ROMT’s Updated FIRE Prowess Scores for 2001-2017
Last year, The Green Swan introduced a new FIRE metric that received a lot of attention, the Swan FIRE Prowess Gauge.
I, and many other personal finance bloggers and readers, calculated and publicly reported on our FIRE Prowess scores on our own blogs and in the comments section of The Green Swan’s original post explaining the concept of FIRE Prowess.
Since I recently completed my income taxes for 2017, I now have all the data needed to update my own FIRE Prowess score for last year. I’ve been keeping track of my finances for a long time, and we discovered last year that my FIRE Prowess history was one of the longest ones reported.
Last year was another good year for the ROMT family’s pursuit of financial independence and early retirement, and our FIRE Prowess score for 2017 confirms we’re continuing to move in the right direction!
FIRE Prowess is easy to calculate. It’s simply the change in your net worth, divided by your gross income, for any time period.
FIRE Prowess = Change In Net Worth / Gross Income
Most of us will have FIRE Prowess scores between 0.0x and 1.0x. The higher your FIRE Prowess number is, the better you are doing at increasing your net worth.
Numbers above 1.0x mean your net worth is growing faster than your income, which is an incredible result, presumably driven by both a relatively frugal lifestyle in the context of your income, and strong investment results.
A negative number means your net worth is headed in the wrong direction, which could be caused by spending more than you earn, a job loss, borrowing money to purchase depreciating assets, poor investment performance, or many other factors.
The Green Swan describes FIRE Prowess as a tool to measure how efficient you’ve been in chasing your FIRE ambitions. The Green Swan designed the metric to be universal and agnostic to income level, how costly or frugal your lifestyle is, and your current net worth. The Green Swan notes FIRE Prowess shows how efficient your lifestyle is compared to income (reflecting how well you do at Earning and Saving) and how well you do putting your net worth to work for you via investments.
I agree with The Green Swan that FIRE Prowess is a useful tool to measure one’s progress towards financial independence.
I have been tracking my finances via Quicken or Microsoft Money since 2000, so I have the ability to calculate my FIRE Prowess for the better part of two decades, and the majority of my working career:
Our FIRE Prowess score dipped to 0.87x last year from an excellent 1.19x in 2016.
As I’ve talked about frequently in these pages, we invested in rooftop solar panels for our home last year, so factoring in that large expense, it makes some sense that our net worth grew more slowly relative to our income in 2017.
According to The Green Swan, a FIRE Prowess score between 0.75x and 1.0x means: “FIRE is on your mind and you are performing in overdrive right now,” which is still in my opinion a very good result given the large capital expenditure we incurred last year.
My lifetime FIRE Prowess score is now 0.60x, an improvement from 0.57x as of end-2016, which means my current net worth is 60% of my gross earnings since I started tracking my net worth in 2000. Given that federal, state, and local taxes have probably soaked up over 30% of what I’ve earned over the years, and I’ve obviously spent a lot of the other money I’ve earned on food, housing, education, children, medical bills, and countless other things, I think this is a pretty good result.
According to The Green Swan, a FIRE Prowess score between 0.5x and 0.75x means: “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!”
The Green Swan also encourages reviewing a rolling 5-year FIRE Prowess score. For me, the rolling 5-year FIRE Prowess score was 0.89x for 2017, up from 0.78x as of 2016, as a relatively poor year in 2012 of 0.12x finally rolled out of our 5-year moving average. 2012 was my first full year in a new job with a lower salary after our family moved out of the big city.
The trend in our rolling 5-year FIRE Prowess score has been improving since bottoming out following the financial crisis, and it reached an all-time high last year:
Although our rolling 5-year FIRE Prowess score has been trending upwards for the better part of a decade, it will be quite a feat if we’re able to improve it again in 2018. In 2013 I had the second-best FIRE Prowess score of my career (1.27x), and that figure will be rolling out of our 5-year moving average, so we’re going to need to post a huge FIRE Prowess number this year to keep things trending in the right direction. We realized the federal tax benefit from our home solar energy system this year, which will help, but expenses associated with our recent trip to Walt Disney World won’t help our FIRE Prowess score!
As I mentioned last year, I was surprised at how volatile my FIRE Prowess score has been from year to year, but pleased with the overall result and the trend over the past several years. Makes me think the ROMT family may have a chance at this whole financial independence/early retirement thing after all!
You may have noticed from the first graphic that I calculated a R-squared to investigate whether annual stock market returns were strongly connected to the historic changes in our net worth.
I hypothesized the annual returns of the S&P 500 might go a long way in explaining the changes to our net worth. While there was a relationship, returns on the S&P 500 perhaps explain 23% of the variance in our annual net worth, a figure that was essentially unchanged since last year. That connection was not as strong as I thought it might be.
As I have thought about this more, I think there are several reasons why the relationship between the annual change in our net worth and the annual change in the S&P 500 was not as strong as I would have guessed:
1) Not all of our net worth is held in stocks. We’ve also had material exposure to cash, real estate, bonds, etc. at times in the past.
2) Our base level of spending each year is fairly consistent. But some years our spending has been much higher (paying for graduate school, large medical bills, children, engagement ring, wedding/honeymoon, buying a car in cash, etc.), and not necessarily driven by an increasing amount of income.
3) Our income level also varies significantly from year to year, with a significant part driven by a variable bonus. This means our net worth could rise materially despite a bad year for the stock market, and vice-versa. 2011 is an example of a great year for our net worth that was a weak year for the stock market, and the opposite occurred the next year in 2012.
I think someone who has invested consistently in the market over the years, and lived in the same home, with the same job, and relatively consistent earnings and expenses, would likely see a more significant relationship between the change in their net worth and the S&P 500 than I did.
I continue to think the FIRE Prowess Gauge is a great tool to help us track our progress towards financial independence and early retirement, and look forward to reviewing our progress next year after we have filed our 2018 taxes!
Have any readers calculated their FIRE Prowess scores for 2017? How have things changed for you?