The Crossover Point & Financial Independence

If you’ve read Your Money or Your Life, you know what the “Crossover Point” is.

And once that seed has been planted, it’s hard to forget about it.

If you don’t know what it is, I’ll give you an overview and some tools.

I recently read and reviewed the personal finance classic Your Money or Your Life (YMOYL), and the Crossover Point was one of the key concepts that really stood out to me.

I am not sure if the YMOYL authors originally came up with this concept or coined it, but they are often credited with the concept.

If you’re kind of aimlessly saving without any hope for financial independence, it can be a pretty profound concept.

So what is this “Crossover Point”?

The Crossover Point Definition

The Crossover Point is simply the point in time when your income from investments surpasses your expenses.

For a graphical representation, here is the example given in YMOYL:

crossover point

Your trend of monthly income, expenses, and investment income may vary, but what’s important is that your investment income intersect and surpass your monthly expenses.

Where does income come in? Well, you need income to generate investment income, of course.

Does the Crossover Point Equal Financial Independence?

In our recent discussion of financial independence, we spent a lot of time discussing the “qualitative” definition of financial independence. I described my qualitative definition as:

“Living comfortably and doing what I want with my time without concern about how much income I earn.”

The YMOYL authors describe the Crossover Point as the point when you:

“will have a safe, steady income for life from a source other than a job.”

Wikipedia describes financial independence as:

“a term generally used to describe the state of having sufficient personal wealth to live indefinitely without having to work actively for basic necessities”

Do you see a pattern?

I’ve found the Crossover Point to be the best quantitative definition of reaching financial independence. When you reach it, you are no longer dependent on others to meet your costs of living.

The Crossover Point Reality

The Crossover Point is a beautiful concept, but does it hold up in the real world?

It could, so long as your investment income returns outpace inflation. The reality is that is not easy to do. Even supposed “fixed income” investments these days have down years. And the truly fixed income investments like treasury bonds and CD’s are not even keeping up with inflation at the present time.

The other part of the equation is how long you plan on adding zero additional income. Without income, you’re cutting in to your investment base through withdrawals to cover your expenses.

It is possible you could achieve returns that cover inflation AND your withdrawal rate. Is it likely? Probably not.

Crossover Point Calculator

Ryan Stewart created a nifty Crossover Point calculator at his website

It’s a fun little tool to play around with and factors in all of the variables I would have factored in had I designed it.

Here is what it looks like for a 27 year old with:

  • $60K in income
  • 3% annual raise
  • $100K in savings
  • 50% spend rate
  • 3% inflation
  • 6% return on investment
  • life expectancy of 80


Looks like this hypothetical individual’s Crossover Point will be reached at about age 38. Not bad for an income of $60k!

Play around with the tool to see what some hypothetical Crossover Points are for you.

What can we Take from this Concept?

The Crossover Point is something for everyone to strive for. It’s a great concept, and one we’d all be wise to set out to achieve.

There are, however, so many variables out of our control (inflation, withdrawal rates, unforeseen high cost events, lifestyle changes, investment returns, etc.). It is not a be-all, end-all solution to financial independence. In other words, don’t just quit your job at age 35 because you have hit the Crossover Point.

We’d all benefit from using the Crossover Point as motivation. There are certain things that we can all do to influence and tilt the numbers in our favor when it comes to financial independence:

  • increase your income when you have the opportunity
  • cut your expenses to a minimum
  • be wary of lifestyle inflation – your cost of living does not have to match the CPI
  • increase your personal savings rate to a maximum
  • invest wisely so that inflation does not eat in to your savings – don’t let the fear of investing paralyze you

Do those things and you will have a very successful financial future ahead.

Crossover Point Discussion:

  • Is the Crossover Point your quantitative definition of financial independence?
  • When do you anticipate hitting the Crossover Point, if at all?
  • How do you envision your life changing when you hit the Crossover Point?

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