Student Loans, 50% Save Rates, and Being a Capitalist: JL Collins, Godfather of Financial Independence, Returns

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The last time JL Collins joined me on the show (our most popular episode ever), we covered everything from millennial challenges, to his “VTSAX and Relax” approach, to lessons from his 2015 best-selling book, The Simple Path to Wealth. Now re-released a decade later with new insights, JL joins us again and we talk about:

• If the US Dollar still holds its reserve currency status—and what it means if it doesn’t

• America’s student loan crisis and the myth of “good debt”

• The liberation of dramatically downsizing your living expenses

• Our culture of consumerism, and what might replace it

• We even had a civil dispute about capitalism (I’ll let you guess who played defense) and whether billionaires create jobs or jobs create billionaires

RICH GIRL NATION IS HERE. GRAB YOUR COPY.

THE 2025 MONEY WITH KATIE WEALTH PLANNER IS LIVE—GET YOURS NOW.

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 President of Morning Brew content and additional fact checking comes from Scott Wilson.

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Mentioned in the Episode

• Nick Maggiulli’s piece, “Climbing the Wealth Ladder”

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Transcript

JL Collins:

I think the real tragedy is if you come to the end of your life and you’ve struggled and you’ve carried debt and you’ve worked at jobs that are soul crushing or even just don’t give you satisfaction. And then you find out, you could have not bought as many trinkets, then you find out you could have taken some of that income you earned and bought assets and bought your freedom in the process. That’s tragic.

Katie:

Given the market turmoil earlier this year, it’s coincidental that JL Collins is releasing a new edition of his bestseller, The Simple Path to Wealth, a book which has sold nearly a million copies. Five years have passed since I read it for the first time, and there has truly been no better time in recent memory for a reread this time. Completely different sections of this book resonated with me. So for example, I learned that the Social Security Trust—held in treasury bonds—is 7.8% of the national deficit. That is to say, the Social Security program is the beneficiary of the government paying back 7.8% of our debt, and by comparison, China only owns about 2% of US debt. I also picked up on a fun little factoid this time around about Bill Bangen, discoverer of the 4% Rule and former Money with Katie Show guest: He was technically a rocket scientist who studied aeronautics at MIT before he became a CFP.

So I was really enjoying this reread. Like I said, I was getting different things out of it. Now, JL Collins is known as the Godfather of Financial Independence and he’s really a larger-than-life figure for nerds like me and probably like you who love talking about safe withdrawal rates, but much like financial independence, his simple path to wealth is about far more than math and stock tickers. It’s about breaking the shackles of debt, consumerism, and limiting mindsets and living free. He writes about how many of us live in a state of benign neglect with our money—I think that’s a great phrase, benign neglect—about the joys of work and career when you aren’t shackled to it for a living.

Last time he came on the show, I asked him if he felt like his advice which was developed and successful for a person born in the 1950s would still work for people beginning their careers today and if 50% save rates are still attainable. We talked about his friend who’s worth $18 million, who still chooses to live in what he classifies as a working-class neighborhood and why JL thinks that’s a sign of Buddhist level contentment and not a pathological aversion to spending. I also pressed JL last time on his singular reliance on US equities and he said something that I had never heard him say before, that at some point young people may be better served by switching to VTWAX, the Vanguard Total World Market Fund. We even debated whether housing is more expensive in real terms or just bigger and fancier.

Now this time I was really excited to catch up with him, see how much The Simple Path has changed since it was originally published in 2015 and where it’s remained comfortably the same. And since I have changed quite a bit since the first time I read The Simple Path, we ended up getting into a little light debate about capitalism, billionaires and other areas where JL and I see things differently, which was invigorating. Enjoy this conversation with JL Collins.

JL, welcome back to The Money with Katie Show.

JL Collins:

Hey, it’s a pleasure to be here, Katie. Thanks for having me back.

Katie:

So I want to start with a little update because the last time we spoke I went back and listened to our previous conversation just to refresh my memory and I had told you that I had felt as though moving into a bigger house we had overshot our needs. And so now I want to compassionately roast myself a little bit.

We just moved for the final time. My husband just got out of the Air Force and so now we’re settling down in a more serious way and in choosing our new place that we were going to live, I had this weird hangup about going backwards. Well, we upgraded to a three bedroom home starting in 2021. We can’t go backward now. We can’t move back into an apartment that’s smaller. It’s not enough space.

And this was kind of something we were going back and forth on because we had gotten in touch with this couple friend of a friend who was moving out of their two-bedroom condo in Denver and was offering to rent it to us at below market. So we’re really going back and forth on this. We find out that this couple has lived in this apartment for years with two children and a dog, and we kind of had this moment of like, oh my God, we need to be grounded so violently. We really badly need to touch grass. Of course we can live in a two-bedroom apartment. Get over ourselves.

So we did it. We reversed years of housing expense creep. We cut our housing expenses cleanly in half. We’re back now to what we were paying for housing years ago, and I didn’t know how it was going to feel, but I have to tell you, I love it. I love how cozy it feels. I feel like it is the right amount of space for me for us, and it was just this really valuable lesson to me that there’s really no such thing as going backward and all the narratives we have about how you’re supposed to move through the upgrades of life or these different lifestyle changes as you progress, it’s all kind of made up and sometimes that lesser option is actually going to be the better fit for you. So I’m really thrilled that I get to report this to you today because last time I felt a little bit fraudulent talking about my too-large rental house with JL Collins.

JL Collins:

Well, the only thing I don’t love about that story, and I do love that story, is that you didn’t learn the lesson from me two years ago on the verge of doing something silly and then learn it from the previous renters of where you are now. You’re talking to somebody who has downsized multiple times since my daughter graduated. She graduated almost 15 years ago now from college. And so I’m a big advocate of having just what you need and nothing more.

I was actually just coincidentally talking to a friend yesterday and he asked, what would you do if you suddenly had a billion dollars? And I said, that’d be really awkward. If I had a billion dollars, I’d suddenly feel like I’d have to have a $20 or $30 million mansion and then I’d have this big mansion that I’d have to manage and I’d have to get furnished and I’d have to deal with all these different people that would just make my life miserable. I live in a little shack on the beach, we’ve got 1200 square feet and I don’t use all of that. Yeah. And I couldn’t be happier where we are, so kudos well played. I’m glad you found your bliss.

Katie:

I sure did. It’s funny. On that note, I know that we did spend a lot of time last time talking about housing, but it was interesting when I was reading the book because even though it is a new addition, so there are things that are different. I was kind of cross-referencing between the original and this one to be like, oh, this is new. I don’t remember this from last time. And more often than not, it was like, oh no, this was in the original. It was like five years ago. I was in a different place financially.

So different things are jumping out at me now that when I first read it years ago, I wasn’t in the right place to receive. And one of the things that I clocked was the section about the myth of good debt. I think this is a trap that we fall into a lot. You write about how mortgage loans often tempt people into buying houses that they don’t need or that are far more expensive than is prudent they buy the most house that they can afford rather than the least house that meets their needs. And this is, to me, just as much, if not more, a cultural thing than a financial thing.

JL Collins:

Oh, absolutely. It’s a cultural thing and it’s also like a lot of cultural things. It’s driven by outside influences. We are influenced by the culture around us, and those influences in this case are real estate agents and banks, lenders. Because the real estate agent makes the most commission when you buy the most house.

So the first question the real estate agent is going to ask you is what’s your income? How much house can you afford? And they’re going to do the calculation and that’s what they’re going to want to show you. And the bank is going to do the same thing and they at that point want you to borrow the maximum they’re willing to give because that’s how they make more money. And too many people just take that at face value because frequently those numbers, those levels while theoretically are doable according to the real estate agent in the bank, put a tremendous financial strain on most household budgets and that puts them in houses that they really can not quite afford or only barely afford rather than something that you enjoy.

It’s not necessarily the bigger and more luxurious house that’s going to give you more pleasure. In fact, it might not be owning a house at all. It might be renting, and that comes from somebody. By the way, I’ve owned houses, I own my own two actually at the moment.

Katie:

For me, part of the joy of this new chapter has been not just the location and being a little bit more in the action again after being in the suburbs for several years, and that feeling like a welcome shift and change, and some of this I’m sure is grass is always greener. You get accustomed to one thing and then this other thing feels super new and novel. So in four years from now, I might be like, oh, can’t wait to have a yard again.

JL Collins:

That, by the way, is the beauty of renting.

Katie:

Yeah, just move around as you please,

JL Collins:

Right? Because if four years from now you decide you want to go have a yard, it’s as easy as waiting till your lease is up.

Katie:

Drama free.

We’ll get to the rest of this conversation with JL after a quick break.

There’s subconsciously an element of this, which is as a business owner, as a young person, someone that’s kind of looking out at the horizon now and going, what do I want the next few years of my life to look like? Do I want to start a family? Do I want to start a different business? These are big shifts, and I think that subconsciously that higher housing payment and that allowing those fixed costs to creep up for me was giving me this subconscious sense of burden that I think I had grown accustomed to it, but now that it feels like it’s gone, I’m like, oh yeah, this is what I used to really value when I first got into FI and why it all felt really liberatory. So on that note, last time you told us the story about your first job and about how saving half of your income early in your career gave you the F You money that allows you to take some time off and to travel. And so I’m curious now, however many years later it is, have you had any good money experiences recently? Or is your whole life just like F You money every day you wake up and it’s F You money.

JL Collins:

You’re not wrong about that. Going back to that original story, the amount of money we were talking about back in the day, and this would’ve been in the mid-seventies, right? Like ‘76, I want to say it was, $5,000. So it was certainly not enough to retire on, but it was enough to step away from a job and travel extensively if that’s what I decided that I wanted to do.

But when you follow this path and you become fully financially independent, it’s a journey. So every step you take in those early days for me, you’re a little bit stronger than you were before. You have a bit of F You money, which in my definition is the interim amount of money before you’re fully financially independent that allows you to make bolder choices like I did back in the day with that traveling and every step of the way that few money grows.

And your strength kind of only going to the gym, you get stronger and stronger until finally you’re FI and FI in my mind is defined as where your assets, your investments are throwing off enough money to cover all of your expenses and then some. And when you’re at that point, and I’ve been at that point for a while, essentially everything’s free and I remember Mr. Money Mustache was the one who taught me that lesson. You’re not really spending money that isn’t instantly replaced and more importantly, you’re not spending any of your life energy to accumulate the money to buy whatever it is that you’re buying. It becomes free. So I suppose that’s my F You money win, so to speak, but it’s been going on for a few decades for me now, although I only realized it about 10 years ago when he gave me that little epiphany.

Katie:

Well, and to your point about it being the interim state that you don’t actually have to be FI for that to be true. It’s true. It’s smaller levels in the beginning and that scale kind of expands as your nest egg expands. So even if you don’t have enough invested yet that everything is free to you that you’re buying your daily coffee might be free, your weekly Saturday night dinner out might be free.

I think that that can be an enticing way to kind of right size some of those decisions. I think Nick Maggiulli has a good blog post about this that we can try to find and link in the show notes where he basically talks about these different levels that you reach where in the beginning it’s that scale of groceries or dinner, but then after a while it’s like, oh, now my vacations are free. Oh, now it’s like my housing is free, this upleveling that happens.

And I think the cool thing about it and what I always try to drive home when we have conversations like this is that as more time passes, it starts going faster. So the beginning really is the hardest. It’s the slowest. It’s where you don’t really have the momentum of compounding on your side yet, but if you’re talking 8% to 10 to 11% returns per year, when you’re hitting that halfway point toward your number, you’re really closer to like 75% of the way there because now the compounding is really going to begin to work for you.

JL Collins:

That’s absolutely true. There’s a couple of important things here. First of all, when people are just starting to consider building their wealth and their financial independence or maybe in the early stages of it, it can feel overwhelming because you look at the kinds of levels that you want to accumulate and I think a lot of people say, I’m never going to get to a million dollars or $2 million or whatever it is, and they give up.

So I think it’s very important to understand what you were just saying. What I was just saying is that every step you take makes you that much stronger. It would be going to the gym and saying, well, this is no good. I can’t bench press 300 pounds on the first day. Well, yeah, that should be no surprise, but you do what you can and then the next time you go you’ll be that much stronger.

And even if you never get to that FI number, one of the questions I get a lot from older people, it does take time to take this journey is well, am I too old? I’m never going to—looking even at savings rate, 50%, that you’re talking about and it’s going to take 10, 15 years and I don’t have 10, 15 years. Well, no, maybe not, but at the end of the day, will you be better off being halfway there than you are today? Absolutely.

One of my favorite quotes, and it’s in both editions is from Leo Burnett and it’s when you reach for a star, you might not get one, but you won’t come up with a handful of mud either. So if you start out investing saying, my target is a million dollars and you only wind up with half a million dollars, well I guess you should just throw that half a million dollars away at that point because you failed. Totally. It’s kind of silly.

Katie:

Totally, yeah.

JL Collins:

It’s a journey worth taking.

Katie:

There’s also an element of this that’s like, we’ll just try it. What do you have to lose from trying it? Commit for six months a year and see what happens? I do write about this a little bit, this idea in the first chapter of my book about experimentation with some of the things that I was spending on and being a little playful with it of like, well, I’m just going to try to pair that back and see how that feels.

And oftentimes I think what you find is that when you begin to spend less on things that you can’t imagine spending less on what you find is like, oh, that actually didn’t really impact my life that much, or maybe you’ll find the opposite that it did.

So I want to talk about some of those returns that make that compounding possible. And what else has changed in the last 10 years since The Simple Path to Wealth was originally published in 2015, you updated the timeframe to include the last 10 years of returns in all of your estimates. The original book was 1975 to 2015, and now we’re including returns up until, I assume, end of last year whenever the most recent numbers would’ve come in. And before, the average return of the US stock market with dividends reinvested for the period that you were studying was around 11.9% per year, which is bananas on its own.

And you write that you were a little bit nervous about how the following 10 years were going to impact things and like, oh gosh, is everything going to fall apart or are things going to look really different with this expanded timeframe? But you found that including the last 10 years and expanding the timeframe made the average 12.2%, so it actually went up. You thought it would be worse. The fact that it’s better actually gave you pause. You said that you were a little unsure what to do with that. Why is that?

JL Collins:

Well, it’s interesting, first of all to give people perspective, the reason that I picked 1975 as the start date was simply because that was the first year I started investing and 2015 was a nice even 40-year period. And as you said, I thought, well, I got to look up. I did the S&P 500 over that 40 years and I was stunned to see 11.9% because that was not an easy 40 years. There’s a lot of financial turmoil. There were wars. I mean this was not some golden age that I lived to. In fact, I have a blog post called Time Machine in the Future of Stock Returns, which the conceit of it is that I’m sitting around with a bunch of friends in 1975, and that was also the year Jack Bogle brought out the first index fund, an S&P 500 fund.

And we’re sitting around in this scenario, our little campfire saying, gee, I wonder how this S&P 500 fund is going to work out that this guy came up with. And I raised my hand and said, as a matter of fact, I just happened to be back from 2015 in my time machine and I can tell you exactly how the next 40 years are going to go. And then the rest of the post is this litany of all the disasters over that 40 year period. And of course everybody around the campfire when I’m done, it’s like, man, I’m glad you told me. There’s no way I’m investing in this thing now. Well, except that through all that we got to 11.9%.

But I was very careful in the first book to in big bold letters, not once but twice say you cannot count on this kind of annual return. And of course it’s not an annual return, it’s very volatile. Some years it’s down significantly. Some years it’s up significantly. That’s just the average. So I didn’t want anybody to do their projections going forward thinking they were going to get these kinds of returns. And that was my big concern then.

And that was my concern with this free vision because as you said, now that I’m looking at 50 years, the last 10 years, which a lot of our listeners can remember have been no golden period either. We had a pandemic, we had a bear market, a lot of political turmoil, and yet the market performed so strongly this past decade that it raised that average over that entire 50-year period by a couple of points. What was striking to me about that, by the way, is back in 2015, 2016, all of the smart guys were predicting that the market’s done so well. If you’re going to invest in stocks, you have to anticipate much lower returns somewhere in the order of 4%. That includes by the way, Jack Bogle, but even Bogle with his perspective and great experience was saying that, and I was saying maybe, but nobody knows. So the key is you don’t know what the market’s going to do in the short term, but you do know that over the long term it always goes up.

Katie:

Well, and the 4% rule is designed to contain and adapt to those types of periods as well. So I think that that’s something that I often find solace in, which is the 4% guideline if that’s what we were using to project the future and to give us these safe parameters for how much of our own money we can safely use regardless of what the market and inflation does. 4% was like the minimum that you could take out with high success during a period that had returns where there were long stretches where you were not getting 12%.

JL Collins:

Or anything close to it.

Katie:

Or anything close, and inflation was three times what it is now. So I think I find some solace in that of this is a benchmark that has been pressure tested pretty rigorously, and I think things would have to change far more dramatically than they have for that to be seriously under threat. I think that the risks of planning with overestimates saying, oh, I’m going to assume I’m going to get 12% per year and I’m going to base my whole life around that. I think those risks are quite obvious. I always tend to skew pretty conservative in my own projections and use around 6% average returns.

But something that struck me while I was reading the new addition was that we don’t really often talk about the risks of underestimating and the risks of playing it just a little bit too safe, which could mean working a job that you hate for way longer than you to because you’re playing it way too safe. There was one idea that I picked up on in this reread that I think illustrates that risk really well. You say, hey, if you work a soul crushing job, remember that a 5% safe withdrawal rate has an 82% chance of success. So in effect, I would take those odds, I would quit the job in that instance. We don’t always think about as a risk in the same way we’re very acquainted with the idea of running out of money as a risk. We’re not as well acquainted with the idea that in underestimating how things are going to go or playing it too conservatively that we might be giving up a little bit too much life in pursuit of that 100% success rate.

JL Collins:

Guaranteed. Absolutely. When I was running Chatauquas, which were my events where we took small groups of people to cool places, that was a question that I got on a pretty regular basis: I’m in this sole crushing job, I got a million dollars, but that’s only $40,000 as 4%. I need 50 to live on, but I just can’t. What do I do?

And you’ve phrased it very well. And I would also say to those people, do you imagine that if you were only taking the $40,000 out and you stated 4%, is there some way you could come up with to generate $10,000 over the course of a year? And anybody who’s gotten themselves into that position by definition has the smarts and the resources, and nobody has ever said no to that question and they kind of sigh and relief and most of the time, as you said, 82% of the time, you’re not even going to have to do that. So the 4%, I hate the term rule, I like the term guideline.

Katie:

So does Bill Bengen, right?

JL Collins:

And Bill Bengen was very clear that when he came up with the 4%, it was a very conservative withdrawal rate that was designed to survive through lots of traumatic times and it does, but I frequently say I would never take any specific withdrawal rate, set it and forget it for two reasons. One is 4% only succeeds 96% of the time. So that means there is a chance that it won’t work for your particular 30 year period because these measure over 30 years, and obviously you do not want to run out of money, so you’re going to want to pay attention.

If you have the misfortune of retiring and living on your portfolio at the beginning of a long bear market, you’re going to probably want to adjust your spending and figure out ways to generate a little extra income. So that’s a big reason to pay attention, but there’s a bigger reason to pay attention.

That is, as you alluded to, in the vast majority of cases, not only does 4% work and you wind up having money lasting, it works phenomenally well to where you wind up having huge amounts of money at the end of 30 years. If you’re starting with a million dollars, it’s not uncommon pulling that 4% every year adjusted for inflation to wind up with $8, $10, $15 million left over.

Katie:

Wild.

JL Collins:

Presumably you would prefer to enjoy that extra money along your 30-year journey. So that’s the other and bigger reason to not just set it and forget and to pay attention.

Katie:

I think one of the key things that I’ve noticed too is a lot of people that are really into this level of financial optimization and lifestyle planning don’t really count on Social Security and then are like, ah, got an extra several thousand dollars a month. Yeah, I know. I’m looking at you, JL.

JL Collins:

Yeah, absolutely.

Katie:

Same thing given our conversation a couple of years ago where I kind of kept pressing you to be like, okay, but what about the fact that we don’t know what’s going to happen to the United States just because the United States has been this kind of global superpower for the period that we’re talking about? Who knows if they will be 10, 15 years from now? And I don’t know what I was expecting, but I think I was expecting to see even more commentary on VTSAX or the VTWAX, the Total World Market Fund, which you write is about 60% US stock, so you’re still getting that US exposure, but you’re also getting about 40% international exposure.

But I noticed in the end of the book you mentioned that the US dollar losing its reserve currency status and therefore rendering the US national debt a little bit more of a problem would be a systemic shift that would cause you to expand your VTSAX horizons. You also noted in the part of the book where you’re talking about why you have historically not invested internationally, that weaker regulatory structures involve greater risks that countries that don’t have strong financial regulation adherence to the rule of law countries that have corruption in their legal and governance systems, that these are things that weaken investors’ faith in markets, and therefore provide a less stable foundation in which these returns can happen because there’s inherently less certainty.

I was reading this and I was like, man, all of these ideas hit quite differently in April, 2025 than they did in 2015. And so I want to ask you, you note that it’s hubris to think that the world is going to end on our watch, but couldn’t the inverse also be true? It also be hubris to assume that the American empire is going to last forever.

JL Collins:

You covered a lot of ground there. So I will start by disagreeing with you. I feel the same way about it today as I did in 2015.

Katie:

Okay, why is that?

JL Collins:

A lot of reasons. So let’s take your last point first. The American empire is certainly not going to last forever. No empires last forever, but it’s pretty rare that they collapse suddenly and completely. So let’s just look at the Dutch as an example, right? You go back 400 years, they were really the folks who created modern capitalism, which is of course the engine that provides all of the wealth that we now enjoy, and they were the dominant power in the world for a considerable amount of time, and then they weren’t. And the Netherlands is still a prosperous, wonderful place to live, true of France, true of England.

So even if we lose our number one status in the world at some point, which I don’t see happening candidly in the near future, but even if we lose it at some point, which ultimately we will, that doesn’t mean that this is going to cease to be a prosperous country with sound investments in terms of the governance and the security of that. We have the best system to this day in the world. Now, it’s not perfect for those who are old enough and going back to the debacle in ‘08 and ‘09 when a company like Enron collapsed, well, nobody expected Enron to collapse. All the numbers looked perfect and good and what have you. Well, it turns out the books were cooked, and that happens even here. So in a sense where the cleanest shirt in the dirty laundry basket. So it’s not perfect.

Having said all this, if somebody said to me, JL, I get it and I understand what you’re saying, but I still would feel more comfortable being invested all around the world, you’re not going to get big pushback from me. I talk to my daughter about this and I tell her, you want to pay attention to some point. You might want to move from exclusively US-based VTSAX into a world fund. And if she chose to do that today, she wouldn’t get a lot of pushback. I would think that she’s a little bit ahead of the curve.

The other thing I’ll throw out is so far this year, I haven’t looked recently, but I’d be willing to bet that this is still correct. So far this year, for the first time, European stocks and Asian stocks have dramatically outperformed US stocks. Not for the first time ever, but for the first time in a long time. So as anybody paying attention knows, our stock market in recent weeks and months is at a very volatile rough ride.

Meanwhile, Asia and Europe have taken off, and I don’t think that’s been true for 15 years. The US has just been totally dominant, but it’s not completely unique. There have been many times over the course of history where one geography outperforms. I wouldn’t predict that Europe and Asia are going to continue to outperform the US for the next decade. If I knew that, then I would certainly be in a world fund, but that wheel will turn.

But that doesn’t change my opinion necessarily because it keeps turning. So the last thing I’ll say is when you’re in something like VTSAX, which is weighted, which means it’s heavily tilted towards the largest companies, those companies almost exclusively are by definition international companies. When you own Apple or Meta or Google or General Motors or whatever in that fund, you are owning a company that gets a significant amount of their revenue internationally. So as the rest of the world prospers, which I expect by the way the rest of the world to continue to do you prosper as well, just owning those base companies.

Katie:

You mentioned the Dutch and the British, and yes, if we look back, these regions of the world kind of had their time in the sun. Sun never sets on the British Empire, right?

JL Collins:

Until it does.

Katie:

Until it does. And you’re mentioning these are still fine countries to live in. It’s not like things collapsed and now no one lives in the Netherlands anymore, which is totally true and a point that is well taken. However, I still think it’s fair to say that you probably would look a scan set, somebody who is in a 100% British stock portfolio, that person is still probably going to be better served by taking the wider view.

And I think that’s the thing that I’m cautious of as an American, that even if, I mean let’s be real, it’s probably going to be China. If another country begins handedly usurping the American economy, then do I want to invest in that economy too? I did not know that about European and Asian stocks this year. I just went and checked my Copilot app. I own VEA, which is the Vanguard I think it’s developed markets or developing markets. And I checked and it is up 10% this year, whereas my VOO, my VTI, they are down respectively around negative 6%. So that’s not insignificant. I mean, it’s only four months of data, but kind of proves the point.

JL Collins:

That’s 16% to the better on your European fund, agreed. Now, whether that lasts or not, nobody knows, right?

Katie:

That feels like a theme nobody knows. But there is one thing that we can control and that we do know. It’s something that Brad Barrett says a lot, which is the 50% save rate cures all, and if you’ve got a 50% save rate, it almost doesn’t really matter what happens. Which brings me to something that I want to talk to you about.

I had this chilling experience the other day, and it was disturbing because of how casual and normal it felt. But for some reason that day it just kind of struck me funny where it felt like you actually probably have never seen this show. Maybe your daughter used to like it, That’s So Raven, on Disney Channel about a girl who was a psychic. She’d get these visions and she would look to the camera and it was this freeze frame moment of the world stopped spinning for a second. That’s how this felt. I was in the car. The radio comes on in the middle of an ad for a debt consolidation product. So there’s this upbeat music and this chipper voice is like, you are drowning in debt. And I was like, whoa, that’s forward. Take me out to dinner first. And he goes, for a limited time, you can get up to $10,000 of debt relief with no upfront fees, terms and conditions apply, blah, blah, blah, blah, blah, visit blah, blah, blah for details.

JL Collins:

May cause cancer.

Katie:

Yeah, diarrhea. No. I just had this moment of like, wow, how dystopian, how did we get here as a society that these are the ads on the radio where? And then I go and I look it up after the fact and it says, yeah, the median non-mortgage debt. Okay, so we’re not even talking about housing. The so-called good debt. The median non-mortgage debt in the US is $25,000.

JL Collins:

Wow.

Katie:

And I’m like, holy smokes. So when they make an ad that says you are drowning in debt, the average person hearing that is a safe thing to say, just the tone of it, the casualness it all just for whatever reason in that moment and really was like, God, how did we get here? And you write about how debt and credit and financing have become dangerously normalized. I assume that you say that that is something that has happened in your lifetime, that you have kind of observed this shift and you note that the availability is potentially responsible for driving prices up. I think that is an underappreciated consequence of how available credit is today. And so I wanted you to walk us through that and how you think about that.

JL Collins:

Yeah, so first of all, you’re right. This has been something that has fundamentally changed in my lifetime, and probably the easiest example is when I was in college, no credit card company was offering to send me a credit card. They would’ve been insane to do it. I mean, I was dirt poor, I was putting myself through college, went to pay for room and board and tuition and what have you. Now I understand, and this has been true for a while, that college kids routinely get offers for credit cards. And that just strikes me as being insane until you realize that there’s a huge advantage to hooking people on credit in an early age, right?

I remember when I finally got my first credit card when I was out of college and working and I was young and naive, I didn’t know how this stuff worked. And I charged I think about $300 of stuff on it the first time. And the bill comes and up in the little corner, there’s the box for the payment and it says, minimum amount due $10. And I looked at that and I thought—

Katie:

Whoa, hell yeah, brother.

JL Collins:

I can spend $300 and all they want me to give them is $10? Sign me up. And fortunately, my older sister was sitting next to me while I was doing this and she said, oh yeah, but you do understand they’re going to charge you 18% on the balance you don’t pay off. I said, 18%, do they think I’m stupid? And she said, yes, they do. And most of the time they’re not wrong because people just buy into this normally. And that was back then.

Now you talk to most people and not only are they carrying debt, but they think carrying debt’s just the normal way you live your life. And I guess in this country, for a lot of people it has become exactly that. It’s become normal. But if you ever expect to be financially free or actually free in any sense where you’re not obligated to continually work in exchange your time and effort and blood, sweat, and tears for money to keep all of these expenses rolling, to keep this ball rolling, you’re going to have to change that. As my buddy money mustache says, your hair is on fire, nothing else matters at that point other than getting out of debt because you are never going to be financially free

If you’re carrying that ball or you’re dragging that ball and chain around. To me, it’s like being covered with blood sucking leeches and everybody thinks this is normal. And it’s like, well, no. Being covered with blood sucking leeches is not normal. You went swimming and came out covered with leeches. You take out your sheriff’s knife and start scraping the little blood suckers off, that’s your debt. That’s what you need to do.

Katie:

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

We had a conversation on this show earlier this year with an author who has a book called You Don’t Need a Budget, and it’s kind of this anti-personal finance personal finance book. And one of the things that we talk about in that interview that really riled up our audience was the idea that basically, debt is not this moral failing or that it can become so emotionally charged for people that it’s worth keeping in mind that this is a financial instrument that has rules. You need to learn the rules, make decisions accordingly, but that there’s not some moral failing in having debt.

And a lot of the comments that we got on that episode were like, this is dangerous advice. Debt is a dangerous thing, and you essentially should not encourage people to feel less urgently about debt that they might carry. And I think that this is a really interesting tension because I think at the risk of using that phrase, two things can be true at once. I think that in our attempt sometimes to make people feel a little bit better and to make the status quo a little more tolerable, we’ll say, which is the status quo being if you want to go to college and your parents aren’t wealthy, you’re probably taking out debt. If you don’t have any help from family and it takes you a little bit to get employed after you graduate, you’re probably going to be putting things on a credit card. Unless you’ve been saving your whole life and you need a vehicle to get to work, which in this country most people do, you’re going to probably be taking out some auto loan. And even if you’re being responsible, cars are not super, super cheap.

But this is sometimes a situation where people are finding themselves in debt, not because they’re swiping their way through Neiman Marcus like I was when I first graduated college, but because they’re just trying to keep the wheels on and they’re trying to give themselves that leg up in life and that by talking about debt as this moral failing, we’re really just doing somebody a disservice. But I think that sometimes that can be taken too far.

And to your point about the normalization, that I think is the thing that I find most challenging. It is also true that American Express wants you to feel totally fine about needing debt to afford everything you need. The mortgage lender that wants to sell you a really expensive house also wants you to feel okay about borrowing a bunch of money. You deserve it. So I think that there’s this element of this, which is, I wrote this in the newsletter a couple weeks ago, which is maybe avoiding debt because it’s financially prudent, is a little boring, but avoiding debt to stick it to the man and basically be like, no, consumerism, I’m not going to play your game. That’s highbrow, baby. That’s exciting.

So I think that there’s a way to frame this, which is yeah, if you accept the rules of the game as this system has laid them out for you, you probably are going to find yourself feeling pretty financially trapped. And if you have gotten yourself into a position where you have accepted the rules of the game of the system, which most of us have, and why wouldn’t you really, unless you’ve learned differently by now, that you can make different choices and that those choices while not morally superior might just put you in a position that you’re going to be happier to find yourself in.

JL Collins:

Agree. I don’t think it’s useful to think of it as a moral issue or a moral failing because it’s such a part of our culture. It pays to question everything that you were indoctrinated to believe is true, and most Americans are indoctrinated to believe that that’s just a normal part of life. I think it’s a big one worth questioning. To me, it’s more like rather than a moral failing, I think of it as quicksand doesn’t mean you failed morally, it just means you didn’t know where the trap was. You didn’t even know the trap existed. And I think what you’re trying to do, and what I’m trying to do in my work is show people where the traps are now after we show you where the traps are, if you go and step in the quicksand, well that’s on you.

Katie:

Well, and it might be that you are like, okay, well I’m actually fine. I’ll get in that trap because I want to go to dental school and I need a hundred grand to do it. So alright, I’ll get him this trap because I know that I can pay my way out of it later. And I think sometimes it is necessary.

JL Collins:

But it’s important that you recognize you’ve stepped into the quicksand and you’re going to need a very stout rope to pull yourself back out of that quicksand. And it’s not going to be fun. It’s not going to be easy, and it’s going to take a long time. And if that’s the price you’re willing to pay to be a dentist or whatever it is you want to do, then I’m not going to say don’t do that. I need to have a dentist to go to. But be very clear of the choice you’re making. One of the things in my manifesto I say is not every decision you make is about money, but you should always understand the financial implications of the decision you’re making.

Katie:

I mean, you write about the student loan crisis in the book, you basically lay out this argument that’s like, I believe that debt that is freely taken on is somebody’s responsibility to pay off. And also that targeting 18 year olds with mortgage sized loans to get an education is, I’m going to paraphrase basically that that’s wrong and that we should be taking a serious look at that.

One underappreciated aspect of this that you touch on in the book is that because of the financial structure of colleges in the United States today, this is really no longer something that people can pursue solely to grow intellectually, follow their interests. Now you really can’t go to college and again, unless your parents are wealthy and are going to pay for it without a guaranteed payoff or the whole idea looks absurd.

There was a recent piece that Kyla Scanlon wrote who I really enjoy her work. She basically said, this is very dangerous for a culture’s critical thinking skills when fields like philosophy and fields that are maybe a little more esoteric, the humanities things that are not really associated with a high payoff and that have really become far less popular. It kind of correlated with or inversely correlated with the cost of college rising. If those things are seen as things that only rich kids can afford to care about and you can only go to college if you’re going to study something that’s going to pay you a lot, then we’re losing a real element of the ability to think clearly for the sake of thinking clearly.

That is an argument that I’ve maybe long agreed with, but I’m feeling it in a little bit of a different light now that the talk of AI replacing things like software engineering jobs and these supposedly very safe and very high paid computer science jobs that when I was in college, aside from investment banking, if you wanted to make a lot of money and have amazing job security, you studied computer science well, if artificial intelligence renders those jobs kind of obsolete or far less, were only the best data scientists or computer scientists are going to be able to get hired now because so much of the maybe lesser work can be offloaded to a robot. Now that tradeoff that we’ve made looks particularly silly.

JL Collins:

I’m a big believer in a liberal arts education. I’m an English major, and the idea that people with a liberal arts education can’t be successful is a bit of a myth. I will say it’s a lot harder to get started. If you come out of college with an engineering degree, you are probably going to get more job offers more easily. It took me two years to find my first professional job out of college. Now to be clear, this was in the seventies, which was a terrible economic time, stagflation and all that sort of nonsense. And then I went on to have a fairly prosperous career, probably more so than a lot of my engineering graduate friends.

So there is absolutely that possibility. Probably in the late nineties, the government decided that everybody should go to college because there were statistics that said if you went to college, you would make more money. That’s when this whole, we’re going to make student loans readily available to everybody. The government’s going to guarantee them. So no financial institution is going to loan an 18-year-old with no financial assets, a hundred thousand dollars to go to school. If the government guarantees it, they’ll fall all over themselves to give them that money and try to persuade them to borrow even more. And whenever you arrange things so you can pay for it with borrowed money, which you didn’t use to be able to do with college, you make that thing much more expensive because now there is much more money in the hands of many more people to buy it. So not surprisingly, schools stepped up and started charging more and they started taking in all this extra money and building all these extravagant facilities on their campus. The way my daughter lived when she went to the University of Rhode Island, a state school was so different than the cinder block dorm that I was in the University of Illinois.

But that’s just the way the world had changed. And now we’re kind of stuck in this paradigm because it’s very, very hard to unravel that stuff. The other thing to consider is this whole idea that everybody should go to college, and if you don’t, you are stupid. Well, that’s just plain wrong, and it’s insulting to all the people who don’t do that. I own this little cottage on the lake and it’s a needy place. So I interface with lots of tradespeople who are helping keep this cottage from returning to the earth in dust as it so desperately wants to do. These are not stupid people. These are very, very bright people. Many of them are extraordinarily well-read in a lot of different subjects, and they are extraordinarily well paid. You’re talking about plumbers, tuck pointers, electricians, carpenters extraordinary, just remodeled the bathroom. The guy who did it for me has a degree in engineering. Young guy just got his degree in engineering and decided he’s going to be better off with this contracting gig that he’s very, very good at than getting an engineering job.

And I don’t have those kinds of skills. I wish I did. I have deep respect and envy for the people who have these kinds of skills. But if you have them and you’re presented with the option of, okay, you can borrow a bunch of money and go to college, which is what everybody is telling you to do, what the government for a long time was implying that you should do, or you can go out and be a plumber like your dad, take over your dad’s business or start your own business or be a carpenter. And that’s really what you want to do because you like creating things. You like building things with your hands. You like looking at the end of the day and saying, there’s something tangible I did, tremendous satisfaction of that. You’re not going to take on that debt.

So let’s assume maybe you had a hundred thousand dollars you would’ve spent, I know this doesn’t really happen in the real world, but you got a hundred thousand dollars I can use and that wouldn’t even get you through college today, so I’m dating myself, but or you could take that a hundred thousand dollars and put it in VTSAX and you can go begin right out of school. You can go begin your work, your trade, and build your business doing it. And you fast forward to when you’re 30 and who’s going to be further ahead? You or your buddy who went to college and like me, came out with their English degree who was just probably then hitting their stride.

And by the way, you have a job that is not going to be taken over until they get a whole lot more sophisticated, I suppose, by technology. If you’re a carpenter or a tuck pointer or a roofer, maybe someday robots will be sophisticated enough to do that, but you’ve probably got a lot more runway than that computer programmer you were talking about. So yeah, I’m a huge fan of that path, and I’ve just met so many people on that path who are smart, engaged people who take tremendous satisfaction in their work and who make really, really good livings.

Katie:

Something that I hadn’t thought about before with respect to that difference is that a lot of the examples you just gave were people that, because of their trade and because of their skill, ended up owning a business or being self-employed.

JL Collins:

Absolutely.

Katie:

That’s something that obviously when you go to college or you go and get an MBA or you do follow the path of increasing your education and your schooling, many people do that with the intention of starting a business or becoming an owner in some capacity, and many people do. But I wonder if the bigger difference there in the financial outcomes is less about maybe that tangible difference of working with your hands in many of these cases or doing a trade versus, I call them fake email jobs. I count myself among the fake email job legion, the spreadsheet warriors. I talk into a microphone for a living. I’m under no delusion that my job is real, but that the difference is that usually when you have a fake email job, you’re employed by someone else. Someone else controls your wages, someone else controls how quickly you ascend.

You can navigate that in such a way that you can be promoted quickly, you can rise the ranks, you can job hop to earn more over time. But that, we just had Pete Stavros on the show who is a big employee ownership advocate. But something that we talked about in this episode is if you want to succeed in a modern capitalist economy, becoming an owner, whether through business ownership or owning pieces of the public market or real estate or whatever your path is, that that is really the path to stability. And so it’s interesting to think about trades. It circumvents that big student loan debacle and question that culturally emphasizing that more for people. It’s more about the fact that you end up being an owner in many cases. I’d have to see the numbers to see how that common that is. But anecdotally, that does sound true to me that oftentimes that’s kind of the path that your career ends up taking, and that is, if we’re looking at numbers, typically a pretty lucrative way to earn money or a pretty lucrative way to structure your life.

JL Collins:

I would imagine that overall that’s true. It takes a certain kind of person, ambition, smarts, and what have you to be self-employed, to be the person who winds up hiring other people. So certainly if you don’t want to go through the hassle and frankly the extra work of owning the business, if you’re a carpenter or bummer, you can certainly find no ends of opportunities. I used to be publisher of a magazine in the HVAC field, heating and air condition conditioning, and the biggest problem that industry had was finding technicians to hire. And that was true for 40 years before I came along. It was true for my tenure. I’m sure it’s true today.

So if you want to just have a regular W2 salary job, hourly job, go home every night and not have to worry about it, you can do that in the trades too. I spent most of my career as a, well, all of my career as an employee, as a W-2 employee. But there’s no question that the world’s a more profitable, comfortable place. If you’re an owner, whether it’s through your index funds or through your carpentry company or through your podcast business, you’re better off being owners. Even the government treats you better as an owner.

Katie:

That’s true.

JL Collins:

From the tax point of view.

Katie:

Yes, that is very true. On the government side of things, this student loan bubble sort of began when the government said, hey, we will guarantee these loans. They get taken out So all these private banks are like, oh, amazing. Who wants to go to college, kids? We’re writing blank checks, which I think highlights something that when we talk about that, sometimes people take the wrong conclusion away from that. They go, oh, well then the government’s inept and they can’t do anything and we should just let the private market run free and that will fix everything.

I am of mind that what you’re seeing there is the way that these private public partnerships give you the worst of both worlds because you get the profit motive of the market, which ordinarily under normal circumstances you think would drive prices down, but then you get the unlimited bank account of the government. You put those two things together and you get a crazy runup in prices. Whereas that is the biggest critique that I would have of the US government, is that they try to solve these social problems by collaborating with private interests.

Whereas I don’t think you would’ve seen this if they had taken the approach that was, we are going to do what other high-income nations do, which is say we want our population to be educated. We’re going to work directly with the schools to arrive at what is the reasonable cost for a student, and we’re going to take the private interests, the lending, the profit motive out of this and eliminate that middleman.

Basically. I think that you see this in the healthcare industry as well, that the involvement of government money collaborating with private interests, we know that healthcare costs have skyrocketed as a result of that. I think you see it to some degree in the housing sector as well. You certainly did in the run up of 2008, where these well-intentioned things end up inadvertently incentivizing bad behavior on behalf of people who see this as an opportunity to make a lot of money. So I just wanted to offer that up because I think that we’re in a period where sometimes that poor execution can be perceived as like, oh, well, clearly then anytime the government gets involved in something, things go sideways and it’s like, I would say the problem is that they just need to do it themselves and not try to collaborate with the private sector in these things where we have evidence in other countries that like, oh, well actually when you take the profit motive out of some of these things, you actually can come up with these very cost-effective solutions.

JL Collins:

Well, that probably becomes more expensive on the government side, which is probably why they’re not doing it. But I think even more fundamentally, I would prefer that our government were a lot more cautious in the things they undertook. All these things are done with the best of intentions. I believe that. But as saying goes, the road to hell is paved with good intentions. So you have to be very careful about what it is that you’re trying to accomplish and whether you’re the correct entity to accomplish that. So I think higher education is a great example of that. Where they went off the rails is first of all thinking the government should be involved in that at all, number one. Number two, making the assumption that everybody should be encouraged to go to college. And then the financial part that we’ve already talked about comes into play, and the next thing, you have this debacle that we’ve wound up with 20 years later. The higher education system, as far as I could tell, was doing just fine before the government got involved.

Katie:

Well, and I guess it depends on how you define just fine. I don’t know how many people went to college, I guess is what I’m trying to say. I think the rate of college attendance has risen substantially. So I think you could ask the question of we don’t have the counterfactual to know how many people would’ve continued to go, but if you double college attendance, how has that impacted the economy? Do we have a more productive economy because of how much innovation or technology? Can you trace back to the fact that you have a unbalanced, more educated population? I don’t know.

JL Collins:

I would suspect that if your goal is simply more people going to college, then that goal was probably met. But I question whether that should be the goal. So I’m not sure that it, it’s an unalloyed good. If more people have gone to college, it may have maybe took them off the track that they would’ve been happier and more productive in might be a big reason that we have a shortage of all these tradespeople, which we do. Whenever the government gets involved in try and manipulate the economy for the best of reasons, there’s always unintended consequences, and so I’m not sure that’s a good thing. So you’ll go a long way unsuccessfully convincing me that the government’s involvement is a good thing.

Katie:

I’ll keep chipping away at you. Don’t worry. It’ll start getting some missives in the middle of the night. Yeah, JL, contend with this.

JL Collins:

Anything that keeps us talking, I’m in favor of, no matter how wrong you are.

Katie:

Brutal. Brutal. Okay. When we look at the last 15, 20, 25 years of stock market returns, I think we are in agreement that the market has ripped, that clearly this economy is doing something well, otherwise you would not be seeing a historically high average return we’ll say. And so I would maybe look at the path that we have taken with education, which has its flaws, but that could be driving some of these returns. The other half of that though, that I think is really interesting and a little bit ironic in the FI world is that we are actively engaged in discouraging consumerism in people and saying, hey, those are cheap fleeting thrills. They’re not worth going into debt over. You should save a 50% of your income.

But if everybody did that, I don’t think we’d be getting 12% returns per year. I’m curious if you’ve ever sat back and reflected on the funny nature of that bargain where it’s like if everybody read the simple path to wealth and took it to heart, I don’t know that we would see the returns that we see, and maybe that’s okay. Maybe we still would have a better economy. I actually would say that we probably would still live in a happier world even if we were getting returns that were half as high because consumerism was kind of routed out at the American psyche. But I’m curious if you’ve ever given that any thought.

JL Collins:

I don’t think it’s ever going to happen because you and I are sending this message out. While the rest of the world is sending out a very, very different message, our efforts are a teaspoon into the ocean of consumerism, which is promoted. But let’s say it did happen. That’s an interesting thing to speculate about. I’m not sure that our returns would be worse. I think they would just come from very different kinds of economic activities.

Right now, 70% of our economy I think is consumer driven, but there is nothing that I’m aware of that says that a 70% consumer driven economy is what you need to have a robust economy. I don’t think that’s true. There have been other economies in the world that have much higher savings rates, much lower consumerism, and that we’re very, very robust. So I think we’d be living in a different economy, but I would not be concerned that I wouldn’t be getting good returns.

Now, if you suddenly stripped away the consumerism from the economy, that would be a disaster. Just like if you do anything suddenly in an economy, it’s going to be a difficult thing to digest. But if in a perfect world, Katie, more and more people began listening to your program, and more and more people began reading my work, and more and more people began saying, you know what? Rather than spending my money on trinkets and trash, I could spend it on buying my freedom. Yeah, I think that would be a better world ultimately, and I think the economy would adjust just fine.

Katie:

I think your buddy Pete might have a blog post about this where he basically talks about that sort of transition and how it would actually, I’m paraphrasing his argument, but it would unleash untold amounts of innovation because you would no longer have people working meaningless jobs that they don’t care about in order to afford all to use your phrase, trinkets and trash, you’d have a little more time on your hands. You’d have more mental bandwidth back and you’d start pursuing things. It’s in some ways kind of like the socialist utopia where everyone’s needs are met and everyone has all the time in the world, and you have this ability to route your attention and energy and work toward things that you actually care about.

And I am of the mind that any human being that is that involved, passionate, engaged about the thing that they’re working on is going to be contributing at a far higher rate than if you’re working the fake email job that you hate plugging numbers into the spreadsheet. The economy is going to get way more out of you if you have the 50% savings rate and you can afford to do the work that you actually want to be doing,

JL Collins:

And you’re going to get way more out of the economy. And I hope that you haven’t missed the delicious irony that if we get to that utopia you described, it will be capitalism that gets us there. Capitalism is the engine that allows us to build wealth. It allows us to create the wealth so we become independent of work that is required of us as opposed to work that we really want to do. And I absolutely agree with you if more and more people we’re able to focus on the work that really spoke to them. But I think yes, the world would be a happier place because people able to do that, like you and I are probably happier than people who are forced to trade their time for work that is drudgery or just doesn’t inspire them. So yeah, I think absolutely that’s a great thing to aspire to, but it takes having financial resources to get there.

Katie:

Yeah, I don’t know that actually that irony is as delicious as we think it is. I think it was Karl Marx that says, capitalism is necessary, but what will eventually happen, capitalism will lead you to this place where everyone becomes the owners themselves. And once everyone is an owner, then you’re not doing capitalism anymore because capitalism is owners and workers, right?

JL Collins:

As you may have gathered, and our listeners may have gathered, I am a full-throated capitalist. I am a huge believer in capitalism, and the world is an enormously wealthy place far more than it has ever been in any time in history. And capitalism is the engine that drove that. Now, capitalism, the word has become a very loaded term. It’s become misused in my opinion in a lot of ways.

So what do I mean by capitalism? The actual definition that you will get if you look up the word, which is that private ownership of the means of production and property is allowed, that’s a capitalist system. That’s all capitalism means, is that you and I can own a car, we can own a house, we can own a business, we can own parts of a business through the stock market. So if you’re going to follow The Simple Path to Wealth, it requires capitalism because it requires a system that allows you to own things. And in the case of The Simple Path to Wealth, which is largely based on investing in equities, it requires a system that has a stock market, a robust stock market that trades fairly, that you can invest in. You can own parts of companies, and thanks to our St. Jack Bogle, you can now most easily do this through low cost index funds. That’s capitalism as I’m defining it.

When you hear people rant and rave about capitalism negatively, if you scratch that surface a little bit, what they’re really talking about is bad behavior on the part of people who are in the capitalist system. A crony capitalism is a great example of that, right? Monopolies are a great example of that. So capitalism doesn’t mean that it transforms people into saints, but it is the best engine of creating wealth and creating prosperity for everybody.

And I’ll make one final point on that. You frequently hear this trope, the rich get richer and the poor get poorer. Half of that is true. The rich do get richer, but so do the poorer; capitalism lifts everybody. I think the last five years in recent history, the lowest income percentile in this country has had the biggest improvement in their financial situation percentage wise, but it might be even a little more than that. Now, let’s be clear and fair about this. If you have $10,000 and I have $100,000 and we both go up by 10%, well, you’re better off by $1,000 and I’m better by $10,000. So clearly there is an advantage to having more money, but from a percentage point of view, it’s equivalent, but that’s one of the reasons people should build their wealth.

Katie:

It is true that wages at the lower end of the spectrum have risen faster than wages elsewhere on the income spectrum over the last couple of years. But much of that low wage growth was driven by government intervention and intention to change the fact that the income distribution had become so skewed. I think that this is an area where you and I will have to agree to disagree because I don’t think capitalism on its own, I don’t think the data would indicate that capitalism on its own creates things like a middle class that a lot of these things, the good parts of capitalism will say it’s certainly true that it is a tremendous wealth generation engine best way we have found to generate enormous amounts of wealth, but that it doesn’t really on its own do a very good job of distributing that wealth according to, in my mind, who’s actually producing the bulk of the value, meaning the Amazon warehouse worker who makes $15 an hour compared to Jeff Bezos. That, in my mind, I look at that and I go, that is not representative of the value that those respective individuals are bringing to the table. And so that’s why I say we might have to agree to disagree on this.

You mentioned that you have an ethical issue with the structure of funds like the Fidelity 0% stock market fund. There’s no expense ratio on this fund, and you note that the reason there’s no expense ratio is because people who are owners in other funds are footing the bill, right? This is a business decision. It’s being subsidized by other funds and that you have an ethical kind of qualm with that. How do you think that that’s different from the fact that the workers are the ones who are making us investors richer, that in the same sense, they’re the ones that are footing the bill for our investment returns with their labor? Because to me, these things seem very functionally similar.

JL Collins:

Well, they don’t seem that way to me at all, because the implication of what you’re saying is that the worker doesn’t get anything out of this relationship, and they do. They get an income. So you mentioned the warehouse worker on the Amazon warehouse, right? Without that Amazon warehouse, there would be no job for that worker. So if Jeff Bezos had not created Amazon, there would be no job for that worker to go to. Now you can argue whether the worker’s getting paid enough or not enough or what have you, and that’s a constant push and pull in the system we have.

But I look at Jeff Bezos, I don’t know what he’s worth now, but it’s an extraordinary amount of money. But he’s brought an extraordinary amount of value into the world by creating Amazon. And I hear people say, well, I mean, yes, but he couldn’t have done it without workers. Well, I mean, I suppose that’s true. You can’t make steel without iron ore. Obviously, you need raw materials to build anything, and labor is one of those materials at your disposal, which is why some countries, to your point earlier, who have educated workforces are better environments in which to build prosperous economies to build companies.

So you look at Jeff Bezos and I say, if Jeff were walking down the street and he saw on the sidewalk my entire net worth, and he took the time to bend over and pick it up, you could say, Jeff, big mistake, your time is better served by just leaving that on the ground; it’s not worth it because it’s my entire net worth, which provides me with a very, very good life, make no mistake, is a rounding error. Does that diminish me? Not at all. Not in the least. So I look at Jeff Bezos and say, one of the reasons I have this position that I have is I wrote The Simple Path to Wealth, and if it had not been for Amazon, that book never would’ve seen the light of day. There would’ve been no publisher, traditional publisher who would’ve taken that book on.

And so because Bezos created this company that allowed me to self-publish this book, which countless people have told me, have made their lives tremendously better, I mean the ripple effect of that one thing, because this man created a company is extraordinary. So if Jeff is worth $300 billion or whatever it’s up to now, that is a tiny fraction, a tiny fraction of the value that he’s brought into the world by creating Amazon, the jobs, the spinoff, and the investments, all of the entrepreneurs like myself who have been able to create a product that’s facilitated through that, it’s extraordinary.

Katie:

I think we are looking at the same reality and we’re looking at the same coin, and we’re just flipping the interpretation. You say the billionaires creating the jobs, and I look at it and say, the jobs are creating the billionaire. Both of these things are true.

JL Collins:

So does the iron ore create the steel?

Katie:

Yeah.

JL Collins:

It’s necessary for the steel, but it’s not what creates it. It’s a part of it. Yes, labor is absolutely necessary for most businesses. The post office was important for Amazon to exist. That’s kind of a given. I mean, roads were important. So yes, you raw materials, you need labor. You need infrastructure to build things.

But Amazon would not exist without Jeff Bezos. Those workers wouldn’t have created magically a company like Amazon. That’s not how it works. It takes the drive of entrepreneurs to create these things. I’m older than Bezos is. I could have looked around at the same landscape that he looked around at the same resources that were available, but I didn’t do that and neither did any other American or anybody else on the planet. And then to shepherd it through all of the decades, I remember when Amazon was first launched and was first a public company, the criticism was enormous because he kept not making a profit on the business.

He kept pouring all of the money back into the business to make it grow. And I think this was in the nineties, everybody on Wall Street, all the analysts and everything said, no, no, you got to stop doing that. You got to start throwing a profit. And he kept saying, Nope, I’m just going to keep building the business. That’s the reason that he’s worth three, four, whatever, how many billions of dollars he is worth.

Katie:

And isn’t that ironic though, because really the shareholders, the Wall Street analysts, they were the voice of capitalism in that scenario. They were saying the point is to profit, right? The point is to create excess value to profit and Bezos in saying, no, I’m not going to profit. I’m just going to keep pouring the money back in. I’m going to lose money to grow this larger. That in some ways is antithetical to at least in that period, the kind of principles of capitalism, which is that the point is to profit.

JL Collins:

Absolutely. No disagree completely. The entrepreneur, the builder of business, is the soul of capitalism. It’s kind of like Wall Street. Are the spectators of the sport sitting there and criticizing and as opposed to the players who are out in the field giving it their all and who are fighting the battle? No, it’s not Wall Street analysts and traders who are, they’re certainly part of our capitalist system, and it allows us to have these investments, but it’s the people building these businesses that are the soul of capitalism. That’s what it’s all about. That’s where it comes from.

Katie:

Agreed. And that’s why I think the fact that the Wall Street traders often benefit more from this system, that that’s where I’d go, see, something’s wrong here. I agree. The entrepreneurs, the workers, these are the people that are creating the value. And so the fact that the people that are creating the value are often walking away with less of it than the person in the ivory tower on Wall Street. Spectating

JL Collins:

There. I agree with you. First of all, I think that the entrepreneurs and the workers do benefit, and they do get paid. So I don’t think it’s like they’re being cheated out of something. But yes, Wall Street takes a lot of money for very little value. So on that score, we’re in complete agreement.

Katie:

Then maybe I should quit while I’m ahead.

JL Collins:

It’s one of the reasons that I’m always saying, you could take your arm and sweep the vast majority of all the products that Wall Street creates, all these financial instruments onto the floor because they are complex almost by design, So they can charge more fees for them, and all you really need are these low cost, broad-based index funds that Jack Bogle initially created. So yeah, I’m not a huge fan of Wall Street, but I’m a huge fan of entrepreneurs. I don’t take anything away from workers. They’re extraordinarily valuable to the necessary to process, but they don’t create the business they work for.

I think the only place we disagree, these businesses don’t magically rise up from the workforce. They rise up usually from the drive of a single individual who has a vision, and a lot of times those visions don’t work out. More businesses fail than succeed. Amazon’s an extraordinary story that’s very unusual, and that’s the risk that you take on as an entrepreneur. The chances are that you’re going to be left bleeding at the side of the road and laughed at. Of course, the good ones have that experience and they get up and they do it again, but that’s the soul of capitalism.

Katie:

I’m glad that you brought up financial products. Something that I hear from time to time when I speak with somebody who I am trying to talk into, either DIYing it or hiring a flat fee type person if they want help is, well, my advisor says that our incentives are aligned, my incentives are aligned with theirs because they make more money when I make more money. What do you say to that?

JL Collins:

Well, so first of all, I would say if they’re fee only, that’s not true, and that’s why if you’re going to use an advisor, you should only do one that is fee only because their incentives are not necessarily aligned with yours, and their fees are always going to be a drag on your returns.

So what’s an example where incentives are not aligned? Let’s suppose that you have an advisor and you go to that advisor and you have a mortgage of half a million dollars on your house, and you have enough money invested that you could pay off that mortgage. So you sit down with your advisor and you say, hey, here’s the interest rate I’m paying on my mortgage and here’s my portfolio which you’re managing, and I think I want to take half a million dollars out of the portfolio and pay off my mortgage.

Now, there are a lot of factors that go into whether that’s a good decision or not, but there is only one decision that’s better for your advisor, and that is that you keep the mortgage. Well, why? Because if you pay off the mortgage, that’s half a million dollars that your advisor is no longer drawing a fee on. So you would put your advisor in a very interesting position because objectively they might look at that scenario and say, the best thing for you is to pay off the mortgage. Maybe it’s not. Maybe it is, but it is never the best thing for the advisor. So if it’s the best thing for you, the advisor now has to take a step that hurts them financially. I suppose there are advisors who do that, but you’re asking a lot of a human being to make a decision that is going to take food out of the mouths of their children to do something that benefits you. So no, your incentives are not necessarily aligned.

Katie:

Another thing that I will often add is, yeah, it’s true that they make more when you make more, but that’s only half true because they also make money when you don’t make any money. They’re going to get their percent no matter what happens. So the incentives might be aligned, but they’re a little disproportionate in that sense.

You cover some math in the book that I think everyone should know. You write if just 0.59% of your money goes to management fees and you’re living on 4% of your investments, that’s 15% of your income that you’re spending on fees. And I will up the ante here because most people that I speak with are paying 1%, which is to my mind, industry average. Well, that’s now a full quarter of your income if you’re living on 4% of it. That meaningfully changes the game here, I think in a way that we don’t talk about as much when we’re having these conversations about the 4% guideline.

You remind us in the book that the 4% guideline has that 96% success rate over 30 years with the 50/50 portfolio, but that’s with no fees. If you add fees in, this is now a different equation. Now, the success rate drops by I think more than 10 percentage points. So they’re not nothing.

JL Collins:

Yeah, they’re huge. They’re huge, and 1% sounds like it’s nothing, but when you put it in the terms that you just very accurately put it in, and then also when you extrapolate out whether it’s 8% or 10% or whatever projected annual return you use and you take off that 1% every year, the end result is stunning. It can run up into hundreds of thousands of dollars.

Jack Bogle once famously said, performance comes and goes, but fees are forever. Fees are always going to be a drag, and that’s why if you’re going to use an advisor, my advice is to use one that is charges by the hour, right? The charges used specifically for the advice advisors don’t like that because it’s less money for them, and it’s also less comfortable for the customer because now the customer, instead of a fee that the customer never really sees, go out of the portfolio, now they’ve got to sit down and write a check to their advisor. My take on that is I understand why it’s uncomfortable for the customer and why it’s not good for the advisor, but I think a customer should be uncomfortable about getting for advice, and you should be keenly aware of what that advice is costing you.

Katie:

Definitely. So toward the end of the book, you write out this 10 year plan, and it’s framed in such a way—it’s like you’re almost giving it to your daughter as though she’s graduating from college again, and you’re really laying out for her. Here’s beat by beat what I would recommend you do, all of this advice is enabled by that 50% savings rate, which means because of the way these savings rate proportions and the math works, that she will reach financial independence in about 10 years, and I’ll be conservative and say, at the most, it’s probably going to take about 15. If you’re saving half your income and because of the age at which you graduate college, you basically say, okay, well, you’ve done this, right? You’re now in your thirties. You’ve saved aggressively. You can now live off 4% of your investments if your job were to go away tomorrow. And so now’s the time that if you want to, you can do things like expand your lifestyle, begin donating, have children buy a house, right? I want to hear more about how you arrived at that approach and that suggested order of operations, because I think it does fly in the face of the kind of classic life advice, which is you graduate, you get married, you try to buy the house as quickly as possible, and then you have kids, and then maybe later, then you’ll start worrying about your financial future.

JL Collins:

The 50% savings rate, first of all, was just what I arbitrarily chose when I started working. And so I thought, well, my first job paid me $10,000 a year. I knew I could live on $5,000. I knew people who were doing that, it was a whole lot more than I was living on in college. But my lifestyle expanded as my income expanded because when I was making $20,000 a year, well, now I’m investing $10k, but I’m also, I’ve doubled my living, and that went up when I was making $50k and $100k. It was the same kind of, so my lifestyle expanded pretty comfortably.

I just think that if you put financial independence as your first goal, everything that follows after that becomes easier. It’s a lot easier, even if you’re not fully financially independent. And to be clear wasn’t when I bought my first house or when my daughter was born, but I was well on the way. So I was in a much more comfortable position to do those things. And yes, that’s completely counter to the typical advice you give, but that’s why you read The Simple Path to Wealth, to hear a different perspective. I frequently said, I don’t expect everybody to follow my recommendations. In fact, I think people on this path are unicorns. Very few people are going to actually do what it takes to become financially independent, and I guess I’m okay with that.

I think the real tragedy is if you come to the end of your life and you’ve struggled and you’ve carried debt, and you’ve worked at jobs that are soul crushing or even just don’t give you satisfaction, and then you find out you could have not bought as many trinkets, then you find out you could have taken some of that income you earned and bought assets and bought your freedom in the process. That’s tragic. So if people read my book at a young age, and for those for whom it resonates and they go on the path, they’re going to have a rich free life if it doesn’t resonate, at least it was an option.

Katie:

I want to close today with a quote that I think about sometimes from my friend Caro, who came on the show last year. We were talking about the expense of childcare and basically saving for childcare before you have children, and she said something that always stuck with me, which I think applies here as well, which was, it is so important to me to spend my life doing things that matter to me, and because of that, I have to be financially vigilant to ensure that I am able to do that.

And I think that that’s been something that has been the unifying theme, and even when I have strayed on my journey, kind of the center that I come back to, which is keeping things in perspective and remembering what really matters to me and the creative risks that I want to be able to take and how I want to be able to take time off when I feel burnt out, and I appreciate that as well in the book.

JL Collins:

Yeah, that’s very well said on the part of your friend, and not everybody thinks that way, and that’s okay. It depends on what you value, but the important thing to me is that there is a way to achieve what we’re talking about. There is this other thing that is not commonly presented to you in our culture.

Katie:

JL Collins, thank you so much for joining me again, for subjecting yourself to all my probing questions. It was, as always, such a pleasure.

JL Collins:

I love your probing questions. Our conversations, Katie, are some of my favorites, so thank you for having me back.

Katie:

Thank you for saying that. And everybody, if you have not read The Simple Path to Wealth yet, I mean when I say there’s no better time than right now to grab a copy, especially now that it’s been rereleased with some updated numbers.

That is all for this week. We will see you in two weeks for our next episode. 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 the—I’m trying to think of a better adjective, hold on. Okay. Okay, hold on. Sorry, Nick. Ready? With our audio engineering and sound design from the incomparable Nick Torres. Devin Emery is president of Morning Brew Content and additional fact checking comes from Scott Wilson.