(Business Insider) Leif Dahleen has always lived frugally for a high earner.
About a decade into practicing medicine, Dahleen had saved and invested an amount equal to 25 times his family's annual spending — the magic number for financial independence — somewhat by accident.
"I had been saving, often more than half of my take-home pay, but I never knew what I was saving for. It occurred to me that I had been saving for my freedom; I just didn't know it," Dahleen wrote in an article for Business Insider.
Dahleen crafted a plan to leave work for good at age 43. He calculated that by that point, his savings and investments would be equal to at least 36 times his family's estimated annual spending. In August 2019, Dahleen retired from anesthesiology.
Along the way, he started a blog, Physician on FIRE, to track his progress and share advice. While Dahleen's situation may be unique, he says the first step to retiring early is the same no matter how much you earn or when you decide to chase financial independence: take inventory.
"There are two things you need to know in order to make a plan for the future," he told Business Insider. "First, you should calculate your net worth. This can be done in a matter of hours."
Your net worth is what you're left with after subtracting your liabilities (what you owe) from your assets (what you own). Not to be confused with income — that's what you earn from your job and what's reported on an income-tax return — your net worth is a single figure that represents your financial standing.
"The second thing you need to calculate is your annual spending. You may be able to guesstimate this based on credit-card statements and your checking account habits," Dahleen says. "It's a good idea to set up semi-automated tracking with an app to verify how much money actually goes out the door every year."
If you plan to keep your spending at the same level once you leave work, your target savings number will simply be a multiple of that figure. The common benchmark is 25 times your annual spending, which is predicated on the 4% rule. This tells us that when we invest an amount equal to 25 times what we spend in a given year, we will be able to indefinitely withdraw 4% of that nest egg each year thereafter.
"These two puzzle pieces will help you craft a plan to reach financial independence," he says. "It's tough to reach any destination without knowing your starting point."