ROMT’s “FIRE Prowess” Scores for 2001 to 2018

Image by David Mark from Pixabay

Two years ago, blogger The Green Swan introduced a metric called the FIRE Prowess Score.

“FIRE Prowess” went viral among those seeking financial independence and early retirement in 2017. Many financial bloggers, including yours truly, wrote about our FIRE Prowess Scores back then.

Since I’m finishing up my taxes, I’ve pulled together the information needed to determine my score for last year. I’ve been keeping thorough financial records for years, and enjoy tracking how my “FIRE Prowess” has changed over time.

I’m disappointed The Green Swan blog is no longer active, but their work lives on with this update!

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, the better you are doing at increasing your net worth.

Numbers above 1.0x mean you’re growing your net worth faster than your income. That’s an incredible result, likely driven by both a relatively frugal lifestyle and strong investment results.

A negative number means net worth is declining. That 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 described FIRE Prowess as a tool to measure how efficiently you’re chasing your FIRE ambitions. The metric was designed to be agnostic to income level, how expensive your lifestyle is, and your current net worth. FIRE Prowess measures how well you do at earning and saving, and how well you put your net worth to work for you via investments.

I agree with The Green Swan that FIRE Prowess is an interesting tool to measure one’s progress towards financial independence.

I have tracked my finances closely since 2000, so I now have almost two decades of FIRE Prowess scores:

Over the past two years our FIRE Prowess is moving in the wrong direction. Our FIRE Prowess score for last year was just 0.12x – our worst figure since 2012!

There are many explanations for our inability to grow our net worth significantly in 2018. First and foremost is last year’s weak stock market performance. We also spent more than usual, including our trip to Walt Disney World and a few home improvement projects. That spending took place even though our income declined. While I wish our net worth increased more last year, I’m pleased it grew at all given the ugly fourth quarter for stocks.

My lifetime FIRE Prowess score is now 0.56x, down from 0.60x as of end-2017. That means my current net worth is 56% 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 encouraged reviewing a rolling 5-year FIRE Prowess score. For me, the rolling 5-year FIRE Prowess score now stands at 0.68x, down from 0.89x a year ago. Until 2018, our rolling 5-year FIRE Prowess had steadily improved since bottoming out following the financial crisis:

I am surprised at how volatile my FIRE Prowess score has been from year to year. Despite the disappointing performance in 2018, I’m pleased with the general upward trend over the past decade. 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. My purpose in doing this was 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 explain about a quarter of the variance in our net worth. The R-squared increased by about two points last year, but the historic connection is not as strong as I thought it might be.

I think there are several reasons why the relationship between the change in our net worth and the change in the S&P 500 is not as strong as I expected:

1) Not all of our net worth is 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, purchasing a new car, wedding/honeymoon, expensive vacation, etc.). Moreover, our spending level isn’t always driven by our annual income.

3) Our income level also varies significantly from year to year, with a significant part driven by my 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 in 2012.

I think someone who invests consistently in the market over the years, and lives 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 track our progress towards financial independence and early retirement. I’m already looking forward to reviewing our progress again next year!

Have any readers calculated their FIRE Prowess scores for 2018? How did the tough year for the stock market impact your net worth?

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