I’m a huge fan of using savings rate to track financial health, but there are some pitfalls to the formula. It only looks at the amount you saved, which means on those rare occasions where you receive a bonus or a windfall, the score can spike 2x or 3x the normal amount. The FIRE Prowess Gauge, on the other hand, handles this case much cleaner.
What is the FIRE Prowess Guage
To calculate this score, you’ll need a lot of data:
- Total earnings over a time period
- Net worth at the beginning of a time period
- Net worth at the end of a time period.
With these stats in hand, you can calculate this score!
FIRE Prowess =
Change in Net Worth / Total Gross Income
Some elaboration on these. Networth is your total worth across savings, investments, real estate — everything. It also includes deductions like your mortgage, credit card debt and car loan. Your gross income should be yours before tax earned during the period you’re calculating your prowess score for.
What I like about this formula, is that it takes into account net changes in net worth, while savings rate focuses on what you can to today. The downside is that in a down market, your FIRE Prowess score could very well be negative.
What’s a Good Score?
If your FIRE Prowess score is positive, you’re increasing your net worth. If it’s negative you’re losing net worth. After that, it’s just a matter of how much you’re increasing. Here’s my take on the ranges you’re likely to come across.
- 0 or below – You’re losing money! If you aren’t saving and investing it might be a good time to start looking into how to reduce expenses.
- 0 – 0.25 – You’re likely making token saving contributions – 401k, maybe Roth IRA. At this pace, early retirement isn’t going to be likely.
- 0.25 – 0.5 – Making good progress. This was me when I first learned about FIRE and started to make changes to my lifestyle.
- 0.50 – 0.75 – You likely know that you’re saving a bunch at this rate. Staying in this range for years will payoff big.
- 0.75 – 1 – You’re working hard to early retirement! At this pace you’ll be FIRE in no time.
- 1+ – You’re on pace to kill it and be FI crazy early. At this rate, you’re increasing your net worth by more than your income. This could be your investments growing at a rate that exceeds your income.
The graph at the top of this post is my score over time. Here are the exact numbers for this.
FIRE Prowess Score
|Year||FIRE Prowess Score||Savings Rate|
When I calculated them I did a bit of a double-take. This seemed really high? Why was mine above 100%? Here are the main reasons why:
My Net Worth Doubled Since 2015
This isn’t clear from these numbers, but my net worth doubled. This was largely due to the stock market being on a rampage, and me being heavily invested. I didn’t use any crazy strategies – just low cost diversified, low cost, index fund investing with Vanguard. As of today, 20% of my total net worth comes from investment gains since 2015.
Savings Rate Above 50%
Having a savings rate low means that much more going into the net worth column. Even if I’d saved 100% though, the change wouldn’t have been as big as the investment growth.
Don’t Let Investment Growth Inspire Spending
The same way people have a tendency to spend more when they earn more, it would be easy to take out money from all these gains and use them. However, doing so is even worse than spending more through the year, as I’d be paying taxes on it.
Hidden Expenses, or Lack Thereof
During this period, I was lucky enough to not have too many huge expenses. We’re still at the same house we were at before and nothing has gone cataclysmically wrong. We had some spending spikes – a wedding, a honeymoon, a burst pipe in a wall, some long-neglected housework – but nothing that threw off our budget.
Not Alone in This
There have been a ton of posts by others using this calculation. I’m fascinated by the variance between these. Namely how narrow a range there is for financial bloggers. The group likely to blog about the subject are much more financially organized due to the amount of information needed to make the calculation, so it does make sense.
- The Green Swan – 2016: 132% Lifetime: 93%
- The Retirement Manifesto – 2016: 57% Lifetime: 44%
- OthalaFehu – 2016: 72% Lifetime: 61%
- Budget On A Stock – 2016: 52% Lifetime: 55%
- Shnugi – 2016: 71% Lifetime: 54%
- DadsDollarsDebts – 2016: 26% Lifetime: 32%
- Debts To Riches – 2016: 29% Lifetime: 43%
- Adventure Rich – 2016: 45% Lifetime: 47%
- Freedom Is Groovy – 2016: 163% Lifetime: 90%
- Working Optional – 2016: 97% Lifetime: 75
- Budgets Are Sexy – 2016: 135% Lifetime: 60%
- Life Zemplified – 2016: 78% Lifetime: 76%
- Physician’s Wealth Services – 2016: 43% Lifetime: 46%
- Married And Harried – 2016: 32% Lifetime: 14%
- Ms. Liz Money Matters – 2016: 279% Lifetime: 72%
- Actuary On Fire – 2016: 61% Lifetime: 59%
- Trail to FI – 2016: 34% Lifetime: 53%
- Maximum Cents – 2016: 94% Lifetime: 70%
- Retiring On My Terms – 2016: 119% Lifetime: 57%
- Military Dollar 2016 81% Lifetime 83%
- Finance Yo Self 2016: 44% Lifetime: 44%
- The 7 Circles 2016: 246% Lifetime: 219%
What about you? What’s your FIRE prowess score?