Back in 1992 I 1) was married for less than a year, 2) had just started to grow my career, and 3) knew virtually nothing about managing money.
The terms “FIRE”, “financial independence”, and “financial freedom” were nowhere to be found, at least compared to how they are today. And they idea of financial independence/retiring early was certainly not as widespread. In fact, I’d say they were pretty non-existent.
Dave Ramsey was only four years out of bankruptcy and had just written Financial Peace
. The Millionaire Next Door
was still four years away from being published. Suze Orman and David Bach were yet to publish a single book.
In other words, a lot of the money literature and people that many listen to these days were not around. They had not yet made names for themselves. And very few, if any, were talking about early retirement and financial independence the way we speak about these today.
That is, except for Vicki Robin, the author of Your Money or Your Life
. Her book came out in 1992 and was about achieving financial independence. Plain and simple, she started a conversation that we’re still having today and created a movement that was not going to come to life en masse for 25 years. In fact, Your Money or Your Life is listed as one of the original sources on Wikipedia’s definition of financial independence.
I have named Your Money or Your Life as one of the best personal finance books ever and placed it on my list of the only five money books anyone needs to read. Yes, it’s that good and a must-read for anyone wanting to learn about managing money.
Today we’re going to talk about one of the core principles in the book: the Crossover Point. These days we call this financial independence (or at least a version of it), but back then this was really the first time anyone had named it (at least as far as I can tell).
Anyway, let’s get into the book a bit and discover what the Crossover Point is all about.
Nine Steps to Achieving Financial Independence
As noted on both the book’s front cover as well as my review of it, Your Money or Your Life details “9 steps to transforming your relationship with money and achieving financial independence.”
The first seven steps are designed to basically set you up for step eight. They focus on:
- Cutting expenses as low as you can get them
- Building up assets (which generate income) to cover your expenses
There’s more to the book than this, of course, but these are the highlights. [Note: The book is also awesome at showing what you think you make per hour of work is much less than you actually earn because of the inherent costs built into working.]
Eventually, you get your expenses so low and/or decreasing quickly and income so high and/or increasing that you reach the Crossover Point.
Here’s how the book details step #8:
Each month, apply the following formula to your total accumulated capital and record the result on your wall chart:
(capital x current long-term interest rate)/12 months = monthly investment income
As an example, let’s say you have $500,000 saved that you can invest. We know today’s interest rates are pretty weak, but let’s say you could get 3% on your money. This would give us the following:
($500,000 x 3%)/12 months = $1,250
This means that the capital you have can churn off $1,250 a month in income.
As capital increases over time (through savings and earning), the amount your capital earns each month goes up. At the same time, your cost-cutting efforts have expenses going down (or at least has gotten them to a minimum.)
At some point, the amount earned by your capital is more than your monthly expenses. This is what the book calls the Crossover Point — the point where your money earns enough to cover your expenses. As a result, you no longer need to work.
Here’s how the book describes the Crossover Point:
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.
Pretty simple, right?
In addition to being a basic concept, it also turns out to be a safe concept.
After all, you are not drawing down any of your assets. You live on the income your assets generate in perpetuity.
There’s no chance that you will run out of money since you’re not spending a penny of your principal. The Crossover Point has a built in margin of safety that’s very solid.
It’s a financial dream come true!
The Crossover Point Has Issues
But the Crossover Point did take a bit of refinement to become available to a wider audience. This often happens when someone trailblazes a new concept — they get the initial idea out there and others develop it to make the concept better.
The main problem with the Crossover Point is that it’s difficult to reach. It takes a lot of saving, especially in today’s environment where interest rates are so low.
For instance, let’s say you need to make $50k per year to retire. If you can earn a safe 3% on your money (and that’s a big if), you would need about $1.7 million in investable assets to do so.
That’s a pretty high hurdle for most people. It means your total net worth is probably well over $2 million (you’d likely have a house to add to the $1.7 million). Do you know how many Americans have a net worth this high? Approximately 6% according to this calculator. And I can guarantee that most early retirees these days (or at least the ones who write about it) usually have a lot lower amount saved.
This is why Your Money or Your Life focused as much on cost-cutting as it did on income generation. Because accumulating enough to cover $30k per year is a lot easier than trying to cover $50k per year.
But even then, you still need $1 million at 3% to cover $30k. And while people whine and moan that “$1 million isn’t what it used to be” and “$1 million isn’t that much”, it is still more than the net worths of 88% of the population. And remember, the Crossover Point requires investable assets of this much, not total net worth. In addition, those investable assets need to be outside of any retirement savings (if you want to retire early.)
See? It’s a tough road for most people.
The Financial Independence Cavalry
So over time the financial community has brought in the cavalry to make reaching financial independence more realistic.
Namely, they have taken the Crossover Point and added the following:
- The 4% “rule”. Now you can withdraw 4% of your assets (which is at least higher than 3% earning) forever (in theory), though some dispute this.
- Real estate investing. Many early retirees invest in real estate because it’s a lot easier to save up an amount that works at an 8% to 10% return rate than at 3% to 4%. For example, if you need $50k in income, it takes $1.7 million at 3% but only $500k at 10%. Real estate return rates make generating your needed annual income much easier.
- Side hustles. If you need $30k, you can reach it by a $15k side hustle (not that hard to do) and only $500k in savings (much easier to get to than $1 million). I talked about this in How a Side Hustle Business Can Get You to Financial Independence in 10 Years. If you want to run your own numbers and see the impact for yourself, check out my ESI Scale calculator.
These “upgrades” to the original Crossover Point have made financial independence more attainable to a wider audience.
Thankful for the Start
All this is really a way for me to say thank you to Vicki for getting us started on the path to financial independence.
It took the rest of us some time to latch on to the concept, but once the momentum started, it’s created an entire movement that shows no signs of slowing down.
I’d love to hear your thoughts on the book as well as the Crossover Point. Has anyone been influenced significantly by either (or both) of these?
I love getting your newsletters. You are the best out there. Thank you!
I hate to admit it but I have yet to read this book but have heard such wonderful things about it that I really need to rectify that situation.
It is funny but I have modeled my own retirement planning with the modified crossover point as a guide without really knowing it. I wanted my passive income to reach a level where I could support a middle class retirement lifestyle in perpetuity, hoping I did not have to consume capital and leave a financial legacy to my heirs.
Real estate by far has been the best way to do it but it is not without its risks. However this incredibly low interest rate environment makes it difficult to achieve by any other means.
Completely agree that Your Money or Your Life is a great read! In my opinion, the greatest takeaway is that the book challenges readers to really take a hard look at where their income is going each month and which of those spending areas are really bringing true contentment and value.
Also agree that side hustles and multiple streams of income are a great way for folks to achieve the crossover point sooner. As a coach, I have seen as many people get burned with real estate and tenants as I have those that have come out ahead…that risk is often overlooked. Still believe in the power of investing over time, as the S&P has averaged 8% post inflation for all five to thirty year periods over the past 40 years. Power of compounding for those that start early is impossible to beat!
I’m glad you brought this up, @Marco, because I was thinking about the same thing regarding real estate investing as a side hustle. I think it’s very dependent on where you live, for one thing. Here in Northern California, rents are high, but so is real estate, making it a formidable play for someone who doesn’t have a big asset pool to invest. Also, rules for rental properties are increasingly in favor of tenants, making it more onerous for landlords, even those who are well-intentioned and fair minded.
I also agree with you, we see a lot of posts about how great it is to build your fortune with real estate. My dad had around 25 rental houses when I was a teenager, and I helped him fix them up after purchase and between renters. That started my appetite for real estate, so as soon as I could as an adult, I bought a few rentals, and usually had one or two throughout my working life. Renters can really mess things up for you. If you get burned on a month or two of no rent payments per year, there goes your profit. If they trash the place on their way out, you’re out some more time and money to fix it back up. For some of my properties, I figured they ended up being no more than forced savings accounts, and when I sold I got back what I had put into it, if I was lucky. I had a few where they went pretty well, and I put quite a bit in the bank when I sold, which more than made up for all the rent losses, etc. Now that I’m retired, I have the time to do rental properties full time, but absolutely no inclination to do it. As Tom says, the rules are so much in favor of renters that it’s hard to do an honest business when you get a renter who’s out to scam you. To those who manage to avoid the pitfalls, I salute you!
I agree that this book is a top fiver. I was already keeping net worth statements, so this book added more of a cash flow angle. Never could get into a budget. Then Guy Kawaski’s Cashflow game helped us pass along the concepts to our sons. There is some great advice out there for those who bother to look …and get real life reinforcement examples from ESI.
Millionaire 84
I love YMOYL! One of my first finance books. I first read it when the first author listed was Joe Dominguez with Vickie as second. Later it was re-published with Vickie as the primary (Joe Died in 1997). I have not read the newest incarnation – but I have an old one and read it occasionally. Thanks for the post.
I read Your Money or Your Life in 1992. I however adopted much of the philosophy of the book Die Broke by Stephen Pollan. I am not really interested in leaving an inheritance to my adult children. I really don’t believe that people value money that they didn’t earn. I have paid for my children’s college education and they have decent jobs. I have taught them about important values. Any money that I give them will be when given while I am still alive. If there is any appreciation for financial gifts, I will be alive to receive it . I have reached my crossover point.
ESI- have you ever had the chance to meet Vicki? Curious to know what she thinks about today’s FIRE movement.
Nope, but I’ve heard her on many podcasts. She seems to be supportive of the movement.
Interesting post – always fascinating to see how ideas like this have evolved over a long period, and what has remained constant.
I keep puzzling over this apparent disconnect in FIRE movement thinking: the idea of planning for leaving an inheritance to heirs.
If you work hard, keep your costs low by foregoing an extravagant lifestyle, and follow the ESI principles, it seems to me that when you finally do reach FI you should be focused on taking care of yourself first and enjoying the benefits of your hard work and sacrifice through however many years you may get to do so.
If there’s anything left, great. If not, well – you probably spent a lot helping your kids get to the point where they will be fine with or without an inheritance.
Also, regarding YMOYL (remember it – haven’t read it), back in the early 90s when interest rates were higher, what was the strategy for taking advantage of them over the long haul (say, 30-40 years) to get that safe return without exposure to the stock market? Annuities?
Yes, I believe both savings and annuities were the ticket, though I’d have to check to be sure.
Coming up with the replacement income is always the hardest part…
Totally agree with you.
What I find humorous is that some of the best financial advice I ever got was from my priest when my fiance and I sat down to talk to him as part of our wedding preparations. This was before Vicki’s book was out in 1992, maybe he was a fan of Richest Man in Babylon? In any case he asked us if we wanted to be “rich” and I responded “hell yeah!” Probably not the best response to a priest’s question, but he appreciated my enthusiasm. He went on to lay out much of the basics of FI, putting a percentage of salary away first before paying bills, investing it for better returns, the need to keep at least a basic budget to know how you are spending your money, etc.. It was a good talk and while we struggled in those early years for a variety of reasons, it helped more than he probably knew.
But in my mind I was still focused on retiring at a traditional age in my mid 60’s and setting my savings and investing up for that. Then I read Your Money or Your Life, many of the messages from my priest and other reading I had done got reinforced but the crossover point idea really stuck up and above everything else. Such an obvious concept and goal, yet I’d been so indoctrinated into this idea that as a good working person you don’t retire until your mid sixties so that is what you build your financial plan around. I feel the idea of being financially independent as soon as you reasonably can is so much stronger a message to most people than talking about retiring early. For example when I say “retire early” to my younger relatives they’ll typically shoot it down, claim it can’t be done, give me an “if only” kind of attitude, and generally throw up a bunch of barriers to make discussing the subject difficult since they’re already on the defensive. The numbers they think they’ll need are too big, what they have to save is too much, and what would they do if they stopped working anyway? It’s almost like I’m insulting them by suggesting they should have a goal to retire early, as if not working for a living in your 40’s and 50’s is somehow cheating and wrong. I really think a large part of it is being hung up on the concept of a good person brings value by working as long as they can and then relaxing and “retiring” much later in life.
But when I talk about FU money, or having plenty to get you through a tough patch like a lay off, etc. then it seems they’re more open to it. Then it makes sense because in their minds they don’t have to stop working, they have an option to stop if they want to. They seem less defensive, it seems more achievable to start with a smaller amount out of their check and make it grow while drawing down on how much they spend. For me, the message I pass on and focus on is the FI part, which the idea of crossover point started for me and got me on the path.
>>And while people whine and moan that “$1 million isn’t what it used to be”
I get a big kick out of reading and hearing folks say this kind of stuff. While “it ain’t what it used to be”, it’s still way more than most ever attain. The math says it should be easy, but so many never make it and never will. Understand I wish that on no one… just acknowledging the statistics. It’s my goal to convince more young people to start investing early and let those investments compound.
You’re absolutely right. This book is groundbreaking and has inspired me to work harder to achieve 3 FIs–Financial Integrity, Financial Intelligence and Financial Independence. Vicki’s framework is easy to grasp for it speaks of the truth. Thank you for distilling the concept of the book and giving credit to the author for this remarkable work!
Agree — this is a great rule and the most difficult for us all is to have this money available in a “taxable” account, otherwise, it’s locked up in 401ks/IRAs until age 59. Then make sure to factor in that any money generated on this “taxable” account is taxed so your $80k on $2M quickly becomes ~$65k. Crossover means many things since we all have different budgets but to me it appears the only way this can happen for most is if you have $2M – $3M+ in a “taxable” account otherwise keep plugging away till 59 when your larger portfolio becomes available.
I think the 1992 edition of the book used a 6% interest rate which was what applied when Joe Dominguez retired in 1969. The 2008 edition revised that to a 4% interest rate when calculating the crossover point (on page 238).
In the early 1990s, 30 year treasuries were paying about 8%, so the numbers were definitely different. However most FIRE adherents including Vicki herself never actually seem to quit earning money from work. I think the retirement police pushback has changed the message surrounding financial independence again. Now all the FIRE writers are like “No, forget about that RE part – it’s all about FI! We never said you should actually live off your investments – FIRE just means you have the freedom to switch to a job you love which will still provide you tons of income!” Because people had that option all along and just don’t act on it until they make millions from a job they hate?
FIRE definitions aside, the reality is that anyone who is motivated by money enough to learn about getting rich and put the principals into practice – much less actually achieve financial independence or get close to a crossover point – is probably productive and intelligent and restless enough to never be comfortable actually sitting back, earning $0 active income and living 100% off their portfolios – at least not until very old age when they are bound to have accumulated more than they can reasonably spend.
The good news is that means we can all relax and switch our focus much sooner to living our best lives NOW rather than fretting about cutting spending and optimizing assets in order to reach the soonest possible crossover point. I have consciously welcomed lifestyle inflation as part of my FI journey since reaching A crossover point. I’m FI if I want to live off $102K a year and don’t get divorced. I’m only 35 and am not sure sure enough about either of those variables to RE anytime soon. Every quarter I update the net worth spreadsheets and inform my husband what we could spend if we both retire now. When we first married we could live pretty well in Thailand or South America. Now we could rock an upper middle class lifestyle in much of non-urban USA. But we don’t dislike our work enough to FIRE. Instead I took a less demanding job and a smaller firm a couple of years ago 3 miles from the townhome we love, and I’m happily avoiding any hint of burnout so far. I like luxury travel and pets and nicer-than-median real estate and options, including the option to give generously. I could give that all up and FIRE if I need to or hate my job; but instead I’m spending more than I *should* since I can look at every additional year worked as gravy in a way.
Knowing you *could* RE is the new FIRE I guess. 🙂
I think this is the most honest and informative comment regarding FIRE I have read to date on this site.
Many thanks for sharing.
Elizabeth,
I am mid 50’s (so much older than you), but totally subscribe to your approach. Wife and I could have FIRE’d as you put it, in an upper middle class lifestyle in much of non-urban USA, quite some time ago. But, we are both extremely productive people. She enjoys running with her creative business ideas, and I enjoy the benefits, challenges and excitement that come with my MegaCorp career (not to mention paycheck).
So we are FI, but not RE. And in so much as I have made and cancelled plans to retire, a couple times, I have come to the realization that as long as the stress is not killing me or making me unhappy, and as long as the pay is adequate enough to cover expensive big city living, I will keep on truckin for awhile (or until they put me out to pasture).
Knowing I am not required to get up and go to work for survival is oddly very motivating for me to keep working. Because when I realized I had a choice, I had to think long and hard about what I valued. Right now I value the things that come with working, even though it can be very demanding, but not being chained to it takes a lot of the crazy STRESS I used to feel off the table. Now, I have healthy stress, the kind that comes with loving the game and being a competitor, instead of the oh my god I will be a complete failure if I [don’t win this deal, don’t ace the performance review, don’t get promoted, don’t get this job, get laid off, etc.]
My biggest challenges now are (1) How to stay energetic and competitive, (2) How to maintain a work/life balance that works while I’m working, and (3) How to figure out when/where/how what comes next.
I immensely enjoyed reading Vicki’s book in the areas surrounding this discussion of the Crossover Point, as well as her discussion of how we trade our own life energy for money. Having your net earnings exceed your expenses is a very straightforward, accounting-like approach to the problem, as opposed to using finance tools to forecast the rest, as we do now. However, it’s the ultimate conservative approach, and for that reason a good alternative to consider. – Josh