Authors: Trent Hamm
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Keep your savings in a hard-to-reach place.
At the same time, simply having a savings account at your local bank with an enormous balance is also incredibly tempting. Such savings is easy to access quickly by ATM, and it often takes little more than a phone call to have that savings balance transferred right over to checking for easy access to fulfill lifestyle inflation desires. Our solution for this is incredibly simple: We keep our checking account and a small savings account for emergency purposes at one bank—the local one in our town so that we have teller access—and the rest of our money is stored either in certificates of deposit (CDs) that financially penalize us for early use or at an online bank that cannot be as easily accessed. These barriers are just enough to force us to think about and talk about large lifestyle-inflating purchase and gives us the time we need for our more rational minds to take over.
As we shopped for our next car, we test drove many different models in many different price ranges. Some of them offered exquisite experiences—leather seats, perfect leg room, full surround sound, a DVD player, an in-dash GPS, clever storage, exquisite handling, and so on.
After trying them all, Sarah and I walked back to one of the least-expensive models that we drove, a Toyota Prius with almost no bells and whistles on it. It did what we wanted—it provided fuel efficiency for her lengthy commute and a high level of reliability and safety for the dollar.
We could have afforded the Lexus with the leather seats or the BMW with the superb engineering. In the end, though, that expensive car would have just served the same function as the Toyota would—getting my wife back and forth on her daily commute.
We smiled at each other as we drove away in the Prius, knowing that the tens of thousands of dollars we saved in not keeping up with the Joneses and simply buying what we needed left us that much closer to our dreams.
March 2009
The crossover point, as popularized in the book
Your Money or Your Life
by Joe Dominguez, Vicki Robin, and Monique Tilford, refers to the point at which the income from your savings and investments exceeds your living expenses, making it unnecessary for you to work for an income.
It’s easy to understand this with an example. Let’s say Leo lives happily on $30,000 a year. His local bank has long-term certificates of deposit that earn a 4% return. If Leo is able to buy $1,200,000 worth of these CDs, the CDs will return the stable $30,000 a year that Leo needs to live on. Obviously, this is simplified—I’m excluding tax implications—but the basic principle is clear.
For many people, the sum required to reach the crossover point seems tremendous—an insurmountable goal. They give up before they even begin. However, consider these four points.
A partial crossover point allows you to leap into your dreams.
Let’s say Leo wants to be spending his free time as a gardener at the local greenery, earning minimum wage doing what he loves doing: putting plants in
the ground. This job earns Leo about $25,000 a year. So, for Leo to be able to take this job, he just has to come up with that extra $5,000 a year. In order to earn that amount, Leo merely needs $125,000 worth of CDs to make that life-changing leap.
Your investments as you approach the crossover point help push you over the top.
As you save toward the crossover point, the income from the investments you already have can be rolled over into the investment. In Leo’s case, let’s suppose that he’s buying a $500 CD each month that returns the steady 4% we discussed previously. In the first year, he only buys the first twelve CDs for a total of $6,000. The second year, he buys twelve more, giving him a total of $12,000 in CDs. However, the first year’s worth of CDs each return 4% on that investment, giving him an extra $240, which he uses to buy another CD. In the third year, he buys twelve more CDs, giving him a total of $18,240 in CDs. However, the first $12,240 is returning 4% to him, giving him another $489.60 to invest in additional CDs. Each year, his initial investments help push him toward his big goal.
As you push toward your crossover point, you can be more aggressive with your investments.
Once you reach the crossover point, you’ll want your money to be in a very safe investment where the return is steady and there is minimal risk of losing your initial layout. Before then, though, you’re supported by the income from your work, which means you can afford more risk in how you invest the money. Stocks, for example, are a good place to invest this money. In a given year, stocks might go up 16% or they might go down 16%, but over
the long haul of history, a broadly-based stock investment will go up an average of 7% per year.
Taking that into account, let’s look at Leo’s progress with an investment in a stock index fund instead of CDs. Each month, he’s putting aside $500 for stock investing and, at the end of the year, he rolls that $6,000 into his stock index fund. In the first year, he only buys $6,000 worth of stocks. The second year, he buys an additional $6,000 worth of stocks. However, the first year’s worth of stocks returns 7%, giving him an extra $420 that he can roll into his investment. In the third year, he buys $6,000 worth of additional stocks. However, the first $12,420 is returning 7% to him, giving him another $869.40 in his investment. Over the course of the investment, the acceleration given by his early aggressive investments will cause him to reach his goal more than a year earlier.
Snowflaking is an incredibly powerful strategy.
Back in
Chapter 6
, “With or Without You,” we discussed snowflaking as a useful strategy for reducing debt. Simply put, snowflaking means making small choices to save money and turning the money saved from those choices toward your financial goals. Receiving a windfall, cooking at home instead of going out, finding a $50 bill in the parking lot—these are all sources for snowflaking. Each little step seems small and insignificant, but it’s the combination of a lot of little actions that makes a profound difference.
If Leo did nothing more than give up a $5 breakfast once a week and replaced it with a piece of toast before leaving the house, he’d contribute $260 more toward his goal each year and move his partial crossover point
almost two months earlier. Even one single, simple action can have a surprising impact on your life. A collection of simple choices can bring about truly profound change.
As you begin to accumulate significant wealth, you’ll want to put some safeguards in place to preserve this wealth in the event of a personal crisis. After all, this wealth is the result of a lifetime of careful planning and work, and in a world that grows ever more filled with randomness, you don’t want an extreme negative random event to undo all of your hard work.
Here are some options to carefully consider if you have hard-earned financial resources that you want to protect against the unknown.
A will and/or a living trust
are vital tools for ensuring that your property is handled in the way you desire after your passing. A will is simpler and less expensive, but it requires that your property goes through probate, which is the legal administration of your will in court. In cases where your will is unclear, a judge will likely be the person making the decision as to the final destination of your property. On the other hand, a living trust allows you to identify trustees for your property, allowing these people that you trust to make any such decisions about your property that you didn’t specify. However, living trusts can often be quite expensive to set up and to maintain. The choice often comes down to more precise control with higher costs or less precise
control with much lower fees. If you have substantial assets, you should consult an estate attorney to go over your options in your jurisdiction.
A living will or advance health care directive
sets in stone the actions you want to have taken on your behalf in a medical emergency. Getting this document in place ensures that, if it is against your wishes, you never become a medical burden to your family, sapping away your life’s work just to maintain you in an incomplete state. Take this difficult choice out of the hands of your loved ones—protect them from having to decide and protect yourself from a life that you may not want.
Umbrella insurance
covers you in the case of additional liability beyond the limits of your already existing insurance policies, like life insurance, homeowner insurance, and automobile insurance. If you have wealth that extends beyond the limits of the protection such insurance offers, your personal wealth may be in danger if you’re at fault in an incident. If you have it, in such high-liability instances, umbrella insurance steps in and protects your hard-earned money against legal attacks.
Long term care insurance
provides coverage for the cost of long-term care if you’re struck with a medical condition that causes you to have long-term health care expenses, such as a nurse or expensive equipment that goes beyond the coverage provided by typical health insurance or Medicare coverage. Long-term care insurance merely makes sure that, if you find yourself in such a situation, your lifelong earnings aren’t drained in the cost of your care.
You’ve mastered the art of the gap, and the gap has helped you achieve things you never thought possible. What can you do to keep the momentum going?
We looked out the windows of the airplane as it rested on the tarmac, waiting to take off. Our fingers were entwined. Just twenty-four hours earlier, we had walked out of the church, husband and wife. Now we were beginning our new life together with a honeymoon in the United Kingdom.
I squeezed Sarah’s hand and she looked back at me, her hazel eyes shining. “It’s just me and you now, honey,” I said, and she gave me one of her patented crooked smiles. As the plane took off, I leaned back to relax. After all, we had a lifetime ahead of us. This was no time to think of money. The rest would take care of itself, or so I thought.
June 2003
We are all emotionally invested in our money and in our spending decisions.
The money we have is the result of our hard work, our hours and our energy given over to someone else so that we can have the things we need and a few of the things we want. Our spending decisions are often a window into our imperfections, full of impulsiveness and materialism. The investment of our time and the revelations provided by our buying choices are areas that we often protect.
There’s a big reason why money is often something that’s avoided in polite conversation.
But in the real world, we have deep, intimate relationships with other people and our choices, when it comes to money, can affect them greatly.
This is where our conflicting interests can run into trouble. On the one hand, we value our privacy and our hard work, as well as a sense that we make good spending decisions. On the other hand, we need positive intimate relationships with other people; often, we need to provide care and resources for them.
Balancing this equation is simple once you recognize that the people with whom you share a deep relationship love you for who you are and are invested in your success. Their criticisms come from a desire to see you both succeed and their defensiveness comes from the difficulty in opening yourself fully to another person. If either of these statements fails to hold true, then the relationship itself is in danger.