An introduction to the crossover point

Trent at The Simple Dollar recently wrote about the Crossover Point, a notion popularized by the book Your Money or Your Life. The Crossover Point is simply that point in time at which your investment income exceeds your monthly expenses. For most people, this never occurs.

YMoYL is about getting readers to the Crossover Point. The authors want people to achieve Financial Independence, which they define as “having enough — and then some”. They ask readers to track income, expenses, and investment income, plotting each of these on a wall chart. The entire book is about finding ways to get the investment income line (low on the graph) to meet (and then cross over) the expenses line.

This is esoteric, I know, but it's important. Reaching the Crossover Point means that, if you wanted, you could stop working for money. You could retire. You could work for self-fulfillment. You could travel the world or write a book. If YMoYL were a novel, this would be the climax of the story:

The Crossover Point provides us with our final definition of Financial Independence. At the Crossover Point, where monthly investment income crosses above monthly expenses, you will be financially independent in the traditional sense of that term. You will have a safe, steady income for life from a source other than a job.

But how can you find your Crossover Point without a lot of fussy calculations? Ryan Stewart dropped a line to share a web app he developed that allows users to play with the numbers. He writes:

I recently read a post on The Simple Dollar that reintroduced me to the ‘crossover point.' (I first read about it in Your Money or Your Life in 2001). When reading the post I thought, “I wish I had this spreadsheet so I could see what my crossover is.” So, I did what any self-respecting geek would do and I created an online calculator for the world to see! I thought I'd share it with you (and hope you'll share it with your readers).

In many ways, the Crossover Point is just a fancy way of saying “Retirement”. If you've never played with a retirement calculator before, take some time to play with Ryan's crossover point tool. And then — if you haven't already — go borrow Your Money or Your Life from your public library.

I'm curious if any of you are actually following the YMoYL program, graphing your monthly income and expenses. Have you begun tracking your investment income? What's it like to see it climbing toward the Crossover Point?

More about...Planning, Retirement

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Wesley
Wesley
13 years ago

This is something that’s been at the forefront of my mind recently. My wife and I took the route of paying off our house early, and foregoing certain investment opportunities (outside of the real estate obviously).

Our bills are quite low relatively, and this “crossover point” may well be in reach, given a dedication to tracking expenses and income.

I appreciate you sharing this information. The spreadsheets will come in handy, and I plan to borrow this term when regarding future planning. Thanks again!

randomperson
randomperson
13 years ago

I never read the book but I use paper and pencil spreadsheets to keep track of all my investments and all my spending. I don’t plot these expenses monthly though at the end of each year I look at total and monthly figures of spending, saving, and investment income. About once a quarter I break out the graph paper (from old role-playing days) and plot the principle from each of my investments/holdings. I add to the same graph each quarter in case I was not clear. Nice to see the cumulative graph over the years. So that is sort-of close… Read more »

MillionDollarJourney.com
MillionDollarJourney.com
13 years ago

This is an interesting concept, but not a new one. Basically, you want your passive income to meet your expenses. Kinda like how Derek Foster built up his dividend portfolio to the point where he could retire at age 34.

J.D.
J.D.
13 years ago

I want to mention that I struggled with writing a much longer piece about The Crossover Point. It’s a fascinating concept. As I mentioned above, it’s basically another way to say “retirement”, but it puts the concept in a perspective that I hadn’t seen before. Reading YMoYL and then coming to the discussion of the Crossover Point was eye-opening. “That sounds really simple,” I told myself. “It can’t be that easy.” But it all makes sense. The trick is that of course it’s not that easy — few people ever reach it. Cutting expenses and boosting investment income are an… Read more »

Ryan Stewart
Ryan Stewart
13 years ago

Thanks for the mention JD. This [arguably overly simplistic] chart is a great motivational tool for me. I hope it is for your readers as well.

I’m certainly open to any suggestions for improving it – your readers can contact me via the ‘about’ page on the site.

MoneyDork.com
MoneyDork.com
13 years ago

Awesome, good job with this. I’m going to post a link on my round-up tomorrow. I had a calculator, but this is much easier.

brad
brad
13 years ago

The important caveat is that in order for you to really be able to stop working, the monthly investment income you’re receiving at your crossover point must be low-risk. You have to be able to depend on that same amount (or more) coming in every month. And the problem is that low-risk investments have low rates of return. You can of course kick-start it by investing in the stock market and real estate and other risky ventures, and then if you’re lucky then you can pull out and put the money somewhere safe. But if you follow the Your Money… Read more »

LM
LM
13 years ago

I read this book a couple weeks ago and while the crossover point explanation was interesting, I found the conclusion of the book really disappointing. After spending so much time explaining how to get your expenses down to meet your investment income, you’d think the authors would explain how to beef up your stream of investment income. Instead, they simply tell you “buy government bonds” — and that’s it! Did I miss something?

Sdub
Sdub
13 years ago

This is simply not true… If you retire when you hit your break even point, you have 2 problems: 1. Your income is now fixed at your annual rate of return * your “nest egg”. If you spend your entire interest earnings every year, your nestegg won’t grow, and inflation will eat you alive. 2. Even if you re-invest a portion of the interest to keep up with inflation, you will need to pay capital gains taxes on the investments you’re now living off of, not to mention the cost of benefits that you’d need to pay out of pocket.… Read more »

J.D.
J.D.
13 years ago

No, you didn’t miss anything. What you found is this great book’s glaring weakness. “But government bonds” is dated advice, and not a smart move in today’s market. The author’s concepts are sound, but the implementation is lacking. Unfortunately, Joe Dominguez has been dead for several years, so the book hasn’t been updated. As a launching pad, it’s great, and it’s helped many people — including me and Trent at The Simple Dollar — overcome debt and take control of our finances. But his one key assumption is untenable. At some point I’ll write a detailed review of YMoYL. Before… Read more »

brad
brad
13 years ago

Sdub, when you read the book you see that the authors offer strategies for avoiding inflation (many of which involve lifestyle or behavior changes that not everyone would be willing to make). I do think there are inflation-related issues that they haven’t considered, but basically they’re saying you can live for decades on a fixed income without having to worry much about inflation, you just have to make some compromises. If you’re not willing to make those compromises, then you have to take steps to ensure that your monthly income keeps pace with inflation.

jaime
jaime
13 years ago

I’d like to know if other people in my boat are able to save 20% or more of their income. My husband and I make about $53,000/yr, but after income taxes actually bring home about $37,000. That is not much money to support a family of 4. Even here in the midwest where cost of living is very low. We work hard, rarely go out to eat or do any activities that cost money. We NEVER go on vacation. We own both of our vehicles free and clear, and are very frugal with our money. Yet there never seems to… Read more »

Angie
Angie
13 years ago

I really like YMOYL and think it has some very useful perspectives. When I first read it in my 20s I did track every penny and did some graphing. I’ve always been a quantitative person, love numbers, and grooved on that level of *focus*. Fifteen or so years on, with the way life looks now…I look at that graph and it’s hard not to laugh! If only it were so simple. Or maybe I should say: it was that simple when I was single and childless, with a relatively steady (though small!) income. And no sense of the kind of… Read more »

Zachary
Zachary
13 years ago

I’m enthralled with this concept. Makes me want to sharpen that investment income curve and invest a bunch more!

Gnashchick
Gnashchick
13 years ago

This is very close to what I’m trying to do with my own finances. The difference is that I’ve figured out my crossover point amount (estimating on low-risk, fixed value investments) and set a deadline as to when I want to reach that point. I know I need to both pay down my debt and save 30% of my salary in order to get there. It’s going to be a challenge! As for tax, inflation, and health insurance concerns, I’m planning on working part time to cover all of my expenses. My whole idea is to stop working full-time, not… Read more »

Andrea >> Become a Consultant
Andrea >> Become a Consultant
13 years ago

I guess we could technically be there. If we cashed everything out, moved to a small town condo, and stopped saving for retirement, we could still make ends meet without working. Real estate inflation would probably eventually undo it all, though.

Money
Money
13 years ago

Save more, invest more. The problem is that our lifestyle always changes making it harder for us to reach a crossover point. I have a full time job with benefits and a side business and dividend income and little debt. I’m happy!

Kristi
Kristi
13 years ago

Actually, Vicki Robin and some of her colleagues recognized that the emphasis on bonds in step 9 of “Your Money or Your Life” doesn’t always work well for everyone, especially in today’s investing environment.

There’s an article addressing this at the YMoYL site:

http://www.yourmoneyoryourlife.org/gh-step9revisited.asp

Halfway down the page there’s a table laying out various investment options.

Debbie
Debbie
13 years ago

Angie, you don’t have to do any projecting. If every month you just calculated the amount you actually earned that month, the amount you actually spent, and the amount your investments actually returned, you would have a very wiggly but still interesting graph. After a while, you would probably have a fluke month where your investment earnings reached your spending level. Then you would have more and more of these months. Then most months would be like that. You could also plot twelve-month averages or something to get smoother lines and get a better idea of your typical spending, earning,… Read more »

Aleks
Aleks
13 years ago

Jaime, What I find works for me is to do the “pay yourself first” thing. My 20% savings comes out of my bank account the same day my paycheck goes in, so it never really feels like my money. Granted, I’m a family of one so my expenses are a lot lower. Maybe 20% is unrealistic for your situation and you should aim for 10%. What really worked for me was that I started doing this shortly after I got a big raise. I was able to go back to my previous level of spending fairly painlessly because I hadn’t… Read more »

joe
joe
13 years ago

plus i don’t think ymoyl factors in having health insurance, which is crazy. i have a heart condition and would probably be dead without insurance. as long as we have jobs my wife and i pay about $7-8,000/year for insurance that is paid through our jobs. it would probably be more for this quality of insurance without our employers group plan. plus it’s easy to be frugal with oneself, but it’s hard to be a complete tightwad when it comes to gifts for other people, especially when they live in the non-frugal world. plus i’ve come to the conclusion that… Read more »

Elissa
Elissa
13 years ago

Huh. Very interesting concept. But stop working? No thank you! 🙂

I think I’m one of the very few who isn’t looking forward to retirement. I work in an industry that I absolutely love and one that is constantly growing and changing, you never get the same thing twice. Not working just doesn’t appeal to me so long as I can continue to do what I do.
Although according to Ryan’s calculator, I should reach my crossover point by the time I’m 55. Not too bad. 🙂

Pippin
Pippin
13 years ago

Hurrah, I didn’t know there was a term for ‘retiring really really early’ (I’ve been working towards a Crossover Point at just before 40, mostly ‘cos I’ll have v. low overheads).

But agree with Elissa- the closer that goal gets, the less I can imagine not working. (even though I’m not “doing what I love”, I love what I’m doing). I’d hoped to transfer to the voluntary sector but my experience is that they don’t know what to do with skilled (professional middle management) volunteers- is there any resources out there for people like us?

CatWhisperer
CatWhisperer
13 years ago

@sdub and @brad Brilliant follow-on to a great post. sdub, I’d like to do some algebra on the left-hand side of your equation, nothing heavy, here we go: Original investment income – inflation rate * savings Make Substitution savings * rate of return – inflation rate * savings Combine like terms: savings * (rate of return – inflation rate) Now we can see how ‘sensitive’ this expression is to small changes in the inflation rate. For example, a small increase in the inflation rate may require tens of thousands of extra dollars saved to maintian the same purchasing power from… Read more »

Sdub
Sdub
13 years ago

@CatWhisperer Good points. I do like that form of the equation better… savings * (rate of return – inflation rate) = gross income You can look at it several ways… perhaps at your “crossover point”, you don’t quit your job, but rather take a lower-paying, more fulfilling job, your change in gross income would be smaller, and your savings requirement smaller. Also, as @brad pointed out, you’d want to move your investments into safer, lower return choices, which also affects your savings requirement. Another version of the equation that takes both into consideration, including a notion of your “personal” inflation… Read more »

LivingReal Steve
LivingReal Steve
12 years ago

this is a great concept to opening peoples eyes to the hope and truth that it can happen for them. Adding two additional components makes this even more possible. The first would be to reduce the expenses – ie: Get out of Debt, pay off credit cards and mortgage. Don’t risk your credit rating in this by negotiating or settlement practices. This should also increase your lifestyle – not decrease it. The second would be to expand your awareness of what investment means. Since the world has been dominated by the pervasive wisdom of the financial services world (Wall Street)… Read more »

Mark
Mark
7 years ago

“In many ways, the Crossover Point is just a fancy way of saying “Retirement”.”

Not exactly. Typical retirement planning is a zero-sum game. It plans to essentially run out of money at death. The crossover point means that one can retire and live forever, assuming same investment return, without working.

Asim Sheikh
Asim Sheikh
3 months ago

I am new to this site, and am enjoying devouring every single article that I come across, as it truly resonates with me and affirms most of what I have already been doing.

I think an easier way to determine the crossover point is to simply take your current spend level and multiply by 25 (aka the 4% rule, which I believe is now the 4.5% rule), and if that number is lower than your current investments, you can retire comfortably right now.

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