Step 8: Capital & The Crossover Point

By doing steps 1 through 7, you will move towards FI. With Step 8 the possibility of Financial Independence opens up. Step 8 shows you how you can perhaps leave paid employment a lot sooner that you would have ever thought possible.

What you should begin to see in your wall chart is a growing gap between income and expenses -- that is, savings. Before FI thinking takes over, a 'normal' person might regard those savings as earmarked for a splurge. But FI thinking sees those savings in a different light. FI thinking calls that gap 'capital'.

Capital is money that makes more money. It keeps working for you and produces an income as surely as your job produces income. When you put capital in a bank or other interest-bearing instrument it is an investment. An investment is the conversion of capital into some form of wealth other than cash with the expectation of deriving income.

The income you receive from your capital of a different nature than your job income. It comes in whether or not you go to work. Instead of simply lumping it in with your total monthly income, you will be entering it separately on your wall chart according to the formula given below.

Each month apply the following equation to your total accumulated capital, and post the monthly independence income as a separate line on your Wall Chart:

How:

• Find the long-term interest rate by looking at the interest of the 30-year treasury bonds in the treasury bond table of The Wall Street Journal or a big-city newspaper. After a number of months on the program, your total monthly expense line will have established a much smaller zigzag pattern at a much lower level than when you started. With a light pencil line, project the total monthly expense line into the future on your chart.

Outside the United States, this information can be found in national daily newspapers, and financial web sites. For this particular section of the program, and for more information, please refer to the book.

• After a number of months on the program, your monthly investment income line will have begun to move up from the lower edge of the chart. (If you have actually been investing this money as outlined in Step 9, the line will be curving upward -- the result of the magic of compound interest.) With a light pencil line, project the monthly investment income into the future. At some point in the future it will cross over the total monthly expenses line. That is the Crossover Point.

Why:

• At the Crossover Point you will be financially independent. The monthly income from your investment capital will be equal to your actual monthly expenses.
• You will have enough.
• Your options will be wide open.
• Celebrate.

Step 8 -- FAQ