Mainstream financial advice often emphasizes cost reduction, income boosting, and consistent saving and investing. These elements are crucial but become less significant at a certain stage of wealth building.
This shift occurs due to compounding growth, which operates exponentially with most impact in later stages. Early progress with minimal capital can be slow and modest, as compounding lacks time or scale to exert its full effect.
The crossover point in wealth creation is reached when portfolio growth rate surpasses annual contributions. For instance, saving and investing $1,000 monthly from zero at a 7% annual return yields approximately $165,800 after 10 years. At this stage, $120,000 of this wealth comes from personal contributions, with a $11,606 return still below the $12,000 annual contribution.
In year 11, the portfolio reaches $189,400, generating a $13,258 return that exceeds the annual contribution. Compounding then becomes the primary driver of growth.
Beyond this point, annual contributions diminish in importance as the portfolio self-propagates. For millionaires, a $12,000 annual contribution becomes negligible.
To accelerate reaching the crossover point, early aggressive saving and investing can shorten the timeline. Increasing annual savings to $18,000 for three years, then reverting to $12,000, achieves $172,684 in six years. A 7% return on this amount yields $12,088, surpassing the annual contribution and reaching the crossover point in nine years instead of 11.
Some individuals, after reaching the crossover point, consider reducing or stopping savings altogether, a strategy known as Coast FIRE within the online FIRE movement. This approach relies solely on compounding for retirement growth, though it typically delays retirement, with most practitioners continuing to work until traditional retirement age according to Empower.
While the crossover point marks a key milestone, abandoning contributions entirely carries risks. Job loss, emergencies, or economic downturns could prematurely deplete savings or delay retirement if growth rates fall short. Maintaining savings habits post-crossover is often advised for financial security.