It was the mid-1970s and the Great Inflation was in full swing. On one hand, recently graduated English major JL Collins was feeling lucky to have a job in a stagnant economy.
On the other hand, Collins had $5,000 in the bank and a huge decision to make. Little did he know that the choice he faced would lead to an epiphany that would change the course of his life – and those of millions of readers.
Today, you may know JL Collins as the author of The Simple Path to Wealth and the new book Pathfinders – or as those in the financial independence (FI) community refer to him, the “Godfather of FI.” Read on to learn about the $5K revelation that would set him on track to becoming an international bestselling book author, financial blogger, and founder of the FI Chautauqua retreat.
JL Collins and the $5K Epiphany
Having $5,000 in the bank might not seem like a problem to most people. Especially in the 1970s, when it was enough to set out on a dream European vacation. But a young JL Collins found himself worried that cashing out to explore Europe might also mean returning to find himself out of work.
After a great deal of thought and a few deep breaths, Collins finally worked up the courage to ask his boss for a four-month leave. With much less thought and far fewer deep breaths, Collins’ boss rewarded his courage with a big fat “absolutely not.”
Though deflated, young Collins was not to be so easily deterred. After wrestling with his wanderlust for a few weeks, JL Collins ultimately went full-on YOLO. He approached his boss again, this time with the intention of resigning to answer the call of European adventure.
But to the young man’s surprise and delight, the meeting didn’t turn out at all how he’d expected. Suddenly, his boss transformed from a hardened task master to a man ready to negotiate. In the end, Collins was able to enjoy his trip and return with his job intact.
“At that point, I learned the power of being able to step away,” Collins reflects. But also that “You gotta do it from a position of strength.”
This vital lesson would form the foundations of a personal finance lesson that’s often overlooked in today’s financially complex world. Money may not be able to buy happiness, but it can buy the freedom to pursue it.
JL Collins and the Road Map to Financial Freedom
Cut to a few decades in the future. After years of successful saving and investing, suffice it to say that JL Collins had learned a thing or two about finances.
As his daughter entered college, Collins decided to start writing her a series of letters filled with advice on how to chart her course to a solid financial future. On Collins' blog, you'll find a great post on how these letters would ultimately inspire his iconic book, The Simple Path to Wealth.
Investors who have yet to discover the book will find it packed with great advice on entering the market with accessible products like low-cost index funds. It also includes insights into the dangers of carrying debt, government student loans, and actively managed funds that only tend to be profitable for investment advisors and the companies that pay them.
If you’re interested in learning more about different types of investments, you can also check out Collins’ popular stock series blog posts. It’ll help you approach the market with a solid knowledge of everything from stocks and bonds to the Vanguard broad-based index funds pioneered by “fiscal saint” Jack Bogle.
But in our recent interview, JL Collins honed in on two different stages of wealth building. The first involves the accumulation of F- You Money (aka FU Money), while the second revolves around attaining Financial Independence (FI) nirvana itself.
The FU Stepping Stone to Financial Independence
Let’s face it, few people have the income to go from paying off debt to financial independence overnight. That’s why The Simple Path to Wealth advises starting with the goal of building an FU cash stash.
As Collins explains, achieving FU wealth is about having “enough money to make bolder decisions than you would if you had to live paycheck to paycheck.”
Remember the opening tale of a young Collins trotting off to Europe? That’s a great example of FU-level wealth in action. But Collins is the first to acknowledge that the simple path isn’t always easy.
To reach the FU stage, you’ll need to take a hard look at your personal finance situation and be prepared to get your metaphorical house in order. The initial steps along the road to becoming FU rich are basically where debt and credit cards go to die.
Why to Avoid Debt Like the Plague
“If you have debt, that’s a major problem – you just have to get rid of that before you can begin to think about wealth,” Collins says. “In our culture, for some reason, we’ve convinced people that having debt is normal, that it's natural, that it’s acceptable. To me, it’s like being covered with blood-sucking leeches.”
As you may have gleaned, getting out of debt is a major first step on the road to FU-level wealth building. For some, this may mean finding ways to cut costs and spend less. Others may find that taking on a side hustle or second job to bring in more money makes the most sense. Regardless, if you want to enjoy FU funds, you’ll need to find a way to trade in that high-interest credit card for a high-yield savings account.
Keep in mind that building FU funds isn’t just about putting aside cash so that you can be rich in the future – it’s also about initiating a gradual power shift. The more capital you accumulate, the closer you’ll get to a financially free life and the options that come along with it.
“If you’re living paycheck to paycheck, you have no power at all,” Collins reminds us. “Until you are living on less than you earn and saving and investing… then the power truly does rest outside of your hands.”
Attaining True Financial Independence
Sure, we all want to be financially independent. But what exactly does that mean? As JL Collins himself puts it, “Being FI means that you have enough money that work has become optional.”
Reaching FI is largely a matter of building an investment portfolio that consistently makes money over time. By accumulating investments that pay enough to cover your living expenses, you'll ultimately be able to enjoy financial security whether you're still pulling in a paycheck or not.
But Collins is quick to point out that he places less emphasis on early retirement than investment gurus like the Mad Fientist or the founders of the FIRE Movement. For the Simple Path author, it’s less about retirement and more about having the option to walk away from the business world at any time, with no risk of economic ruin.
Want to stay in the same business you've worked in for decades, explore other companies, or spend the rest of your days lounging on a beach? When you reach FI, the world becomes your oyster. As Collins puts it, “You’re now in complete control of your time.”
Investing Your Way to the FI Life
So you’ve grown the gap between your income and expenses and taken up the investing life. Excellent. Now the big question becomes – how do you know when you’ve accumulated enough investments to officially reach FI status?
As Collins explains, it depends. It’s less about achieving a certain dollar amount and more about ensuring that your investments can support your spending habits long-term. Luckily, he outfitted us with a few formulas that investors can use to track their progress to a financially free life.
How Much You Need to Invest to Reach FI
The first approach is to figure out how much you need to invest by multiplying your annual living expenses by 25. Imagine that you need an annual income of $40K to maintain your ideal lifestyle. So you plug the number into the following formula:
[Annual living expenses] x 25 = FI
$40K x 25 = $1M
You then pull up your portfolio and verify you’ve got at least a million dollars stashed away in a portfolio of low-cost index funds. Congratulations, as you can officially count yourself a member of the FI club.
What Income Would Your Current Investments Provide?
You can also track the progress of your investments using the 4% rule outlined in the Trinity Study. While more a guideline than a set rule, the Trinity Study famously suggests retiring by cashing out 4% of your portfolio for 30 years. To see how your current investments would hold up, start with the formula:
[Current investments] x 0.04 = annual income
For example, let’s say that you have a $500K portfolio. You plug in the numbers like so:
$500k x 0.04 = $20k
As you can see, you'd discover that if you retired today, you’d need to be able to live on $20k a year to stretch your funds out for 30 years. In this case, it might be worth staying in the game a bit longer, unless you plan to join the tiny house movement.
Where to Find More Great Money Advice from JL Collins
Whether you want to learn more about how to invest in the stock market or why a house may not be such a valuable asset after all, JL Collins is a goldmine of financial wisdom. Be sure to check out his bestselling book The Simple Path to Wealth or find out how it’s changed the lives of people all over the world in his newest book Pathfinders.
What do you think of the words of wisdom from JL Collins? Are you working on building up your FU Money or investing for the FI life?
Please let us know in the comments below.