Early retirement and especially extreme early retirement is more a question of willpower (and courage) than knowledge. Most likely early retirees obsess about five different numbers, because these numbers are everything when it comes to financial freedom.

  1. Net worth. Do you know what your net worth is? I know mine to the nearest $1000 and I have known it practically every day for the past 5+ years. For example, DW’s engagement ring four years ago cost about 1% of my net worth at the time.
  2. Expenses. Do you know how much money leaves your bank account every year? Do you know where the money goes? It is this number relative to your net worth that determines your freedom. The first number to shoot for is 25, but 33 is safer, and 40 is very safe.
  3. Inflation rates and investment return rates. These are the numbers that determine the three numbers above. If you’re serious you will know a lot about safe withdrawal rates, historic inflation rates and principal protection.
  4. Projection of net worth next year, the year after that, etc. Regardless of whether you have a computer program, a spredsheet, a graph or just run the numbers in your head, candidates will have a really good idea of how much they’ll be worth next year, the yar after, when they’ll cross $100,000, $250,000, and other milestones.
  5. The crossover point. The most important milestone is the cross over point. This is the equivalent to an ER candidate as being debt free is to a person in debt. You should know this down to the year but you’ll probably know it down to the month using the projections above.

Daily Yakezie: Five Reasons Why A Penny Saved is Better Than a Penny Earned @ Personal Finance by the Book & How to Get the Most Out of Your Money: Rocks, Pebbles, & Sand @ Personal Finance Ninja

In other news: My book writing is moving along. I am spending almost all of my time on this because I want to get it finished before June at which point I have been working on it for 2 years. I got sevensix sections left to fix. Then it is done, insofar that I don’t add more, though I shouldn’t.

Originally posted 2010-04-05 20:56:36.