Not too long ago, I stumbled across a new financial metric created by a fellow blogger, The Green Swan. This “FIRE Prowess Gauge” promises to be universal to everyone and balance out any differences between people such such as income level, cost of living, and current net worth. By balancing aspects of earning, saving, and investing all into one simple-to-calculate number, we should be able to compare both against our past selves to see how we’re doing and compare to others without revealing all the gritty details of our finances.
In theory, we should be able to use this number to see how well we are doing in our pursuit of Financial Independence and Retiring Early (FIRE) and “Prowess” was a nice word choice given it’s meaning of: “skill or expertise in a particular activity or field”.
I decided to play along and calculate my own FIRE Prowess Gauge which I’ll share below, but I’ll also go into some more detail as to why I think this is a flawed FI metric overall. Let’s get to it.
How to Calculate Your FIRE Prowess
FIRE Prowess is simply calculated by dividing your change in net worth over time divided by your total gross income for the same time period. Using calendar years is the easiest way to track it on a regular basis.
FIRE Prowess = Change in Net Worth / Total Gross Income
The Green Swan recommends using AGI for the gross income aspect (which I have thoughts on below), but you can also use the My Social Security website (in the US) if you no longer have your tax documents for past years. For net worth, you will ideally have been tracking this important financial metric already, but if not, it should be possible to look back over past bank statements, investment statements, and estimate your home’s value (if relevant) for each the past years you want to calculate.
In the future, you might want to consider using Personal Capital which allows you to track the balances of all of your accounts in one easy to use place, for free! I log into Personal Capital on a regular basis to check my net worth and play with their retirement calculator to see if we’re on track for our goals.
Once you have those two important pieces of information, you simply have to divide them over each of the past years to get your “FIRE Prowess” for that year. It is also recommended to smooth out the volatility of the market by looking at 5-year rolling periods, or even calculating your lifetime FIRE Prowess by looking at your total change in net worth and total income since you starting working.
In fact, the Lifetime FIRE Prowess number matches J Money’s own Lifetime Wealth Ratio he introduced a couple years ago.
My Own FIRE Prowess Gauge
First thing’s first, let’s see how our own FIRE progress stacks up within this new metric. I’ve been tracking our finances in great detail since the beginning of 2014 when we really launched into the goal of achieving financial independence by age 40, but I also had my older tax forms and bank/investment statements to calculate our net worth going back an additional couple years.
One interesting note is that Becky and I have only been working in the real world since the middle of 2013! For this reason, 2012 and the first half of 2013 included college, which will most likely skew this metric a bit. For that reason, I’ll ignore 2012 and start our FIRE Prowess in 2013 even though it might be a little skewed:
- 2013: 0.26
- 2014: 0.52
- 2015: 0.66
- 2016: 1.08
- “Lifetime”: 0.68
The numbers seem about right given we discovered FI and started making big steps towards achieving it in 2014 (like maxing out our 401k’s), and the Lifetime score of 0.68 puts us in the following category according to The Green Swan’s Gauge:
“You’re working hard toward your retirement goals! Early retirement is definitely possible. Keep working hard and that investment snowball will be rolling (compounding) in no time!”
That about sums it up, but this previous year being over 1 (meaning our net worth grew more than our income) is a bit misleading for a couple reasons. First the gross income number that’s recommended, AGI, doesn’t include tax-deferred money that we put into our 401k and HSA during the year. For this reason, our AGI was actually LOWER than our net income for the year because we chose to max them all out. In reality, we didn’t actually grow our net worth by more than our income in 2016!
The second thing that skews our number a bit is that a large portion of our net worth is currently tied up in the house we live in. If we sell in the future to downsize, move, or switch to renting then a portion of that money could help us reach our FIRE goals, but certainly not all of it. While the house has been appreciating rapidly ever since we bought it (Thanks Seattle!), it doesn’t really advance our FIRE goals until we eventually move out.
Now that I’ve shared my own FIRE Prowess Score, I’d like to share my thoughts on this new metric and how it might be improved.
I like where The Green Swan’s heart was at with this metric. There can definitely be value in a universal metric that can apply across different income brackets, age groups, and everything else that makes personal finance so “personal”.
A great perk is that FIRE Prowess Score is simple and easy to calculate which means lots of people were able to hop on board and share their own numbers as you’ll see at the bottom.
Unfortunately, that sums up the only good things I have to say about it.
While the FIRE Prowess Gauge includes aspects of earning, income, and investing by including gross income and net worth, I would argue it’s oversimplified and not very useful.
First, there are the two flaws I brought up in the analysis of my own FIRE Prowess:
- Using gross income (more specifically AGI)
- Using overall net worth
If we want to measure FIRE progress, then we should focus on what money we have available to further that goal each year and only the portion of our net worth that helps us with that goal.
For reasons mentioned above, AGI is a poor measure of income (gross or net) because of what it doesn’t include (such as 401k contributions), but even a true gross income wouldn’t be as good as using net income because there is only so much you can control with taxes. Sure, you can defer taxes until later using retirement accounts (and you probably should!), but that has a limit and still doesn’t avoid FICA taxes (mostly). At the end of the day, if you are pursuing FIRE, there will most likely be some taxes that you simply can’t avoid for various reasons based on your earned income. Why should you be penalized for that?
For that reason, I think it makes the most sense to use net income. To calculate it, you take all of the money you made over the course of the year, then subtract out any taxes you paid on that money. Unfortunately, this doesn’t boil down to a simple line on your 1040, so it requires a little extra work, but it does get us closer to the goal of measuring what we can actually control. Why should we use a poor approximation of income when it’s not hard to calculate the actual usable income number instead?
Next, I think it’s flawed to use overall net worth in FIRE Prowess. Why? Primary residences. While it’s great that houses tend to go up in value over time and boost your net worth, that doesn’t actually matter in regards to your FIRE goals. There’s been many articles written about why your house is a terrible invesment for good reason and you won’t be able to pull ~4% of your home’s value each year to support your spending in retirement.
If you’re planning on staying in your home for the long haul, the value of it means almost nothing towards your FIRE goals. Why should we include something that doesn’t matter in this metric that measures FIRE Prowess?
Instead of using overall net worth as the numerator, I propose a switch to: Change in [Investments + (Non-Investment Passive Income * Expected SWR)]
Investments would include anything you would be able to withdraw directly from in retirement such as stocks, bonds, and even cash holdings. I then added the non-investment passive income (such as rental income) which would be expected to continue through retirement. Much like primary residences, the net worth of rental properties isn’t important if you plan to live off of the rental income itself in retirement. Only the profits that come from that rental matter.
I then normalized the passive income to the investments by allowing you to plug in your expected Safe Withdrawal Rate (SWR). This is because for every $1 you are gaining from passive income, there is $25 you won’t need to have invested (assuming a 4% SWR) to achieve FIRE.
If you do plan to sell your primary residence and/or rental properties before FIRE, then you could choose to include the net worth of them (minus transaction fees which can be large) in the Investments portion instead. If you plan to rent out your current residence after FIRE, then you could include the expected profits in the Passive Income portion.
The key takeaway is that successfully achieving FIRE is based on achieving enough passive income to cover your annual spending. This can come from investments or many other forms of passive income, but it can not be directly inferred from net worth. If we’re trying to measure FIRE progress, I think it’s important to focus on what actually helps with achieving FIRE.
The New and Improved FIRE Prowess Calculation:
New FIRE Prowess = Change in[Investments + (Non-Investment Passive Income * Expected SWR)] / Net Income
Yes, it’s a little more complicated. No, I don’t think it’s perfect:
Even with my suggested modifications to the FIRE Prowess Calculation above, we are still left with a flawed metric in my opinion. Based on name of this metric being “FIRE Prowess”, I think it should measure how well an individual is doing on their path to FI. More specifically, how much “skill or expertise” they are applying (based on the definition of Prowess), so I think it’s important to focus on the actions a person is taking (that is within their control) to help them reach FI.
Ignoring income that can’t be used to help towards FIRE (taxes), ignoring net worth that doesn’t help with FIRE (home value), and adding in any additional passive income gets us closer to an ideal FIRE metric, but still has one glaring flaw that I can see: The Market!
As we all know, the market is volatile. While this isn’t that important over the long term if you invest wisely, it can have a HUGE impact on a metric that is supposed to be calculated over the short term.
The Green Swan is aware of this flaw and suggests averaging out the metric over a 5-year rolling period, but even that is still influenced by market drops. If we are supposed to use this metric to compare ourselves to our past self or even others, then why should we put so much weight on something we can’t really control?
The way the FIRE Prowess Gauge is set up now, when you first start out, your score will be almost equivalent to your savings rate because there are no investments to grow or fall. Towards the end of your FIRE journey, it will almost entirely be based off of market returns as your income becomes a smaller and smaller percentage of your net worth. In the end, a high or low FIRE Prowess score could mean any number of things. A low score could mean someone isn’t saving anything or the market had a bad year which are two very different displays of FIRE progress. A high score could mean the market did okay while someone slacked off and hardly earned any income that year! It just doesn’t mean a lot when you boil it all down to a single number without any context.
Not to mention a possible more important point: Why are we trying to compare our FIRE “Prowess” to others?
Personal finance, FIRE aspirations or not, has an enormous number of variables that influence each person’s ability to save and work towards FI. Between age, income level, geography, dependents, parents, and dozens of more items including how you choose to pursue FIRE (index funds, rentals, entrepreneurship, etc.), it is simply not possible to boil a person’s situation down to a specific number.
Even if we could design the perfect “FIRE Metric”, would comparing that number to others actually influence your actions? I suppose it could be a sort of reverse keeping up with the joneses situation where someone having a higher number made you buckle down, but we already have a number that works for that:
A Better Metric
Despite an attempt to create a new FIRE metric that people could track and share, plus my attempt to improve it a bit, I think there’s something much better already available that you’ve probably heard of: Savings Rate!
Not only does this apply across various income levels, spending levels, age, and everything else, it can actually be used in a predictive capacity!
Assuming you calculate it correctly, your Savings Rate can be used in conjunction with your current investments to determine when you should be able to retire. This is a metric that is worth keeping track of (and you can even compare it to others if you see fit).
The equation to calculate savings rate is really simple:
Savings Rate = (Net Income – Spending) / Net Income
Once you determine your savings rate, you can consult the famous Shockingly Simple Math Chart to determine how many years it would take of saving that % to reach FI from scratch. Already have some savings? Use Networthify’s simple calculator to see how many years you can chop off that timeline.
The best part is that this metric is not influenced by the short term movements of the market and can actually be compared to your own previous years to see if you’re getting better on the income side, spending side, or both!
The only downside of tracking savings rate is that is doesn’t take into account how well you are investing and growing your money over time. You can remedy this by comparing your actual investment returns to whatever index you are trying to track (or just the SP500 if you want simplicity) to make sure nothing odd is going on.
Assuming you are following a low-cost, broadly-diversified, index approach to investing like many in the FI space recommend, tracking investment returns simply isn’t that important. If you’re trying something else, then compare your results to the index. Just don’t tie your FIRE progress to how well the index does year over year, the goal is to just to match that progress.
Other Blogger’s Thoughts
After The Green Swan shared his initial post on the FIRE Prowess Gauge, The Retirement Manifesto picked it up and got a bunch of other bloggers on board to share their own posts and Prowess numbers. I think I’m the only person so far to take a mostly negative view on the metric, but it is interesting to see other’s numbers (even if I’m not sure that they mean anything).
Want to test it for yourself? Pick 2 or 3 bloggers below based on their FIRE Prowess scores listed and try to determine which are closer to FIRE, saving more, or any other metric you deem relevant to FIRE. Then see if the FIRE Prowess scores matched the order of the metric you chose.
- Anchor: The Green Swan – The Swan’s FIRE Prowess Gauge 2016: 132% Lifetime: 93%
- Link 1: The Retirement Manifesto – Is Your Wealth Building On Track? 2016: 57% Lifetime: 44%
- Link 2: OthalaFehu – My Swan FIRE Prowess Numbers 2016: 72% Lifetime: 61%
- Link 3: Budget On A Stick – My FIRE Prowess Score 2016: 52% Lifetime: 55%
- Link 4: Shnugi – Calculating My Savings Rate 2016: 71% Lifetime: 54%
- Link 5: Dads Dollars Debt – DDD’s FIRE Prowess 2016: 26% Lifetime: 32%
- Link 6: Debts To Riches – My FIRE Prowess Report Card 2016: 29% Lifetime: 43%
- Link 7: Adventure Rich – The Adventure Rich FIRE Prowess Score 2016: 45% Lifetime: 47%
- Link 8: Freedom Is Groovy – The Groovies FIRE Prowess Score 2016: 163% Lifetime: 90%
- Link 9: Working Optional – Calculate Your Progress To Financial Freedom 2016: 97% Lifetime: 75%
- Link 10: Budgets Are Sexy – My Total Lifetime Wealth Ratio: 2016: 135% Lifetime: 60%
- Link 11: Life Zemplified – FIRE Prowess Score for Life Zemplified 2016: 78% Lifetime: 76%
- Link 12: Physician’s Wealth Services – Physician Wealth’s FIRE Prowess 2016: 43% Lifetime: 46%
- Link 13: Married And Harried – Married And Harried FIRE Prowess Score 2016: 32% Lifetime: 14%
- Link 14: Ms. Liz Money Matters – Introducing the FIRE Prowess Score 2016 279% Lifetime: 72%
- Link 15: Actuary On Fire: The Swan’s FIRE Prowess Gauge – My Results 2016: 61% Lifetime: 59%
- Link 16: Trail to FI: FIRE Prowess Score, Trail to FI Edition 2016: 34% Lifetime: 53%
- Link 17: Maximum Cents: Maximum Cents’ FIRE Prowess Score 2016: 94% Lifetime: 70%
- Link 18: Retiring On My Terms: ROMT’s FIRE Prowess 2016: 119% Lifetime: 57%
- Link 19: Minafi: The Minafi FIRE Prowess Score 2016: 74% Lifetime: 94%
- Link 20: Military Dollar: FIRE Prowess Scores and How to Correct for Military Paychecks 2016 81% Lifetime 83%
- Link 21: Finance Yo Self: FIRE Prowess Score for Finance Yo Self 2016: 44% Lifetime: 44%
- Link 22: The 7 Circles: FIRE Prowess Gauge 2016: 246% Lifetime: 219%
- Link 23: Money Metagame: The Good, Bad, and Ugly of the New FIRE Prowess Gauge 2016: 108% Lifetime: 68%