Our 2019 FIRE Prowess Score
Three years ago, The Green Swan blog 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 close to finishing up our taxes, I’ve pulled together the information needed to determine our score for 2019. I’ve been keeping thorough financial records for years, and enjoy tracking how our “FIRE Prowess” has changed over time. Thanks largely to last year’s great stock market returns, our FIRE Prowess improved significantly over the past twelve months!
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 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:
After a poor performance in 2018, our FIRE Prowess bounced back last year. Our score of 1.16x was the fourth-best figure we’ve ever achieved, driven by an increase in our income, lower spending, and strong returns from our investments.
My lifetime FIRE Prowess score is now 0.62x, up from 0.56x as of end-2018. That means my current net worth is 62% 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. Our rolling 5-year FIRE Prowess score stands at 0.80x, up from 0.68x a year ago. Until 2018, our rolling 5-year FIRE Prowess had steadily improved since bottoming out following the financial crisis. Although the decline in the stock market over the past two weeks has had a negative impact on our finances, I’m hoping last year’s strong result will ultimately be repeated in 2020:
I am surprised at how volatile our FIRE Prowess score has been from year to year. That said, 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 dropped a bit last year, and 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 nice 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 2019? How did the great year for the stock market impact your net worth?