3051: [Part 1] Stocks - Part XIX: How to Think about Money by JL Collins

Summary

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Podcast Summary: Optimal Finance Daily

Episode 3051: [Part 1] Stocks - Part XIX: How to Think About Money by JL Collins
Host: Diania Merriam
Date: February 23, 2025

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Episode Overview

In this episode, host Diania Merriam narrates and comments on Part 1 of JL Collins's highly regarded post, "How to Think About Money." The episode invites listeners to shift their mindset about money: from viewing it as something to be spent to conceiving of it as a tool that can generate more wealth through compounding returns. Using vivid examples and clear reasoning, Collins explains why understanding opportunity cost and the power of investing is the foundation for financial independence. Merriam concludes the episode by reinforcing the distinction between being “rich” and being “wealthy,” encouraging listeners to focus on investing for long-term freedom.

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Key Discussion Points & Insights

Level 1: It’s Not Just About Spending

• Thought Exercise: Collins begins by asking listeners to imagine a crisp $100 bill and reflect on what it means.
  • “Now prop it up on a table in front of you or in your imagination and give some thought as to what it means to you.” (00:30)
  • Most people immediately think about what they could buy with it — a nice dinner, sneakers, gas, groceries, etc.
• Moving Beyond Spending: He points out that people might also consider investing that $100 instead, reaping returns of 8-12% annually if left in the stock market.
  • “Or you might think, but inflation and market drops are a concern. Hmm, I'll invest my hundred dollars but only spend 4% a year. Any extra earnings, I'll reinvest.” (01:00)
  • The critical leap is thinking about reinvesting all earnings for long-term growth — embracing the magic of compounding.

The Wealth Mindset: Compounding vs. Spending

• Different financial mindsets lead to different results:
  • Spend-it-all: “One view will keep you poor.”
  • Invest and spend the returns: “One will get you into the middle class.”
  • Invest, spend little, and reinvest the rest: “The last will make you rich.” (01:55)
• Memorable Example:
  • Mike Tyson, who earned $300 million but went bankrupt — not because of a lack of income, but due to an inability to see money as something that could work for him.
  • “He apparently only understood money in terms of buying stuff…The world is filled with athletes, performers, lawyers…who have been showered with money that flowed right off them and into the pockets of others.” (02:27)

Changing Perspectives on Money

• The key lesson: “Stop thinking about what your money can buy. Start thinking about what your money can earn and what the money it earns can earn.” (02:53)
• Opportunity Cost:
  • When you spend money, it’s gone forever—and so is all the money it could have earned for you.
  • Example: Buying a car for $20,000 comes with an easily overlooked cost.
  • “In choosing to lease or borrow money to buy the car, they are basically saying, geez, I don't want to pay $20,000 for this car. I want to pay much, much more.” (03:26)
  • Even paying cash has a significant opportunity cost—namely, the investment income you’ve lost by not keeping or investing that cash.

Level 2: Quantifying Opportunity Costs

• Using VTSAX (a total stock market index fund) and an 8% average return, a $20,000 car could have earned $1,600 per year if invested.
  • “Your 20K car actually cost you $21,600. But that's just the first year…Over the 10 years you might own the car, that's $16,000.” (04:49)
• The real cost of purchases is much higher when you account for lost growth due to compounding.

The Magic of Compounding

• The money you save earns, and then you earn on top of what you’ve already earned.
  • “It's a beautiful thing. One of the beauties of being financially independent is that by definition, you will have enough money so that the power of compounding is greater than the opportunity cost of what you spend.” (06:00)
• Financial independence lets your “stash” outpace inflation and your spending.

Reframing Daily Spending Choices

• Until you reach financial independence, viewing purchases through the lens of opportunity cost is critical to wise money management.

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Notable Quotes & Memorable Moments

• JL Collins on Mindset:
  “Stop thinking about what your money can buy. Start thinking about what your money can earn and what the money it earns can earn.” (02:53)
• On Financial Ruin:
  “The world is filled with athletes…who have been showered with money that flowed right off them and into the pockets of others. In a sense, they never really had a chance. They never learned how to think about money.” (02:37)
• Calculating Hidden Costs:
  “What you might not have considered…is the concept that even paying cash…is that car is going to cost you far more than $20,000. There is an opportunity cost.” (04:02)
• Diania Merriam’s Summary:
  “Money is always going to be able to work harder than you can. So a key pillar in building wealth is to invest early and often…JL encourages us to stop thinking about what our money can buy and instead consider what it can earn.” (09:11)

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Key Timestamps

• 00:30 – Start of JL Collins’s narrative; the $100 bill thought exercise.
• 01:55 – The four approaches to money and their financial outcomes.
• 02:27 – Mike Tyson example: how wealth is lost through the spending mindset.
• 02:53 – The critical mindset shift: investing vs. spending.
• 03:26 – Real cost of buying a car; misunderstanding of debt and opportunity cost.
• 04:49 – Quantifying the opportunity cost of a $20k car via VTSAX.
• 06:00 – The power and beauty of compounding; reaching FI.
• 09:11 – Diania’s commentary on building wealth vs. getting rich.

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Overall Tone & Takeaways

JL Collins, as voiced by Diania Merriam, is contemplative, practical, and occasionally tongue-in-cheek, blending direct advice with illustrative anecdotes. The tone is inviting, demystifying financial concepts and making them accessible. Listeners are reminded that true financial independence comes not from income or flashy purchases, but from cultivating a mindset that prioritizes investing, compounding, and viewing each expenditure as a trade-off against future returns.

Actionable Insight:
Start thinking of money as a worker that can generate more wealth — the more you invest and allow time to work its magic, the closer you get to genuine financial independence.

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Stay tuned for Part 2 in the next episode, where JL Collins delves deeper into this essential money mindset.

Transcript

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You're about to make a trade which you do you listen to. Is it get optioning those options or let's do a little research. Learn [e-mail] TradeSmart this is Optimal Finance Daily Stocks Part 19 how to Think About Money Part 1 by J.L. collins of JLCollinsNH.com Level 1 It's not just about spending. Get yourself a nice crisp $100 bill or 100 pounds or €100 or any of the bills pictured in this post. Now prop it up up on a table in front of you or in your imagination and give some thought as to what it means to you. For instance, you might think about what you could buy with it. Right now, $100 buys a very nice dinner for two at a good restaurant, a fancy pair of sneakers, a tank of gas for your big a pick em up truck, a few bags of groceries, maybe a nice sweater. I don't know. I don't buy much stuff, so this is hard for me. I did just buy a $119ll bean bed for my dog. It's going back. He won't sleep in it. You might think, hmm, I can invest this money. The stock market returns somewhere between 8 to 12% a year on average. I could spend that each year and still always have my $100 earning more for me. Or you might think, but inflation and market drops are a concern. Hmm, I'll invest my hundred dollars but only spend 4% a year. Any extra earnings, I'll reinvest. So my hundred dollars grows and the money it throws off keeps pace with inflation. Or you might think, I'll invest this money and I'll reinvest what it earns and reinvest what that earns. And and years from now, after the power of compounding has worked its magic, I'll think about spending. You can probably come up with other variations, but looking at these, it's easy to see that one view will keep you poor One will get you into the middle class, one will elevate that a bit, and the last will make you rich. Consider Mike Tyson. Mr. Tyson was one of the most intimidating and formidable boxers of all time. Few have mastered the sweet science. Better, the dismal science? Not so much. After earning some $300 million, he wound up bankrupt. A lifestyle reputed to cost some $400,000 a month didn't help. And as is always the case with the suddenly wealthy and financially unaware, I'm sure he was surrounded by sharks looking to bite off chunks of that fortune for themselves. But the root problem is he apparently only understood money in terms of buying stuff. I don't mean to pick on Mr. Tyson. I'm not nuts after all, in this, he's not alone. The world is filled with athletes, performers, lawyers, doctors and business executives and the like who have been showered with money that flowed right off of them and into the pockets of others. In a sense, they never really had a chance. They never learned how to think about money. It's not hard. Stop thinking about what your money can buy. Start thinking about what your money can earn and what the money it earns can earn. Once you begin to do this, you'll start to see that when you spend money, not only is that money gone forever, so is the money it might have earned and the money that money might have earned, and so forth. Clearly, none of this is to say we should never spend money. Rather, it is to fully understand the implications when we do. Consider buying a car for, let's say, $20,000 for even the least financially sophisticated, it should be obvious that if you buy the car, you no longer have the 20 grand. I sure hope so anyway. But distressingly, it appears that most people don't understand that in choosing to lease or borrow money to buy the car, they are basically saying, geez, I don't want to pay $20,000 for this car. I want to pay much, much more. My guess is that if you're reading this blog, you're already more financially aware than most, and you get that debt makes anything cost more. Level 2 consider opportunity costs. But what you might not have considered and what I'd like you to look at today is the concept that even paying cash is that car is going to cost you far more than $20,000. There is an opportunity cost to no longer having that money available to work for you, and it's easy to quantify. All you need to do is select a proxy for how the money could be invested and earning for you. Since I'm forever. Talking about vtsax, let's use that. Since vtsax is a total stock market index fund and the market provides average returns of 8 to 12% annually, we have a tangible number to compare. Let's use the lower end of the range, 8%. At 8%, 20K earns $1,600 per year. So your 20K car actually cost you $21,600. But that's just the first year. And of course you're suffering this opportunity cost every year. Over the 10 years you might own the car. That's $16,000. Now your $20,000 car is up to 36,000. But that's really still understating things. We haven't even considered what those annual $1,600 chunks could have been earning themselves, and what those earnings could have been earning and what those oh, should you not already be depressed enough about all this? Remember that the 20,000 is gone forever and so is the 1600 in lost earnings year after year with no end Expensive car. You have probably heard of the magic of compounding. In short, the money you save earns interest. Then you earn interest on the money you originally saved, plus on the interest you've accumulated. As your savings grow, you earn interest on a bigger and bigger pool of money. It's a beautiful thing. One of the beauties of being financially independent is that by definition, you will have enough money so that the power of compounding is greater than the opportunity cost of what you spend. Spend. Once you have your FU money, all you need to do is make sure you continue to reinvest to outpace inflation and keep your spending below the level your stash can replenish. But if you're not yet fi and you see this as an attractive goal, you will be well served to look at your spending through the prism of opportunity cost level three. You'll hear that in tomorrow's episode. You just listened to part one of the post titled Stocks Part 19 how to Think About Money by J.L. collins of JLCollinsNH.com this message is brought to you by Apple Card. Does this sound familiar? You're in line at checkout, cart full of items, Your toddler is screaming for a treat, and you left your wallet in the car. Or was it at home? No need to panic. With your iPhone in hand, you can tap to pay using Apple Card with Apple Pay and you'll earn 2% daily cash back when you do so. If your credit card is an Apple card, maybe it should be subject to credit approval. 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Registered broker dealer I love me some J.L. collins. The man just spews out financial concepts and money mindset hacks so eloquently. I think this post is a great reminder that money is always going to be able to work harder than you can. So a key pillar in building wealth is to invest early and often. It also reminds me of the key distinction between being rich versus being wealthy. I think being rich is about having a high income and using it to buy external markers of success. But being wealthy? That's much more about having a healthy gap between your income and expenses and investing that gap in assets that will make income of their own. It has very little to do with material possessions and to a certain extent, a high income. You'll also be far better off in the long run if you focus on building wealth versus getting rich. Just look at Mike Tyson. He was rich, but far from wealthy. JL encourages us to stop thinking about what our money can buy and instead consider what it can earn. Another way to think about this is that you're always buying something. Either you're buying stuff or you're buying a little bit more freedom and options. Well, that should do it for today. Have a happy rest of your day and a great weekend and I'll be back tomorrow where we'll finish up this post and where your optimal life awaits.