J.L. Collins discusses achieving financial independence through frugality and index funds
From Nasdaq: 2025-06-17 15:16:00
J.L. Collins, author of The Simple Path to Wealth, discusses the challenges and appeal of being a super-saver, the 4% rule, and the value of “self-cleansing” index funds for investors in a podcast with Motley Fool’s Robert Brokamp. Learn more about where to invest $1,000 and catch full episodes of the podcast on The Motley Fool’s website.
Collins talks about achieving financial independence through a certain level of wealth that exceeds living expenses, making everything essentially free. He shares insights on why financial independence goes beyond early retirement, lessons from market crashes, and the concept of “FU money” as a stepping stone to full financial independence by saving 50% of income. A 50% savings rate can lead to financial independence. Many Americans save less than 4%, but living below your means is achievable. Starting early is easier, but adjusting later in life requires significant lifestyle changes. Financial independence means having options, but many prioritize material possessions over saving. Saving is about buying freedom, not denying yourself. By choosing to save more, you’re buying independence and optionality, not depriving yourself of luxuries. The simple path to wealth leads to financial freedom, where everything essentially becomes free. J.L. Collins discusses achieving financial independence by reaching a level of wealth where money exceeds what you need to live on. He emphasizes the importance of frugality and making choices based on what brings joy, not just because you can afford it. The goal is to have the optionality to do whatever you want.
Mr. Money Mustache and J.L. Collins are key figures in the financial independence movement. Collins started his blog in 2011, focusing on financial independence rather than early retirement. The transition to FIRE (Financial Independence, Retire Early) reflects a desire for freedom and optionality to pursue activities that bring joy, rather than complete retirement.
Financial independence allows individuals to choose how they spend their time, whether it’s continuing to work or pursuing other passions. Collins encourages investing in Vanguard’s Total Stock Market Index Fund (VTSAX) as a simple way to grow wealth. Achieving financial independence provides the autonomy to engage in activities that bring fulfillment and joy, rather than being tied to a job for financial security. Investors wonder if they can use total stock market index funds from brokerage firms like Schwab or Fidelity instead of VTSAX. Answer: Yes, they are essentially the same. S&P 500 funds are also good options, tracking closely to total stock market funds. ETF versions like VTI are also acceptable alternatives.
Index funds are difficult to beat, with 85-90% of actively managed funds underperforming. While stock picking can work, most people are better off with index funds. Even if investing in actively managed funds helped achieve financial independence, some eventually switch to index funds for better returns with less effort.
Index funds consistently outperform actively managed funds, with less than 1% doing so over 30 years. While stock picking can be rewarding, the return on effort may not be worth it compared to investing in index funds. It took time for some investors to realize the benefits of index funds over stock picking. J.L. Collins explains the concept of self-cleansing in index funds, using the example of the Nifty 50 companies from the late 60s and 70s. He highlights how index funds like VTSAX allow for diversification and automatic reallocation of funds as companies rise and fall in the market.
Collins emphasizes the advantage of index funds in eliminating the need to predict market trends, citing tech dominance as an example. He notes that the self-cleansing process ensures that successful companies rise to the top while underperformers fade away, benefiting investors without the need for active management.
Addressing concerns about market downturns, Collins points out that historical examples like the Great Depression may not tell the whole story. He argues that long-term investors who continue to contribute during market lows can benefit from deflationary periods and increased spending power, mitigating losses from market crashes. During the 1930s, the market was volatile, but those who continued to buy shares at bargain prices saw great returns when the market eventually recovered. In more recent times, investing during market crashes like in 2000 and 2008, allowed for accumulation of shares at low prices, leading to significant gains in later years.
As you near retirement, consider a wealth preservation portfolio. Bonds can help smooth the volatility of stocks, with the percentage of bonds in your portfolio depending on your risk tolerance. While bonds can drag on performance, a balance of stocks and bonds is crucial for long-term portfolio growth.
The 4% rule, popularized by the Trinity study and Bill Bengen, serves as a guideline for safe withdrawal rates in retirement. By multiplying your annual expenses by 25, you can determine the amount needed to be invested for financial independence. This rule provides a conservative approach to managing withdrawals for a sustainable retirement. The debate over the 4% withdrawal rate for retirement is ongoing, but the Trinity study suggests adjusting for inflation and staying flexible. While 4% may run out of money in 30 years, in most cases, the portfolio grows substantially. 5% withdrawal rate has an 86% success rate, offering financial freedom and flexibility.
Safe withdrawal research has shown that following the 4% rule historically results in more money than when retirement started. Being flexible with your approach is crucial, as the average withdrawal rate is around 6-7%. Worrying about the future can be a waste of time, focus on building wealth and financial security instead.
Personal experiences and family history can shape financial attitudes. For J.L. Collins, seeing his father’s health decline due to smoking and its impact on their financial stability scarred him. The simple path to wealth can help mitigate financial risks and provide peace of mind. Case studies in the new edition of the book highlight real-life success stories. Tom experienced a series of financial setbacks, including costly divorces and a financial manager who depleted his wealth. Despite losing everything and becoming unemployable at 62, he remains the happiest person with a positive attitude. Working at the Henry Ford Museum, he leads a fulfilling life and found love in a new relationship.
Many in the financial independence community fear losing their wealth with one misstep, but Tom’s story shows that happiness doesn’t always rely on financial abundance. Reflect on the importance of money and find comfort in knowing that resilience and a positive mindset can lead to a fulfilling life, even with limited financial resources.
In a conversation with Robert Brokamp, J.L. Collins shares insights on financial independence and happiness. They discuss the significance of money, achieving financial independence, and finding contentment beyond financial wealth. The Motley Fool podcast provides valuable insights for listeners seeking financial independence and happiness.
Ricky Mulvey and Robert Brokamp disclose their stock positions, with Robert holding positions in Tesla and Vanguard Index Funds. The Motley Fool has positions in and recommends Tesla, emphasizing the importance of transparency in financial discussions. Listeners are advised not to make investment decisions solely based on the podcast and are encouraged to conduct thorough research.
Read more at Nasdaq: Author J.L. Collins Talks About Achieving Financial Independence