Saturday, December 22, 2007

Cross Over Point - Net Worth to Total Earnings

One of my financial cross over points is approaching.

What is a Cross Over Point?
Simply put, a cross over occurs when one entity exceeds another.

There are several different types of financial cross over points. One popular cross over concerns passive income as compared to expenses. For instance, once your passive income (non-wage income) crosses or exceeds your expenses, you are now making more money from your investments than you need to live. Ahhh, a signal of financial independence!

Another cross over point that I find interesting compares net worth to total earnings. Do you have any idea how much money you have earned in your life? Its probably more than you think. What if you had been able to save every penny that you ever earned? You would probably have a large sum. Obviously, we can’t do that as we must spend some to live. However, we can invest the money we save and it will grow to eventually catch up to our total earnings value.

Net Worth / Total Earnings Ratio
Out of curiosity, I decided to calculate the ratio of my net worth to total accumulated social security earnings. For my earnings, I used the official data provided to me by the Social Security Administration. Every year, the SSA sends each taxpayer a pamphlet that explains their SS benefit. It details the amounts already paid into the system and projects what your payout will be in the future. I added up my earnings from age 16 to present that were provided in the SSA pamphlet. For my net worth, I used the most current data that I had calculated for last month, November.

The ratio of my Net Worth to Total Earnings is 0.98. The cross over point is very close. In fact, it’s possible with a little Santa Claus rally that by the end of this year the crossing will occur for my final net worth calculation.

What does it mean?
As a comparison, some of my co-workers have worked just as long and earned just as much or more than I, yet their ratios are in the area of 0.2. Have they really spent that much more money than me? Not exactly. You have probably heard that a penny saved is a penny earned. Well, it goes even farther than that. When you make a purchase, not only are you spending that dollar, but also all of the future earnings from that dollar. So, when you trade away money it can no longer work for you. This underscores the importance of starting a nest egg, no matter how small, you have got to start the seed. The money I have saved, has been invested and has been working for me for a long time. And now its almost to the point where it will surpass my total lifetime earnings.

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