Another more conventional definition of financial freedom is when you have “passive” income that covers your expenses so that you no longer have to work. Usually, this comes from paper investments like stocks, bonds, or annuities. In the book Your Money or Your Life, the authors outline a somewhat unique way to track your progress towards financial independence (FI).
First, you should go out and buy a huge wall-sized piece of graph paper and put it up somewhere you’ll see every day. Create a chart with the horizontal axis being time, and the vertical axis being money. Each month, you should record the following items:
- Your monthly income
- Your total monthly expenses
- Estimated investment income
Here is a sample of what it might look like:
![](https://www.mymoneyblog.com/images/0807/crossover.gif)
Line 1 – Graphing Your Income Each Month
While many personal finance articles focus on spending less, the book does a good job of reminding us that income matters and we can always do something to increase it. It also tells us that the path towards a happier life and a career you enjoy of also tends to increase your income. The book summarizes this with the following:
“Increase your income by valuing the life energy you invest in your job, exchanging it for the highest pay consistent with your health and integrity.”
Line 2 – Graphing Your Expenses Each Month
Note that we are not making a budget here. A budget often seems to suggest a goal of “I will spend this much”. Instead, here you are first making an assessment of your situation from last month. You then attempt a few (or several) changes, and re-assess again a month later. This continual feedback should ideally help you see what is working and what’s not.
For those dealing with debt, the Expenses line might even be higher than your Income line at first. This should provide a nice incentive to get to the first “crossover point” where you at least earn what you spend. Gradually, we can shave off those lower priority expenditures as we keep seeing that gap between income and expenses grow wider and wider.
Line 3 – Graphing Your Expected Income From Investments
Here, the simple formula given for finding the income you can derive from your investments is this:
The suggested investment here is to use is that of the 30-year U.S. Treasury Bond, currently yielding somewhere around 4.5%. This means if you bought $100,000 of these bonds with your savings, you would earn $375 reliably every month for 30 years without risking your principal. Other people might use dividend payments from stocks, or use a historically-safe withdrawal rate.
Either way, the big goal is to make this third line meet up with the expenses line. As time goes on this line will hopefully curve up exponentially, providing inspiration to reach this “crossover point”. The idea of working for only a finite period of time can be very motivating.
Given that this book was written in 1992, I am going to guess that doing this using a spreadsheet program like Excel is also acceptable. While a physical chart may work better for some people and provide a more constant and tangible reminder, I think perhaps making the chart your Desktop wallpaper might serve a similar purpose. (Or you could create blog about it…)
This is a pretty cool idea. Perhaps I should stop tracking net worth and simply do this? For us, as mentioned before, once our mortgage is paid off the expense line should drop dramatically. Separating out the non-housing expenses into a separate line might help me focus better.
That grafx looks quite sharp, what tool did you make it with ?
Wow, your timing of this is crazy – I literally *just* opened up this book on my morning commute today! haha…unfortunately i can’t read most of this post (i like the surprises), but that whole graphing thing seems pretty smart and motivational.
I’ll be sure to check back on it though for a nice summary of things 🙂
Great tool, thanks.
I like the way that income, expenses and investment income are plotted on a chart. When your alternative/investment income crosses the expenses line you will have achieved financial independence.
I like looking at your net worth the way you’ve got it now, but I wouldn’t mind you adding this type of chart in as well. Did you make that chart from Excel, btw? It looks too pretty to be from Excel, so if you did, how, and if not, what program IS it from?
You know what else? This type of chart might quell all those people who always say “geez, why don’t you just tell us how much you make a month?” 🙂 Unless, of course, you take out the numbers and just give us the lines.
I don’t keep a chart but I run these calculations in my head about once every other month. Before the Fed dropped interest rates like crazy I had enough passive to cover rent and utilities. And by passive I meant bank/brokerage interest, dividend paying stocks, and a bond fund that payed dividends every month (not counting 401k/roth dividends since I won’t have access to those in ages). Now I don’t even make enough to cover rent! (FYI I live in a 400sq ft efficiency so is super cheap).
Just saying that investment income line can also go down (especially if you only include fixed income sorta things). Every 1% the Fed drops is equivalent to one bill that can no longer be covered by passive. Luckily the Fed in independent otherwise I’m sure the old people would’ve voted our current Fed chairman out by now!
Great write up on a favorite section from one of my favorite personal finance books. Do you think the recommendation to use 30-year U.S. Treasury Bonds is still a good one? It’s hard to get my head around the idea of investing in something with such low growth, but I understand the idea is to replace monthly income, not to generate a huge pot of money.
This is definitely a good way to look at your finances. A graph tells the story better than a spreadsheet ever could.
This is pretty neat. Thanks for sharing it with us!
I am trying to figure out where I would put outflow to investments and debt reduction though.
Let’s say I bring in $8k one month and plop $4k of it into my Roth IRA? Does the “investment income” line go up by $4k even though it says “income” not principal? Also, if I were to instead put that extra $4k into paying down a student loan where do I record that? By decreasing my monthly expenses by a certain amount even though I haven’t paid off the whole student loan?
I’m a fan. That’s a great idea. I like how it graphically compares spending to investment income. Too bad those lines haven’t already crossed for me.
This is a great chart, simple but eye-opening. A couple minutes after I browsed away from your site (sorry for leaving!), it occurred to me a slight modification to improve the reality of this topic is to mention effect of taxation on the investment income, so in reality the big goal is to make this third line rise above the expenses line enough to account for taxes. Unless of course, you are assuming taxes are an expense. Are you?
How do you track spending? I find it a pain to keep track of every transaction, but it seems like there isn’t any easier way.
Chart graphic is from the newer version of MS Excel for Mac OS. I am using a friend’s Mac to convert. I wish I could just buy a cheap upgrade my Windows version to have it look so good!
Gretchen – I think everything is just kept independent. Income is income, no matter if it ends up in an IRA or BMW. Expenses should include debt payments. Investment income will go up with the IRA deposit, but only by a percentage
$4000 x 0.045 / 12 = regular income of $15 /month
Dave – Taxes are a definite issue that I thought about dealing with here but it seems liked a big mess. You’d have to adjust for your Roth IRA/Traditional Mix and assume a tax rate.
Andy – If you spend everything on a credit card, you could try the many different flavors of Yodlee: Yodlee MoneyCenter (free), Bank of America MyPortfolio (need BofA acct), Mint.com (free w/ ads), Fidelity FullView (need Fido acct), and so on. You have to be willing to give up your credit card website passwords though.
Johnathan – Regarding MS Office for windows, I can buy a copy of Office 2007 Pro from my workplace (a fortune 500 utilities company) for $20. I’m sure other big companies have similar deals for its employees.
Andy –
In order to track my own spending, I get a copy of my spending report – I bank through Wells Fargo and they have it very easily accessible online – for my credit cards and then just add those up. It’s an easy way for me to keep track of how much money I’m spending on ‘crap’ basically.
If you have online banking, or use your credit cards online, as Jonathan said either use a service like Mint or Yodlee, or alternatively see if perhaps you can download a spending report automatically. Makes life a million times easier than tracking everything independently.
Hope that helps!
I’m a big fan of Your Money or Your Life. Big Fan. The takeaway for me was not so much financial independence, but rather realizing that when you spend money on what you value, you’re satisfied (and you spend less).
Great post.
I never read that book, but I love that idea – something yu can look at everyday to keep you on track. That’s what I need 🙂
Great post – one twist on the investment in dividend paying stocks and bonds is to choose those companies that YOU are using, for example I pretty much have to use NSTAR for my utilities so have a 5K stake in their DRIP program and consider the dividend a “rebate”. After 5 yrs I’m getting about 1/2 month utility paid for – so the idea is eventually to have my expenses coming back as dividends because I have to use these services.
This is a great Idea, I’ve been tracking these three different things but have never gone the second step to create a “investment income” from the investments. This is a GREAT way to put it all into visual perspective.
One question though? Would additional payments to the mortgage and money towards your investments count as Expenses on this graph?
Great post Jonathan, thanks! I just did up one for myself and plan on posting about it soon.
@Corby – I’ve created this graph for myself and as I understand it, or at least how it works for me, is that all “negative” expenses such as consumption, debt payment, utilities, rent, mortgage, etc. should be counted as expenses, but all “positive” expenses, i.e. any savings or investment contributions shouldn’t be counted as expenses. This way the area between the blue and red lines represents the amount of money that you are saving/investing each month. Otherwise you’d have the blue and red lines running exactly together.
I guess this has some grey area in it (i.e. Is a down payment on a home considered an expense or investment? I think I would consider it an investment, but the mortgage payments expenses.)
But the reason this makes sense to me is if you consider the expense line to be simply living expenses. A mortgage payment is a regular lifestyle expense; investment contributions aren’t. The purpose of this graph is to show the point at which your passive income can cover your monthly expenses.
I started charting this on Excel about 2 years ago. I sit down for maybe an hour each month and pull out my paystubs and check my bank statements and credit cards online. Input the data next to last month’s, and voila.
The investment line is challenging — I don’t include any income from my retirement, and instead just track predictable income from CDs, etc. The crossover point idea seems best suited to an investment strategy of keeping all your money in long term bond or CD accounts. With more complicated investments with variable yields, assessing one’s crossover point is trickier.
I also create two income lines — one for take home pay and one that also includes mine and my employer’s retirement contributions.
But really, its mostly about the process and dreading (and therefore avoiding) months when my expenses exceed my income.
Great idea about the graph. With any tool the challenge is putting it to use. If people want to get ahead they have to take advantage of ideas like this and put them to work. So many people just spend until they run out of money.
So, is this book a pretty good book or what? Never heard of it, but I like the reviews that say it’s similar to Kiyosaki’s books but with a means to apply the learnings. What’s your take Jonathan? Is it an easy read? Is it worth it?
This book was my salvation; thank you for writing about it here.
I faithfully do my expenses tabulation to this day, 8 years after discovering this book. I use Excel & its pivot table feature.
But please critically read the investment advice. Supplement it with Bogle on Mutual funds or a similar book; otherwise you may miss future gains in the stock market.
30-year treasury bonds yielded up to 15% during the 80’s when the authors reached FI; today the yield is only 4%. But who knows? Maybe in our lifetime we can catch it next time around.
The book also touches on the notions of right livelihood & the specter of inflation: you’ll probably struggle with these important notions as I did.
I am not FI, but I’m oriented towards achieving it by age 55.
Beware also: when you do retire, you’ll have plenty of time on your hands. What are you going to do?
Vicky Robin (surviving co-author) is still around too, which is great.
Great site btw!
Great idea, anything visual will keep you more on track. I really believe you also have to have your own financial goals in mind also, to determine what you are saving for. The first step should be to determine how much you need to save for each goal each month, prioritize them, and then judge your savings.
A very interesting and different way to look at getting to our goal of financial independence. I must admit that I have never read this book but after reading your post I just ordered it as it should prove to be interesting reading.
Currently I use advanced Excel spreadsheets to track my passive income from various sources and after reading your article I will be adding another spreadsheet as it is always good to look at things from a different perspective.
The Retire early website has a great spreadsheet/graph like this that projects forward to your “crossover point” and factors in taxes (all the way down to brackets/deductions), inflation, rates of return, rates of withdrawl, etc. This is at http://www.retireearlyhomepage.com/software.html
The example doesn’t look that impressive on the website, but when you download the Excel file you see how complex it actually is and how many variables you can control. I’ve found this to be the best retirement planning tool I’ve found to date and would be a great starting point to tracking your progress this way.
Glad you’re finally looking at Your Money or Your Life. That book, although not perfect, gives a great whole picture of how money should really be looked at, IMO. If you want more insight into the book or things that go along with it, the forums at the Simple Living Network are nice to look at and chat on.