Ep 476: The Simple Path to Wealth: JL Collins on Investing, Index Funds, and Financial Freedom

Summary

HerMoney with Jean Chatzky - Episode 476: The Simple Path to Wealth with JL Collins

Release Date: May 21, 2025

In this insightful episode of HerMoney with Jean Chatzky, financial expert JL Collins, often hailed as the "Godfather of Financial Independence," joins Jean to discuss his acclaimed philosophy on achieving financial freedom through simple, effective investing strategies. Collins, the author of the seminal book The Simple Path to Wealth, delves into timeless principles that remain relevant amidst today's economic challenges, including rising living costs and market volatility.

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Redefining Financial Independence

Jean Chatzky opens the conversation by exploring the evolving landscape of the FIRE (Financial Independence, Retire Early) movement. She questions whether traditional strategies of saving diligently, investing in low-cost index funds, and avoiding debt are still sufficient in an era marked by economic uncertainty.

JL Collins responds by challenging the notion that financial independence requires significant sacrifice. At [05:45], he states:

“You referred to following this path to financial independence as requiring sacrifice. I don't see it that way at all... It's simply choosing to spend my money on the single most important thing to me and that's having my financial freedom.”

Collins emphasizes that saving and investing should be viewed as joyful acts of prioritizing one’s freedom, rather than burdensome sacrifices.

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Defining Freedom in Financial Terms

Jean probes deeper into what "freedom" truly means in the context of financial independence. Collins clarifies that financial freedom is about having the choice over how to spend one's time, not necessarily about abandoning work altogether.

At [07:09], Collins explains:

“Freedom means that you get to choose how you want to spend your time. Just because you have financial independence doesn't mean you have to quit your job. It just means you don't have to work for money anymore.”

This perspective allows individuals to continue working in roles they love or to pursue new passions without the financial constraints that typically drive career decisions.

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Navigating Rising Costs and Savings Rates

Addressing concerns about rising costs of living—such as egg prices climbing to $10 a dozen—Jean asks if traditional FIRE calculations still hold. Collins reassures listeners by highlighting flexibility and adaptability in financial planning.

At [11:56], he shares:

“If you set out on this path to become financially independent... you will make progress along the line and every step of the way you become a little bit stronger.”

He underscores that even if one cannot save the ideal 50% of income, any amount saved contributes significantly towards financial resilience and growth.

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Investment Strategies and Market Volatility

A key segment of the discussion focuses on Collins's investment approach, which centers on low-cost, broad-based index funds. He advocates for simplicity and consistency, particularly through periods of market volatility.

At [25:11], Collins analogizes market downturns to hurricanes:

“These are perfectly normal. It’s like hurricanes in Florida. If you panic and run out in the middle of them, they’re very, very dangerous. But if you hunker down, they blow over and the sun comes out...”

He advises maintaining a disciplined investment strategy, emphasizing that enduring market fluctuations is crucial for long-term wealth accumulation.

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Asset Allocation and Financial Planning

The conversation transitions to practical advice on asset allocation. Collins recommends maintaining a minimum of 50% in stocks to harness growth potential, adjusting the balance with bonds based on individual financial needs and risk tolerance.

At [36:28], he advises:

“Your asset allocation to stocks should never be below 50%... the Total Stock Market index fund has 3,600 companies. I’m 100% in stocks. But when you step away from paid work, you tilt more heavily towards bonds to manage volatility.”

This balanced approach ensures that portfolios remain robust and capable of weathering economic storms while still pursuing growth.

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Adapting the Simple Path to Wealth

Jean inquires about adapting Collins's methodology for those who cannot adhere to extreme savings rates. Collins encourages starting with any level of saving, likening it to building strength through regular exercise.

At [20:31], he states:

“Every little bit helps... If you’re saving 5 or 10%, it might not get you to financial independence at a young age, but it will make you a little bit stronger... it’s a journey.”

He emphasizes that incremental progress is valuable and that financial resilience can be built regardless of the starting point.

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Final Thoughts and Resources

As the episode concludes, Collins directs listeners to his blog, jlcollinsnh.com, for more insights and updates on his work. Jean appreciates the simplicity and effectiveness of Collins's strategies, reaffirming that a straightforward, disciplined approach to investing can lead to substantial financial gains without the overwhelm of complex financial products.

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Key Takeaways:

• Financial Independence is About Choice: It's not merely about retiring early but having the freedom to choose how to live your life without financial constraints.

• Simplicity in Investing: Focus on low-cost, broad-based index funds to build wealth steadily and reliably.

• Adaptability is Crucial: Adjust your savings and investment strategies based on personal circumstances and changing economic conditions.

• Endure Market Volatility: Maintain a disciplined investment approach during market downturns to capitalize on long-term growth opportunities.

• Incremental Progress Matters: Even modest savings rates contribute to financial strength and resilience over time.

For women seeking tailored financial advice and strategies to achieve financial freedom, this episode offers both inspiration and practical guidance, reinforcing that financial well-being is attainable through simple, consistent actions.

Transcript

[JL Collins]

And what people should understand is if you're looking at this and you're thinking, wow, this is enormously complex, you're not wrong. Most of the stuff that Wall street sells is enormously complex. Classically, some of it is so complex they don't understand it themselves. Right? That's the bad news. The good news is you can put your arm on the table and sweep all of that off onto the floor. Because we don't need any of it.

[Jean Chatsky]

Hey everyone, thank you so much for join us today on HerMoney. I'm Jean Chatsky and if you have been thinking about financial independence, about the sacrifices it takes, whether it's realistic, how to get there faster, you are not alone. The FIRE movement and Fire, for those of you who are not familiar, stands for financial independence. Retire Early. The movement has just exploded over the last decade with the Fire Reddit community alone now topping 700,000 members. But in a world of rising prices and stock market swings, is the classic strategy of spending less than you earn, maxing out your investments in low cost funds and avoiding debt still enough to get you there? My guest today says it absolutely is. JL Collins is often called the Godfather of financial independence. He's with me today to share why the Simple Path to Fire is still the smartest one. And his book the Simple Path to Wealth became an instant classic when it came out in 2016. Now he's back with a brand new updated edition for 2025. He's got fresh takes on everything from meme stocks to inflation and and a punch list of actionable steps to help you get started. Today. We're going to take a break. We'll be right back. Hey everyone, it's Jean Chatky. And this spring I have been all about refreshing my routines. Closet cleanout check, budget rebalancing, you betcha. Meal Prep. That's where EveryPlate comes in. With EveryPlate, I'm getting vibrant, healthy meals like the Banh Mi style chicken lettuce wrap with pickled veggies and Sriracha mayo. It's light, it's flavorful. It's exactly the kind of boost that my week needed. I spend less, eat better, and most importantly in my house, avoid the dinner rut that I fall into so often. Thanks to their rotating weekly menu, every meal takes 30 minutes or less. So what are you waiting for? Dig into these flavor packed meals your household will. New customers can enjoy this special offer of only $1.99ameal. Go to everyplate.com podcast and use code HERMONEY199 to get started. It's applied as a discount on the first box. Limited time only. You know, I have learned a lot of lessons from running, about pacing and resilience. And yes, getting older. My hips are very honest with me these days. The main lesson I've learned I our bodies are capable of some pretty incredible things, but they also need a little more support as we rack up the miles and the birthdays. Which is why I've been loving Ancient Nutrition's multi collagen advanced lean. Whether I'm lacing up for a quick 5k or just trying to keep up with life, this collagen supplement has been part of my routine right up there with my morning coffee. And collagen is not just about beauty. It also promotes fat loss, it helps build lean muscle, and it supports joints. Right now, Ancient Nutrition is offering 25% off your first order when you go to ancientnutrition.comhermoney that's ancientnutrition.comhermoney for 25% off your first order. Ancientnutrition.comhermoney we are back with Jael Collins talking about the relaunch of the Simple Path to Wealth. A classic. Jael, welcome. I can't believe we were saying this before we started. I can't believe that we are just meeting.

[JL Collins]

I know. First of all, thank you for having me. It's a real honor to be here with you. And yeah, it's kind of stunning. You and I have sort of walk down the tracks in parallel and never having our paths actually cross, which is pretty remarkable. But I'm glad they did today.

[Jean Chatsky]

I am as well. I also can't tell you the number of times that your book has popped up in our Facebook group.

[JL Collins]

Oh, I'm so pleased to hear that.

[Jean Chatsky]

Yeah, often we'll have members. We run a Facebook group, 20,000 Women Strong. And often members will say, hey, what are your favorite books? What are the must read books? Simple Path to Wealth shows up every every time. The Hermoney podcast launched right about the time that your book launched. And we have seen a lot of changes in the world and in the economy. What's the biggest shift that you've seen in how people approach money?

[JL Collins]

Well, I think first of all, as you pointed out earlier, we just met. I have to say, Gene, in your introductory remarks, as kind as they were, you've already rubbed my fur the wrong way.

[Jean Chatsky]

Oh no, what did I do?

[JL Collins]

You referred to following this path to financial independence as requiring sacrifice. I don't see it that way at all. So. And hopefully this also answers your question. To me, I always saved a very large amount of my money and invested it because I want it to acquire what I thought of in those days as FU money, and that was freedom. So this was not a sacrifice. This was simply choosing to spend my money on the single most important thing to me and that's having my financial freedom. I can't imagine anything I would rather spend my money on. So far from a sacrifice, it was an absolute joy. It was probably like some people feel about buying a Ferrari. You know, it's just, it's supposed, it's where your priorities lie. So that's kind of how I'd like people to reframe it. If you follow this path, you should only follow it. If buying your freedom is a highly appealing way to spend your money, and if it is, it should be as gratifying as any other highly appealing way to spend your money.

[Jean Chatsky]

What does it mean to you when you say buying your freedom?

[JL Collins]

So you buy your freedom by first of all setting aside some of your income, some of the money typically that you get from wages, from being paid for your time and effort. And just like you would buy a car or a house, you just divert it to the thing you want to buy. And the way you buy your freedom is by buying assets. And the specific assets, and you already alluded to this, that I recommend, are broad based, low cost index funds. Those are the safest, most secure, long term way to acquire wealth. And ultimately that's how you're buying your freedom.

[Jean Chatsky]

I guess my question is actually more around the definition of freedom. Does freedom mean freedom from work? Does freedom mean freedom from work you don't want to do? Does freedom mean something else? Else or different things to different people? And what does it mean to you?

[JL Collins]

Yeah, so freedom means that you get to choose how you want to spend your time. It's kind of amusing to me. I've met a lot of people in the years I've been writing and talking about this, and some of whom who've achieved financial independence and they'll say to me kind of sadly, but I don't want to quit my job. I love my work. And it's like, no, you're missing the point. Just because you have financial independence doesn't mean you have to quit your job. It just means you don't have to work for money anymore. If you're enjoying what you do, then by all means continue to do it. If you're not enjoying what you were doing to get you to this place, then you can go on and do something else. I think it's also a misnomer that the kind of people who are going to be able to accomplish this goal are not hardwired to sit on a beach and drink pina coladas, maybe for the first few weeks or even few months, but they're going to want to go out and do interesting, active things in the next chapter of their life. Or if they're really enjoying the current work they're doing, they're going to want to continue to do that. So the freedom just means that you get to choose to do what you wish with your time and by extension, with your life. You're not required to do something simply to put food on the table and pay the rent.

[Jean Chatsky]

There are a lot of equations in fire math, Right. When we talk about fire math, we talk about sometimes accumulating 25 times your annual expenses. Right. And there are other ways to look at it as well. Can we talk about whether it still works when eggs are $10 a dozen? I mean, one of our producers who lives in Manhattan actually just paid $12 a dozen. And I'm wondering, based on how wages have increased versus how costs have increased, whether people can be expected to save at such a hefty rate when so much of what they earn. And it's not just eggs, right? It's. It's health insurance premiums and auto insurance. How much can people be expected to save when so much of their money feels like it's going into survival?

[JL Collins]

Yeah, so a couple of things. I mean, I have another book out called Pathfinders and Pathfinders is filled with about 100 stories of people from all over the world who have read the book, embraced the simple path, and have implemented it in their own unique situations. And I guarantee you that anybody listening to our conversation today will find stories in there from people who started from much more humble beginnings, much more significant challenges than most of the people who are able to listen to a podcast like this. So, first of all, I dispute the idea that you can't figure out a way to arrange your life in order to buy if this is the most important thing for you to spend your money on. It's just like if you wanted to drive a big truck, almost no matter what your income, you see people driving big trucks, you figure out how to buy what's most important to you. Second thing I'd point out is that this path is going to put you in broad based, low cost stock index funds to build your wealth. Stocks are probably the single best and most reliable way to keep pace with inflation. And inflation's a real thing and certainly has been a real thing in the last couple of years.

[Jean Chatsky]

Yeah.

[JL Collins]

So if you want to deal with inflation, this is a major step you're going to want to take just for that reason alone. And the final thing I'd say, and you mentioned there are certain metrics about what it means to be financially independent. And the 25 times whatever your annual spend is a classic and that translates into 4% of the amount you have invested. So that's kind of the classic formula and it's a great guideline. But one of my all time favorite quotes, and it's the first quote in the book in both editions, comes from a guy named Leo Burnett who ran an ad agency out of Chicago back in the day. And the quote is, if 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 set out on this path to become financially independent, meaning you never have to work again, maybe you won't get there fully, but you're going to make progress along the line and every step of the way you become a little bit stronger. This is what I always thought of as the fu money phase. Since I go to the gym, every step you take, you become a little financially stronger. And then ultimately, if you do it long enough, you hit that 4%, 25 times magic formula.

[Jean Chatsky]

I think that's such a good analogy. I went to the gym this morning, definitely the oldest person there for my strength class. And they were very focused today. It's always different, but they're very focused today on we're doing back squats and everybody had these very, very big weights on their bar and lifting them up. And my weights were not quite as big as everybody else's. And I said to the trainer, I said, God, I feel like a wimp. And he's like, no, this is ten pounds more than you did the last time. And so it's what is good for you, the progress that you your making. And that's how we build optimism and resilience and all of the other important factors that go into living this life.

[JL Collins]

I love the way you expanded that analogy because swinging it back into the financial world, what represents being financially independent, just like how much weight you can bench press or squat with is different for every individual. And so it's not a raw amount of money that gets you there, it's an amount of money against what you spend. So I've known People who have made millions of dollars a year, literally, but they have structured a lifestyle that absorbs all of that money and tragically, sometimes a little more. I have a very good friend from high school who's never made more than $50,000 a year, raised a family, put a couple of kids through college, and he's achieved it because the total amount, if you're at that level, is much slower and easier to get to. Just like the amount of weight you can lift.

[Jean Chatsky]

For the people in our audience who are not familiar with you and are not familiar with the simple path to Wealth, I want to talk about the principles that that sort of underlie your body of work. We've talked about indexing, but I'd like to expand on that a little bit. But let's back up and start with the savings rate. When you haven't been living a life where you are super saving, how do you flip the switch?

[JL Collins]

Yeah, that's challenging because I did it from the very beginning, and I get. I wrote the book for my daughter, who had the advantage of implementing it from the very beginning. The advantage of that is neither one of us had built a lifestyle that we had to unravel in order to implement this. And that's very hard in ways that I can only imagine I haven't actually experienced. Typically, a lot of my readers, of course, are not at the beginning of their journey. They're somewhere in the middle of it. Again, this is a matter of thinking about how you want to spend your money, what's most valuable to you. And just like somebody who said, you know, I'm really tired of renting, I want to own a house. Well, then you're going to figure out how to set aside the money for the down payment and how to set aside the money you're going to need to furnish it and to probably update it in ways that you want it to do. There's no magic formula for doing that. It's a matter of what your motivation is. And if your motivation isn't to be financially independent, if you don't value your financial freedom the way I do, then you're probably not going to be able to unwind those things. I mean, there's nobody you talk to. If you say to them, would you like to be financially independent? Is going to say no, right? Yeah, absolutely. I'm going to want that. But then if you start talking about the steps you're going to need to take, then you're going to hear things. At least I've heard things like, well, I kind of like those two least luxury cars in my driveway. And this big house we have is kind of essential. I could never see living other than this neighborhood with this many square feet. And I call it the tyranny of must. Haves. People get enthusiastic when they first hear about it and they start following this path. They're like, why everybody ought to do this. This is going to sweep the world. What's going to happen when nobody has to work anymore? And I'm like, don't worry about it. Because people on this path are always going to be unicorns because most people are not going to be willing to take the steps to get there. It's harsh, but true.

[Jean Chatsky]

Sorry, it is harsh. And I think, look, I think all of money is personal, right? It's all personal decisions that we make in line with our own values and our own priorities. And I think, I wonder if there are. For the people who maybe think they don't want to choose to save 50% and can deal with the occasional car payment, I'm wondering what lessons they can take from this methodology to help make their life, if not completely free tomorrow or in five years, a little bit better along the way. Think about that for a sec. We're going to take a break. We'll be right back.

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[Jean Chatsky]

We are back with JL Collins talking about the relaunch of the Simple Path to Wealth, a classic. Before the break, I asked because we acknowledge this is a tough road. This is not a road that everybody's going to be able to do where you save half your income and maybe you choose to live someplace cheaper or avoid spending money on certain things. What's the in between? What are the things that those of us, perhaps who are saving 15 to 20% of our money toward retirement can take from this methodology?

[JL Collins]

So, first of all, I would applaud anybody who's saving anything, right? I think that's great. And I get pushback on this 50% thing where people say, well, nobody can humanly do that. That's just not possible. You're crazy. But I also get pushback from the other side, from people saying 50%. That's nothing. I'm doing 60, 70, 80%. So obviously, the greater your percentage, the sooner you will get there. But every little bit helps. And going back to that quote, if you reach for a star, you might not get one, but you won't come up with a handful of mud. So if you're saving 5 or 10%, it might not get you to financial independence at a young age, but it will make you physically stronger again. It's like going to the gym, right? If you want to look like Arnold Schwarzenegger, you're going to be spending a lot of your free time in the gym. You're going to have to work extraordinarily hard to get there. But if you just want to be a little bit healthier, a little less likely to die of a heart attack, if you want to shed a couple of pounds, then you can get there with much more modest kinds of efforts. So it really depends on your goal. Again, I think too many people think of it as a light switch. Either I am financially independent or I'm not. And it's a journey. And every step along the journey, you get a little stronger.

[Jean Chatsky]

And it's a journey that can sometimes go off track, go wayward. You're one of the pioneers of the fire movement. So is Mr. Money Mustache. So is Sam Dojan, who writes the Financial Samurai blog. And he retired in 2012 with $3 million. A few years ago, he told Fortune magazine he needed to return to work to afford his kids college education. Sometimes we get on a path and we have to adapt. And I'm wondering if you have ever had to adapt or what you say to people who follow your philosophy that find that they need to.

[JL Collins]

One of my good friends in this space is a guy named Brandon who writes the Mad Scientist. He doesn't write too much anymore, but he was extraordinarily dedicated to achieving financial independence. His savings rate was something well beyond 50% and he got there. But he looks back on it now and says he wishes he had taken it more slowly, that he'd enjoyed the journey a little more, had saved a little less and spent a little more. So I think that's definitely worth considering. I did an interview just yesterday with a woman by the name of Gillian Johnsrud who is publishing a book called Retire Often about taking mini retirements through your career. And that's actually how I did my career back in the day when it was sort of unheard of. And one of her questions was what about the financial setback of taking six months off and not having an income if you're going to financial independence? And it's like, well, yeah, but it makes your life better. So absolutely you can add some spice. This is not and should not be a path of deprivation. Now if all you do is take time off, then you're obviously not only going to be not financially independent, you're not going to pay the rent, but certainly you can add some spice to your life along the way and should.

[Jean Chatsky]

We're gonna have to get your friend Jillian on this show because I think many retirements, they're a trend that millennials are really many of them buying into and enjoying. And I'd like to learn more about them going back to your daughter and to the markets specifically. You told her that during her 60 odd years of being an investor she can expect to see it 2008 level financial meltdown every quarter century or so. That's two or three of these economic end of the world events coming her way. I gotta say, it's not felt like 2008 lately, but the volatility has been, at least in my mind, pretty striking. What do you say to her about and all investors about managing through these events and how does having a portfolio of index funds help?

[JL Collins]

I love that question. And I actually just put a. I rarely post on my blog anymore, but I actually put a post up yesterday or the day before addressing exactly this. And the title of the post is something Effective. The single most important thing that determines whether the market leaves you bleeding on the side of the road or makes you wealthy. And that thing is what you do when the market drops. So the key that people need to understand is this is a perfectly natural part of the process. I've been investing for 50 years. In that time there have been three of these meltdowns. The first one was in 74. The next one, long time was in 2000, the tech crash. And then of course, we had the 0809 debacle. So those two came pretty close on the heels of each other. But Also during that 50 years, we had multiple bear markets, which are defined as going down 20% or more, and of course, even more corrections. And you need to understand that you can't predict these things. You can't predict when they're going to start. You also can't predict how deep they're going to go. I mean, as we're recording this right now, the market, through all the turmoil of the new presidency and the tariffs, is now actually in positive territory. I know a month ago nobody, including me, would have predicted that. Right. We also don't know where it's going to go from here. I mean, it could turn around and actually go into recession territory and into a deep bear or go on to post new heights. Nobody knows what it's going to do. You can't predict them. You cannot, as Warren Buffett once said, try to dance in and out of the market. That's the way you lose money. You have to learn how to accept them and endure them and understand that these are temporary. And actually, if you're accumulating your wealth that lost decade between 2000 and 2010, if you'd stayed on the simple path to wealth, which means you're buying shares in your mutual fund, you would have had a decade of acquiring shares at bargain prices for the next 15 year bull market run. So you need to learn that these things, these market declines are perfectly normal. And actually they can work to your advantage. You need to learn to love them. So it's like hurricanes in Florida. If you live in Florida, you have to assume you're going to experience a hurricane probably more than once. And hurricanes are very scary. If you panic and run out in the middle of them, they're very, very dangerous. But if you hunker down, they blow over and the sun comes out and the birds sing in the trees again, and all is right once again with the world. So these are not things to be concerned about. Believe me, I understand. That is easier said than done. I had my own moment of panic at 87 on Black Monday.

[Jean Chatsky]

I was at my desk on Black Monday. It was a boy. It was a difficult, difficult day. I want to just get specific about the tools that you use for investing because I know that my listeners like the details. We've talked about index funds, but basically you rely on the Vanguard Total Stock Market Index Fund, the Vanguard Total Bond Market Index Fund, and Cash and Vanguard's Cash Reserves Federal Money Market Fund. Can we talk about what each of them are good for? And as you go through the stages of life, how do you shift your allocations so that they work best for you?

[JL Collins]

Sure. So let me start by saying that the biggest compliment I get about my book is when people say to me, you know, I've tried to understand this financial stuff and it always just seemed too complicated. I've tried to read other books and it just didn't work for me. And what I realized reading the Simple Path to Wealth is how simple it can be. And what people should understand is if you're looking at this and you're thinking, wow, this is enormously complex, you're not wrong. Most of the stuff that Wall street sells is enormously complex. Classically, some of it is so complex they don't understand it themselves. Right? That's the bad news. The good news is you could put your arm on the table and sweep all of that off onto the floor because we don't need any of it. We just need the key healthy foods, so to speak, that are going to be left, which are low cost, broad based index funds. So you correctly identified that. I personally am invested in three things. VTSAX is Vanguard's total Stock market index fund. Question I get all the time is, well, can I buy vti? Well, VTI is Vanguard's ETF Exchange traded fund version of vtsax. It is exactly the same portfolio. So yes, if you prefer an etf, by all means buy vti. Let's take it a step further. Let's suppose you say, you know, I've bid with Fidelity or T. Rowe Price or Schwab, and I kind of like those folks and I'd prefer to stay there. They seem to have broad based, low cost, total stock market index funds. Is that okay? Yes, it's okay. I have reasons for preferring Vanguard. We can get in those weeds if you want. But a low cost, broad based index fund, Total Stock Market Fund is the same essentially from Vanguard, Fidelity, Schwab. So by all means, same thing is true of their ETF versions. Let's take it one step further. Another question I get all the time is, you know, I've been looking for a total stock market index fund in my 401 and they're just. There aren't any. All I can find is this S&P 500 fund. Is that okay? The answer to that question is yes. And it's okay whether it's Vanguard's version or Fidelity's or Schwab's or whatever. Why do I say that? Well, these index funds are cap weighted. And what that means is the largest, most successful companies are a bigger percentage of the portfolio. So in essence, the s and P500, which are the 500 largest companies in the United States, make up, I want to say 80, maybe even 85% of the total stock market index fund. And if you track their performance over time together, it's remarkable how closely they track one another. And by the way, Jack Bogle, who created these things and started Vanguard, the Index 500 was the first index fund he created and that's the one he held himself all the same. So it's good enough for Jack Bogle, it's good enough for all of us mere mortals. So then the question becomes, all right, JL if it doesn't matter, why do you go into the social stock market index fund? And my response to that is, well, it's the same reason I put Tabasco on my eggs. I just like the little extra spice of some small and mid cap companies. Right. But you can feel comfortable Total Stock Market now beyond that then, because now there's index funds for everything. There are index funds for sectors you could buy, precious metals, index funds you could buy. I'm not interested in any of that. That's why the caveat is broad based, which means Total Stock market S&P 500.

[Jean Chatsky]

Where do bonds come in?

[JL Collins]

Ah, thank you. I forgot that part of your question. So in my world, there are two phases and as we talked about earlier, young people, like my daughter is a good example, are now stepping away from work for extended period of time. So this is not necessarily age related, but I think of them as the wealth accumulation phase. This is when you are trading your time and effort for money. You have earned income. And as we've already discussed, you're going to channel some of that to buy what's most important to you, your financial freedom, which you do in these index funds. In that world. And my thinking, you only need one fund, the stock fund, whether it's S and P or Total Stock Market. And people sometimes say, well, that doesn't sound very diversified. Well, the Total Stock Market index fund has 3,600 companies. The S&P 500 has, well, guess how many companies. 500. Right. So when I was a young investor, diversification was described as, well, you want to pick somewhere between eight and maybe 10 sectors and you want to pick maybe one or two companies in those sectors because nobody can track realistically more than say 15 to 20 individual companies. And if you do that, you're diversified. So when I'm buying 3600 companies with my index fund, I'm plenty diversified. Now I'm 100% in stocks. But I'm there for two reasons. One is they are the most powerful growth engine available, bar none. And number two, as we already discussed, I don't care that they're volatile. I don't care that they're going to plunge periodically. I know that. I know it's normal. I'm prepared to accept it, live through it and endure it and take advantage of it. So that's how you build your wealth. And your flow of income that you're channeling in there is what smooths that ride. It allows you to take advantage of those dips. Because now that regular amount of money you're putting, putting in every week or every month is simply picking up more shares at bargain prices.

[Jean Chatsky]

Right. You're talking about dollar cost averaging.

[JL Collins]

Yes, yes. Which, by the way, if you have a lump sum, I'm opposed to. But for this purpose, it works, ideally. Now, when do bonds come in? Well, when you step away from paid work, as my daughter just did. She's a good example. At that point, she sold some of her vtsax to turn around and buy bonds. And because now bonds provide that ballast that your flow of income provided. And now you deal with the volatility of stocks by adjusting your asset allocation. So if you have an asset allocation, let's say for the sake of argument, you're 70% in stocks and 30% in bonds, and stocks plummet, well, then that percentage of stocks is going to drop and the percentage of your bonds is going to rise. And you sell some of those bonds into the stocks to take advantage of those lower prices. And you also have those bonds to draw on for your living expenses so you're not forced to sell at lower prices.

[Jean Chatsky]

How do you decide what the asset allocation should be at what point in your life?

[JL Collins]

So that's a kind of a complex question because there are a lot of factors that play into it. Right. Here's how I think about it. Step number one is your asset allocation to stocks should never be below 50%. And the reason for that is stocks are the driver for growth that allows a portfolio to survive over time. And if you look at the Trinity study, which is a study that showed different withdrawal rates based on different allocations, you could see that that survival rate breaks down when you tilt too heavily towards bonds. So the second question becomes, in my mind, how close to the edge, are you? So let's assume we're talking about somebody who is financially independent and doesn't intend to work ever again. And let's theoretically say they have a million dollars invested, which, using our 4% rule, is $40,000 a year to live on. If, say, 10,000 of that is because you want to travel and have fun, well, then you're not close to the edge. You've got that nice cushion. Right. Because you only need 30,000 to provide.

[Jean Chatsky]

Right.

[JL Collins]

At that point, I would say, personally, I'd go more heavily into stocks because I want that growth that will make my portfolio even larger over time and provide more assets for me to enjoy. But if it takes every dime of that $40,000 for you to put food on the table and pay the rent, then you're going to want to be much more conservative and tilt more heavily towards bonds. Again. I would never go beyond 50. 50. I probably wouldn't go beyond 60, 40, 60% stocks.

[Jean Chatsky]

And is there a particular allocation that you have for cash at any point in time or. Not really.

[JL Collins]

Not really. I'm pretty comfortably set financially.

[Jean Chatsky]

Yes.

[JL Collins]

So I don't need a lot of cash as a cushion. Right. And so I don't know, it's maybe 5, 5% in cash, something like that, probably less, which is more than enough for our kind of spending. It depends how you see your spending unfolding.

[Jean Chatsky]

It's such a fascinating conversation and I love how. I love how detailed and how simple the methodology has continued to stay because I think that's what enables people to get on this path, stick with this path. And you're right, there's too much information about too many investments out there for a lot of people to stomach. And it's very, very helpful to know that you can follow what I tend to call the boring route and that it will wind up okay. Thank you so much for unpacking all of this for us. Thanks for spending all of this time and thanks for just coming on the show. It's been such a pleasure to meet you, Gene.

[JL Collins]

Thank you so much for having me. I've really enjoyed the conversations. Great questions, by the way.

[Jean Chatsky]

Oh, thank you.

[JL Collins]

And it's such a pleasure to finally meet you. As we said at the beginning, this should have happened a long time ago, but I'm glad it's happened now.

[Jean Chatsky]

I am as well. If people are looking for more information on the work that you're doing these days, where do you want them to go?

[JL Collins]

Probably the easiest thing is to go to the blog, which is jlcollinsnh.com as of May 20th. The new edition will be, as they say, available wherever books are sold.

[Jean Chatsky]

All right, we'll meet again soon. Thank you so much.

[JL Collins]

Looking forward to it.

[Jean Chatsky]

If you love this episode, please Give us a 5 subscribe star review on Apple Podcasts. We always value your feedback and if you want to keep the financial conversations going, join me for a deeper dive. HerMoney has two incredible programs, Finance Fix, which is designed to give you the ultimate money makeover, and Investing Fix, which is our investing club for women that meets bi weekly on Zoom. With both programs, we are leveling the playing fields for women's financial confidence and power. I would love to see you there. Her Money is produced by Haley Pascalides. Our music is provided by Video Helper, and our show comes to you through Megaphone. Thanks for joining us and we'll talk soon.