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Just over a week ago, I asked how much money you need to be wealthy. Not surprisingly, the comments were all over the board, largely because just about everyone seems to have a slightly different definition of “wealth.”
Today, I want to propose that what money people are searching for is something that the excellent book Your Money or Your Life calls the “crossover point.” Simply stated, the crossover point is that point at which your investment income exceeds your expenses.
Graphically, it looks something like this:
(this is Figure 8-7 from the book)
Once you reach the mythical point where your investment income finally exceeds your expenses, you will have effectively achieved financial independence. By saving more and spending less, you’ll accelerate your approach to this magical benchmark.
If you’re interested in playing with the numbers, you can do so at a website called What’s My Crossover? Here are some examples…
First up, let’s consider a hypothetical 25 year old with an annual income of $60k, a 15% savings rate (i.e., spending = 85% of income), an annual raise of 3%, annual inflation of 3%, an annual investment return of 6%, and a current portfolio of $10k.
As you can see, our hypothetical investor won’t actually reach the crossover point before the traditional retirement age of 65 rolls around.
But what if they ratchet up those savings to 25%?
As you can see, this strategy accelerates things significantly – our hypothetical investor now reaches their crossover point (where the blue and red lines intersect) by their mid-50s.
Obviously, the math underlying these scenarios is a major oversimplification (most notably that returns are included as a constant), and there are some questionable assumptions – e.g., that your spending will increase as a constant percentage of your income. Nonetheless, it’s still instructive to play with the numbers.
It’s also worth nothing that you can have a comfortable retirement even if you never hit the crossover point. By getting to a point where your portfolio can more than provide for your needs without touching the principal, you’ll have income in perpetuity – but you won’t live forever.
So, dear readers, how do things look for you? Are you on the path to financial independence? If so, when do you expect to get there? If not, what (if anything) are you doing to get yourself on track?
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