And what is a Crossover Point?
In the world of people of personal finance, the Crossover Point is that point at which one’s [passive] income matches one’s expenses.
So, if you are accumulating assets to provide income, and you are able to generate sufficient income to match your expenses, you have achieved the Crossover Point.
How To Figure This Out
A simple way to calculate a crossover point is to first determine what one’s expenses are. For example, suppose we have average monthly expenses of, say, $3,000.00.
Next figure one’s annual expenses. If $3,000 is an average month’s expenses, then we see annual expenses of $36,000.
Examples, Please
So, for example, if you have annual expenses of some $36,000, we next determine how much money would one need to generate $36,000 of income.
What Will Generate Income?
There are many ways to generate income outside of holding a job. One can have interest from bank accounts and from bonds, one can get dividends from stocks, on can receive business income, one could be collecting royalties, etc. Let’s for sake of this discussion not include a regular job.
If we have financial assets, such as stocks, let’s determine how much one would need to generate $36,000 a year.
The Yield
A crucial component of this discussion is to understand yield. Yield is the percentage of income from an asset. For example, if a stock worth $100 pays a dividend of 3% per year, the annual dividend is $3.00 ($100 X 3%, or 100 X .03).
Math At Your Service
To yield $36,000 per year from assets paying 3%, you will need $1,200,000.00 worth of equities.
And Your Crossover Is
It’s important to keep in mind many factors:
– Expenses vary. So what one year might be $36,000, does not mean the next year will be the same. In fact, because of inflation, it could very well be more.
– Yields are not static. Sometimes yields rise and sometimes they fall. Companies sometimes increase dividends and sometimes they cut of eliminate dividends.
– Transaction costs and taxes can add up. You will likely need to pay taxes on your dividends, so you will probably need more than $1.2 million. If you purchase or sell stock, you will likely pay commission.
So it is prudent to have a margin of safety. If you will run a 10 mile race, you don’t train by running 10 miles, you train by runing 15 or 20 miles.
Mountain High
But what if you do not have $1.2 million? It seems an impossible mountain to climb, especially if you are young or just starting to save. Who in their right minds at age 21 could conceive of having $1.2 million in the bank or stock market? No one I knew at 21.
Hope?
But there is hope. IMHO, focusing on the end goal can make it feel impossible and unattainable. So while figuring out the crossover point’s requirements might be an interesting mathematical question, I wouldn’t spend my time there. Everyone is different and has different capabilities and resources. So instead of looking at what it would take, just focus on saving and investing at one’s capabilities.
That Is Why
That is why, although I am retired, I have not reached what I would consider my crossover point. Based on my current situation, short of winning the lottery, I never will. I can cover a fair amount of my expenses from my investment income, but not a majority. I consider it a victory to cover what I can. What I cannot I cover from other sources.
What Is Optional?
Misery is optional. I do not need to nor will I submit to self-recrimination because I did not reach some theoretical ideal. There are always things to look back about should I choose. Had I begun earlier, had I placed more emphasis on saving and investing, had I not spent money on X or Y or Z maybe I could have …. And so on. It’s as much a waste of time and emotional capital as any of many possible self-defeating attitudes I could think about. So I won’t.
Attitude Is Everything
Yes, that part is true: attitude is everything. Saving money, having money, doing the money thing is all well and good, and money is important in our culture. But it is not everything nor will it ever be.
Adjustments
We adjust our living situation to the resources available to us. We cannot live vicariously. If we try, we fail, often miserably. So while the crossover point might be something to know about, it is not where I place my efforts.
Have you thought about your crossover point? What do you think about it? Comment here: Contact.
The illustration “Lovers Beside Flowering Autumn Grasses” was painted by Japanese artist Hishikawa Moronobu in the 1680s. Courtesy Metropolitan Museum of Art.
The map of India entitled “The Moguls Empire Divided into its Principal Governments” was published in 1767 in The Gentlemen’s Magazine (London). Courtesy Michigan State University.
The eight-panel screen “Orchids and Rocks” was painted by Korean artist Yi Ha-eung in 1897-8. Courtesy Cleveland Museum of Art.
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