- Achieving early retirement can be done with help from a simple habit, according to early retirees: Tracking your net worth.
- You should also have a net-worth target to help stick to your early retirement plan, says Sam Dogen of Financial Samurai.
- But beware: An obsession with measuring your progress can pull you off course.
How much money you need to retire early depends on your cost of living and potential for investment growth and passive income.
But once you have that ballpark number figured out, just how do you get there?
According to several early retirees, one of the keys to achieving financial independence lies in one very simple habit: Tracking your net worth.
It’s a way to “kickstart your journey to wealth” and the “single best thing” you can do within five minutes if you want to progress financially, wrote JP Livingston, who retired early at age 28 with $US2 million, in a post for Business Insider.
“If you think about every engaging thing you’ve done, they probably had some way to measure your progress,” she wrote. “How many goals you scored. How quickly you can complete a set of problems. Personal finance is no different. You improve what you measure.”
She added: “You need to be able to track your income, expenses, and net worth. It needs to be staring you in the face every day. Once you start seeing these key metrics improving regularly, it will spur you to dig into the details and find opportunities to grow it faster.”
Productivity expert and author James Clear agrees. He told Brandon, an early retiree also known as the Mad Fientist, on his podcast that successful people measure their progress toward a goal because it offers three major benefits: It makes the behaviour more obvious, creates an additive effect, and adds immediate gratification.
“It will show you where the opportunities lie to improve your financial picture,” Livingston said. “It is the cornerstone habit that helps build momentum for all the other things you do to grow your wealth.”
Tracking your net worth includes tracking everything – your income, expenses, savings rate, and investing performance,says Grant Sabatier of Millennial Money. It’s one of the key strategies he used to grow his $US1.25 million nest egg and retire at age 30.
Both Livingston and Sabatier use Personal Capital to track their net worth. “I do it every morning, but you can do it as frequently as you like,” Sabatier wrote.
Track your net worth and set goals – but don’t obsess over it
Sam Dogen, who retired at 34 and runs the blog Financial Samurai, also emphasised the importance of tracking your net worth.
“Please track your net worth like a hawk so you know exactly where you stand and how much more you’ve got to go,” he wrote in a post published on Business Insider. “There are too many middle-aged folks who wake up one day and wonder where all their money went because they didn’t stay on top of it. When all they want to do is take it easy, they’re faced with the harsh reality that decades of more work is their only option.”
You should also use it to set goals, Dogen said.
“Everybody should have a net-worth target to shoot for by age, work experience, and income,” he wrote. “Targets will help you stick to your financial plan and motivate you to do more if you’re falling behind.”
Having a net-worth guide – like this one Dogen created – to stick on your fridge will help keep you on track, he said.
But be careful: An obsession with reaching a specific dollar figure could pull you off course. If you obsess about the measurement, it loses its benefits when it becomes the target – a concept known as Goodhart’s Law, Clear said.
“A measure is only useful when it informs you or when it is a bit of data that kind of nudges you toward the ultimate thing,” he said.
Inevitably there will be stock market gains and losses, and your net worth will fluctuate. Try not to track your net worth to a see a bigger number each month. Rather, look at the progress over the long-term and make sure you’re moving in a positive direction.
“One of the purposes the measurement should provide, is that it provides an emotional signal that you’re moving in the right direction,” Clear said. “It provides a signal of progress. And that’s really all that you’re looking for.”
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