Jim Collins, also known as popular blogger JLCollins, has been financially independent since 1989.
He achieved this in the simplest way possible: he saved half of his income and invested in index funds. That’s it.
Jim says that if your goal is to build financial freedom, the simplest possible approach is the best.
“The great irony of investing is the simpler of an approach you use, the more powerful of results you get,” he tells us during this in-depth interview.
In this episode, Jim shares the details of his ultra-simple investing approach. He says that when you prioritize simplicity above all else, you can ignore your investments and move on with your life:
“Most people don’t want to think about this stuff all the time. Most people want to get on with curing diseases and building bridges and writing peace treaties,” he says. “But the smart ones know they have to have some kind of handle on their money.”
Learn Jim’s ultra-simple path to wealth in this week’s episode.
Jim’s new book A Simple Path to Wealth is getting rave reviews on Amazon.
Steve Stewart
Okay, now that this show has aired, I can voice my concerns about something I heard in this episode: The discussion about keeping low interest rate debt in order to invest at a higher rate.
I agree the stock market is likely to offer a better ROR than the cost of a 4% car loan – but what we aren’t taking into account is the ROR on what the borrowed money is bringing to your future.
Now, to be clear – I am not talking about borrowing 4% for a house that will appreciate in value – my point certainly is not about the math. I’m talking about keeping a loan that is eating away at your future paychecks, hindering your ability to have more choices and opportunities to do other things, all because of a choice we made in our past.
If, as we go through life, we ask ourselves “if I wouldn’t buy the stock today, should I keep it” or the mindset of “knowing what we do today, would we make the same decision about education/partner/geographical area to live” – then shouldn’t we also ask “if I didn’t have this debt hanging around my neck today, shouldn’t I just pay it off regardless of the interest rate”?
Debt steals from our future. Yes, we need to be investing for retirement (early or on time).
Yes, we need to be saving for our kid’s college (if we choose to do so).
Yes, we need to be saving for our next big venture (vacation, business venture, rental real estate) – but using math to help us decide if we should keep debt around is an empty pursuit for justification, not an exercise in maturity.
Love the show Paula. Keep up the good work by making us think about this money stuff.
Stephonee
Hey Steve!
I read through your comment several times because I am the type of person who does disagree with your philosophy, who does use math to make nearly all of my financial decisions, and of course as a highly-logical person I’m always looking for someone who can prove me wrong!
The problem is, I can’t quite understand the crux of your argument. Would you mind clarifying where, exactly, you see the issue with focusing on investing in a 7% investment while you have a 4% debt? It seems like cash flow is your focus (paying off the debt sooner frees up cash flow to make investments and choices), but the laws of compound interest are working against such an argument.
Of course, it may just be a philosophical debate – in that case, I can see how what you’re saying may be right for some people, but not right for someone like me who relies on math almost exclusively. I’m just a math-y person.
Will
Hi Stephonee,
I’ll let Steve answer for himself, but I’d like to give my answer as well.
Mathematically, you are correct that investing at a (hopeful) 7% return while keeping a 4% debt around makes sense.
As you may have read on the blog, I had a similar opportunity to either pay cash to replace my stolen car, or invest that money and take a loan. I chose to pay cash, even though I could have theoretically profited by taking the loan and investing the money instead.
Turns out, I would have made something like a total 22% return over the past 3 years (minus the cost of the car loan, of course). But I’m still glad that I didn’t try to make money on the spread. Sure, in hindsight it’s easy to call investing the money a no-brainer, but I didn’t know if the market would have moved up at this time or not.
And I just didn’t want to deal with the hassle. Plenty of people called me crazy or stupid in the comment section, but that’s fine!
Should you pay cash for a car?
S&P 500 since my car was stolen.
Stephonee
Hello Will! Thanks for taking the time to answer with your own life example. 🙂
The one thing I would say to your example is that it’s not about “if the market would have moved up at this time or not,” but rather whether the market would have moved up the entire time the money is invested. When we’re talking about these low-interest-debt-vs.-investing questions, we’re talking about the 20+ years long-haul.
But do not take that to mean I think you did the wrong thing! A big part of personal finance is always about doing what works for YOU, and really these sorts of situations are just “picking between one good idea, and another good idea,” so I don’t believe you can go completely wrong.
That said, I was in a similar situation last year, and I did go the other way. My husband and I had saved up for an expensive couch (over $3000, but it’s perfect for our livestyle), but when it came time to make the purchase, the company was offering a “0% financing for 36 months” promo. Instead of paying the cash we had saved up for the couch, we took the 0% financing offer, and threw all of the cash at my higher-interest-rate student loan (5% interest).
Now yes, this was a debt, and not an investment, but 5+% is my personal cutoff for when it’s better to pay off the debt than to invest, so I went with the debt (my husband was more comfortable with that option, too, so that swung the pendulum to the “pay off the debt” side as well). But with that student loan now paid off (and thus we now have no debts over 4% interest), so if this situation happened again, I would put the money into index funds.
(I covered my couch-buying student-loan-“refinancing” trick on a net worth update on my blog if you’re interested, under the heading “Credit Card Debt?!?”)
But still I’m left wondering – is there an argument for paying off debts <5% instead of investing, that isn't an emotional argument? Like I said, the emotional argument is fine, and everyone should do what works for them, but emotional arguments aren’t what works for me, so that’s why I’m asking.