The Crossover Point and Frugality

A long time ago, I wrote about a concept called the “crossover point”. The “crossover point” describes the point at which the returns from your investments exceed your living expenses, which means you can begin to fully live on your investment income and not have to work.

To give you an idea of what the crossover point is all about, here’s a key excerpt from that earlier post:

Let’s look at another example, that of Fran. Fran has the same job as Joe, but is a very frugal lady: she’s committed to only spending 70% of her take home pay each year. Let’s see how she does:

Crossover Point Illustration

Fran reaches her crossover point at age 48, but chooses to keep on working. She has a second crossover at age 53 where her investment income exceeds her salary, but she keeps working. By age 65, her annual investment return is more than double her salary; she could quit, live off of even 70% of this, and more than double her living expenditures.

As you can see, making it to your crossover point requires some significant personal sacrifice. Fran has to limit her spending to 70% of her gross pay for many, many years to make this dream happen. She could easily walk away from her job at age 50 by doing so, but immediately saving 30% of your pay for two decades is a pretty daunting task for almost anyone.

So, let’s say you’re earning $30,000 a year right now. For you to save 30% of that income, you’d have to bank $9,000 a year. That’s a hefty challenge.

There are really only two roads to get to that point. You can either raise your income level or you can cut your spending – ideally, you do both.

When you raise your income, however, you hit an interesting problem. Let’s say Fran now makes $50,000 per year. Does she choose to keep living on $21,000 per year at that point? If she does, she’ll reach that crossover point even faster.

On the other hand, it is extremely rare for people to not inflate their lifestyle at least a little after receiving a significant boost in income. As soon as that happens, then the crossover point moves farther into the future.

This is why frugality is so important for this picture – and for every personal financial goal. Every method that Fran figures out that can reduce her expenditures without reducing her quality of living brings that crossover point a little closer regardless of her income. Fran could be making $30,000 a year or $50,000 a year or $200,000 a year, but if she discovers a way to effortlessly shave $20 a month off of her spending, that crossover point creeps a little closer.

In fact, in that original picture alone, if Fran can reduce her spending from $21,000 a year to $20,760 per year – which is the end result of effortlessly saving $20 a month – she moves from saving $9,000 to saving $9,240 per year. She’s simultaneously adding to her yearly savings and also lowering the threshold for her first crossover point. In fact, she moves from reaching that point at age 48 to reaching it at age 47, just by finding some way to spend $20 per month less. She also moves her final crossover point to age 52 from age 53.

Saving $20 a month results in nearly an entire year of freedom from the yoke of employment.

Low-effort and low-impact frugality is golden for almost any financial goal that you have. No matter what your goal is, if you apply a low-impact low-effort frugal tactic to it and save the money you reap from that change, it will push you toward that goal.

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