The crossover point

Posted by Maneesh Sethi :: August 30, 2007 @ 11:30 am

The crossover point is a very interesting concept mentioned by Trent over at thesimpledollar.com. I mentioned it earlier in my article on the importance of wealth. I wanted to share with you some resources that will help you calculate your own crossover point.

I built a calculator to calculate this point---it's got a bit of an ugly interface, but it does work. You can type in your current income, your expected annual raise (a 10 percent raise should be entered as .10), the percent you invest of your income each year (again, in decimal form), the expected annual interest rate, and the number of years you plan to invest.

For example, imagine that you are currently making $60,000 and expect a 4% raise each year with 8% annual gains on your investments. If you invest 15% of your paycheck every year, in 36 years your investments will gross about $5,000 more than your income (As soon as the final box switches from negative to positive, you have reached your crossover point).

If you have a Google Docs & Spreadsheets account, you can also see a spreadsheet which calculates the same thing. I didn't write this one (it was written by Owen, who posted it at The Simple Dollar) but it is very interesting. Try it out---you'll need to copy it to your Google account or export it to Excel, but you might find some interesting results.

Reaching the crossover point is a very worthy goal. Once you reach it, you no longer need to work to maintain your standard of living--that means more free time to do whatever you want to do, and more money to lend on Lending Club! And if your idea of free time is the same as mine, you might be making a lot more money after your crossover point has been reached than before it.