now, hasn't worked for a long time, and he and his wife and their daughter live extremely modestly. I mean, they live in a single bathroom, three bedroom house in a working class neighborhood. His hobby is buying junky cars and fixing 'em up. He likes working on cars and selling them. Talk about stealth wealth.

There is no way you would look at this guy in the family and have any concept. What is worth is that includes their daughter who just turned 18 and they had been putting money aside an account for her that had grown to half a million dollars and she has no idea of the financial resources their parents have because she just has grown up in this very middle class. And they decided on her 18th birthday to tell her, and she was a little bit horrified. She'd been taught at school that money was evil and the rich people were evil. And this was the shocking. She said, I don't want it. Why would you do this to me? And she has no idea that half a million dollars to her parents is a rounding error.

Katie:

A pittance.

JL Collins:

Right? And I said to my friend, are you planning to leave? She's an only child. Are you planning to leave your money to her? And he said, yeah. I said, well, you got some work to do between now and then because she's just completely blindsided. By the way, that was my fantasy when I was a kid, and we were in those hard times. My fantasy was at some point my parents were going to pull me aside. They're going to say…

Katie:

We have something to tell you.

JL Collins:

Yeah, we've been living this really poor life, but we just didn't want to spoil you. And the truth is, we're fabulously wealthy, and now that you're not spoiled, we can let you know that—

Katie:

Same. At 18, oh my goodness, go, how could you do this to me? I would've been like, great, because look, I got a list. Let me unfurl this scroll for you. I'm glad we can start chipping away at this now. Oh my goodness.

JL Collins:

I know. And I was thinking to myself, of course, I knew at the time it was a fantasy, and I'm thinking, this never happens to anybody. It's thinking I'm going to grow wings to be able to fly. But now there's a real life example of somebody that my fantasy came true for, and her reaction was entirely different than mine would've been.

Katie:

Do you know why? I mean, I'm just curious whenever I hear stories like that, people that just have basically hit that sheet code of unlimited money where literally probably just about anything would be free to them with $18 million. I mean, what do you think was driving that desire to still live in a house with just one bathroom in a working class neighborhood? I mean, do you think that your friend just truly was so content with that lifestyle that he had no desire to expand?

Or do you think there was some other sort of pathology there of not wanting to spend more money? It just strikes me as so unique, and I think that we celebrate those stories of extreme frugality in the financial independence world. But there's an element of it that I think of what Ramit Sethi says sometimes about how it's a tragedy to live a smaller life than you would have to. And sometimes I think these constraints are self-inflicted. So I'm curious, in the case of your friend in particular, what you think was driving him?

JL Collins:

Look at it this way. Buddha came from a very wealthy family, and obviously, and famously, he came to the conclusion that that's not where peace and contentment lay that peace and contentment lay at giving up desire. And I think there's some truth to that, right? So he walked away from all of that wealth and lived a life of total deprivation in terms of physical things and a very contended life. I mean, the story goes, he achieved ultimate peace in Nirvana.

So I think we need to be very careful about this idea of it's a tragedy not to lead the fullest life that your money could provide. I think that can be a horrible treadmill to get on, is to try to live the maximum life that you could buy. I think there's a happy medium. So I think in the case of my friend, he's just not somebody who's moved by material things.

He's living in a comfortable house. He's got shelter from the rain. He is got food on the table. So he was living a life of perfect contentment At the same time, he's an extraordinarily smart guy and extraordinarily successful guy in his career as long as it lasted, because he had these minimal material desires, the money just kept building. He said, I really don't even know how to invest this money. Now he does. And of course it's growing even more. It's almost meaningless to him. But he's a very happy guy, and I think he would be less happy if he tried to say, okay, I want to live the life that $18 million can provide. I would be a less happy guy if I tried to live the maximum life that my resources could not provide. It just wouldn't make me happy.

Katie:

I think as I've earned more and as we have crept closer to our financial independence number, I have experimented with scaling up in certain areas. And one very present area for me right now has been the home that we live in, because my husband's in the Air Force. So we move every two years and we just rent in these new duty stations. But now that we can afford a much nicer home, we live in a much nicer home. And in some ways it has improved my quality of life. It's in a better location, and I have a room to podcast and he has a music room, and we have a guest room that we can host friends and family in, and that's lovely. But then there are other ways where it creates a level of complexity that I don't know, I anticipated from the standpoint of, well, there's a lot more to furnish now.

Well, it costs a small fortune to heat and cool it. Well, there's landscaping in the front and back that has to be coordinated. Well, when something starts beeping in the middle of the night or there's a weird smell coming from the fireplace, it's like, okay, well now this is a mystery that has to be solved because that beeping could be dangerous. Are there skunks in the area? Is that a gas leak? These are things that I did not have to concern myself with when I lived in a two bedroom apartment. And I've been surprised by sometimes the nostalgia that I feel or that yearning for that simplicity that I used to have when I lived in one half of a two bedroom apartment. And there was less to keep track of. There was less to take care of, there was less to clean. And I think we both realized, okay, we kind of overshot a little bit with this house.

It's lovely, but we're happy that we're renting it and we didn't buy it because now we can scale back down and go, okay, we experimented. We tried it out. It was nice. There were some things we liked about it. Maybe we need to optimize for the way the square footage is allocated in the next one, but we don't really need this much space. This is introducing complexity that we don't need. And so to close this out, I would love to ask you a little bit about one of the more controversial opinions that you hold that I personally love, given my confirmation bias, but that I know it's a bit of a religion in the United States, which is real estate and home ownership and how it is this fantastic investment. So I'd love to hear a little bit about that. But there is a specific piece of this that kind of took me by surprise as I was reading Pathfinders, which was that I found myself getting a little bit, just a little envious of these people that have these paid off homes.

And I was like, ah, well, I've run the numbers and I know it doesn't make sense for me right now to buy, but dang, it would be really nice to own that shelter free and clear. I can imagine the type of freedom that that would unlock the feelings of just like, oh my goodness, I don't have to be shipping off a multi four figure check every month to somebody. That would just be fantastic. So I'd love to hear your take on home ownership, but also whether or not you think owning a home Free and clear is a prerequisite for financial independence.

JL Collins:

So first of all, that angst you have around the house you have now, the Buddha didn't have that kind of thing in this life.

You're referring to the most infamous post on my blog, which is why Your House is a terrible investment. It's gotten me the most hate. It's also gotten me the most love from people who agree with me, obviously, and it's gotten me a reputation of being somebody who is anti-house, and that's not true. I've owned houses most of my adult life.

The difference is that I believe in buying them from a position of strength, which means not overextending to buy them. I totally reject the narrative that the real estate industry puts out, that owning a house is a great investment. It's not even typically a good investment. It's an expensive indulgence, and I don't have anything against expensive indulgences as long as you can easily afford them and buy them from a position of strength. And as I say, I've owned houses most of my adult life, and every house I've owned has given me the same kind of angst that you described.

It has its downsides. There was a guy who came to Chautauquas a couple of years ago, lives in Miami. I think he's making $600,000 a year. He doesn't own anything other than a suitcase full of clothes. I think he works for Google, if I remember correctly. He lives in Miami, rents a very upper end furnished apartment, and whenever he tires of it, he can just go wherever he wants. And his work allows him to be nomadic and can go wherever he wants. I don't want any of this angst in my life. I don't even want to own furniture in an unfurnished rental. I want to have everything I own to go fitness suitcase so that if I decide I want to leave when the last month's rent I pay is up, I'm gone. That has enormous appeal to me. It's not the way I live, but I certainly see the appeal that it has.

But again, I don't have anything opposed to owning houses. As long as you don't overextend yourself, that gets in the way of becoming wealthy. And as long as you recognize that it's an expensive indulgence, and that's okay, then go for it. But don't fall prey to these stories of, oh, so-and-so bought a house in San Francisco 10, 20 years ago, and now it's worth millions more than they paid for it. Well, okay, that happens. But 10, 20 years ago, the people who bought houses in Detroit had a different experience. Well, now I'm reading about all the bad things that are happening in San Francisco, and last spring I was in Detroit visiting a friend who's taken me around and showing the renaissance that's going on in that city. So who's to say 10, 20 years from now, we won't be saying it. Oh, those people who bought in Detroit, they were really smart, and those people bought in San Francisco, they just got hammered. I'm not predicting that, by the way, because I don’t know.

Katie:

It’s just that who knows…

JL Collins:

Right? You don't know. So yesterday, San Francisco can be tomorrow's Detroit and vice versa. So you're taking a lot of risk when you buy a house in terms of what's going to happen in the location. Like any risk, it can pay off, but it can go the other way.

Katie:

Yeah, it's a humongous concentrated bet. And so I personally want that bet to be the smallest percentage of my net worth as possible. That way I'm not overexposing myself to that. I mean, talk about location risk. It's not just the city. It could be the neighborhood. Something could happen to that street that turns it into a worse investment that you just can't foresee.

JL Collins:

It could be the house next to you that drives it down.

I mean, my daughter and I were having this conversation last night actually, because a lot of her friends are buying houses and there's certain pressure on it, and I said, don't ever buy a house until you absolutely want a house where it absolutely is something, a lifestyle decision you want to make. Because the truth is, if you keep investing in VTSAX or something similar in all but a few extraordinary circumstances, that's going to outperform any house that your friends are buying, and that's going to allow you to accumulate the money to when the time comes when you do want a house for whatever reason, it will be easy to buy. You will be buying from a position of strength.

Katie:

I take it. The conclusion then is that no, you do not need to own a paid off home to feel fully financially independent. It is not a prerequisite.

JL Collins:

The one thing I like about owning at this point in my life is because of the hassle factor at my age, I don't ever want to be in a position of a landlord suddenly saying, you know what? I don't want to rent to you anymore. I mean, I want my brother-in-law to move into the place or whatever. When I was younger, I didn't care. I was like, okay, fine. I'll back up and move and go to another place. At this point in my life, I don't want to have to screw around with that. But that's the only reason. There's a strong side of me that would prefer not to own anything and just to rent. If I could be sure that I would always be able to renew that lease if I chose to. But of course, it's not always your choice.

Katie:

Well, JL, this has been truly a pleasure. I could talk to you for hours.

JL Collins:

I very much enjoyed the conversation, Katie. I could talk to you for hours as well.

Katie:

Thank you. That is all for this week. I hope you enjoyed the conversation. I know I sure did. And I will see you in two weeks, same time, same place on The Money with Katie Show to talk all about money and divorce. Yes, we are keeping it optimistic, as always.

Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin with our audio engineering and sound design from Nick Torres. Devin Emery is our chief content Officer, and additional fact checking comes from Kate Brandt.