“Two boyhood friends grow up and go their separate ways. One becomes a humble monk, the other a rich and powerful minister to the king. Years later they meet. As they catch up, the portly minister (in his fine robes) takes pity on the thin and shabby monk. Seeking to help he says: ‘You know, if you could learn to cater to the king, you would not have to live on rice and beans.’ To which the monk replies: ‘If you could live on rice and beans, you would not have to cater to the king.”
To me, this story simplifies and reveals a great truth. If you can keep your needs (operating expenses) low then you will reach financial independence sooner, or, if that is not your goal, at least be more flexible with your decision making and more stable during market downturns. Money can buy you many things, but the most important thing it can buy is your freedom.
To achieve this JL Collins recommends a very simple strategy that has been very close to my own investing strategy. In a nutshell he suggests the following:
- Spend less than you earn – invest the difference and avoid debt.
- Avoid advisory fees by investing your difference in low cost index funds (he suggests Vanguard Total Stock Market Index – VTSAX).
- Reduce your expenses enough so you can invest 50% of your income.
If you want to learn more about the “why” behind the “what” of his investing strategy I would recommend picking up the book or visiting his site.
All this is possible of course only if you free your mind to consider it possible. Many people would scoff at the idea of saving 50%. Of course, whether or not you believe it is possible makes it so. One read through Plato’s Allegory of the Cave made me reconsider.