Hello folks! How’s it been lately? I have a new concept to share with you all. I’ve been known for doing this before. If you’re a regular reader, I’m sure you recall my 4-year goal to double investments as well as my FIRE-Starter inflection point. Well today I want to introduce you to the Swan FIRE Prowess Gauge!
What’s this you ask? Quite simply it is a tool to measure how efficient you’ve been in chasing your FIRE (Financial Independence / Retire Early) ambitions. Not sure if you are on the path toward FIRE or not, find out here!
I’ve intended its design to be universal and agnostic to income level, how costly or frugal your lifestyle is, and your current net worth. As a good friend has wisely advised, reaching FIRE is all about how well you Earn, Save and Invest. If you do two of them well, you’re doing good; have all three going right and you are set! So why not create a system to measure this? Hence, the Swan FIRE Prowess Gauge; a measure that takes into effect all three keys to retiring early!
Over any certain amount of time, your Swan FIRE Prowess is equal to the change in net worth divided by your income over that same time period.
FIRE Prowess = Change in Net Worth / Total Gross Income
For example, let’s assume you want to measure your Swan FIRE Prowess over the last 5 years. What was your income over those years? For easy reference, I’d use your Adjusted Gross Income from your tax return. We all keep our tax returns handy right? No…well then sign into My Social Security and use your reported income.
Either way, the starting point is before tax income (including FICA taxes). For the sake of simplicity, let’s assume that is $375,000 over 5 years (or an average of $75,000 per year).
The next step would be to determine the change of your net worth over those five years. If you already track and monitor your net worth regularly via spreadsheet or easy and free tools such as Personal Capital, then this will be easy to determine. Take the period ending net worth minus the beginning net worth over the 5 year time-span. To continue with our example, let’s assume your net worth increased $275,000 over those 5 years.
The resulting Swan FIRE Prowess = 0.73! $275,000 / 375,000. Easy calculation right?
Why the Swan FIRE Prowess
The Swan FIRE Prowess calculator is an ideal gauge no matter how much you make or how big your net worth is. By making the change in net worth relative to the income over that period of time, it’s a factor showing 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. Earn, Save, Invest!
- Granted, there are going to be bad years in the stock market so year in and year out the Swan FIRE Prowess could be volatile. But over a 5+ year span, the gauge can be quite telling.
- Are you making enough to fuel your early retirement aspirations?
- Is your lifestyle expenses in check…it doesn’t matter if you make a fortune or entry level wages right out of college?
- Are you putting your money to work for you in a safe, but effective manner (stock market, real estate, small businesses, etc)?
What does your Swan FIRE Prowess mean? And now what are you supposed to do with that info? Well measure it over time to track the trend or how certain factors can affect it (such as a promotion or a more frugal lifestyle).
The Swan FIRE Prowess Can be Ruthless
As you age and presumably make more money, you’ll also have higher taxes, not only in nominal dollars, but also as a percent of income. But maintaining a frugal millionaire lifestyle should allow ever increasing contributions to investments. But is that the case…let the Swan FIRE Prowess be the judge, jury and executioner!
With relatively lower wages there is a greater emphasis on maintaining a lower cost of living in order to contribute to investments. Lucy and I weren’t raking it in from 2007 to 2011, but we kept our cost of living low as you can see in my post on our financial wallchart. Even so, we managed to invest and get that snowball rolling.
Are you rolling in the dough, but only putting it in low yielding savings accounts? That will make FIRE all the more difficult. Risk tolerance comes into play with investments, but if you’re a long term investor (5+ years), you could REALLY find a better way to put your money to work. Investing doesn’t have to be difficult. You don’t have to be an investment guru to do well. For example, I’ve done alright over the last decade with my investments primarily in low-cost index funds.
How’s My Swan FIRE Prowess?
Well it didn’t start out good…I can say that much! From a year to year basis big swings can be seen depending on any of the three factors. For me, most the change year over year comes from the stock market performance.
In the chart below, I start with 2008 as that is the year my wife Lucy and I married and the earliest to which I have all the necessary info to compare accurately on an apple to apple basis. As we all know, 2008 was not a good year for the stock market! But 2009 was, and 2013 was even better.
That’s why a 5-year rolling Swan FIRE Prowess gauge or longer can be more telling about your progress toward FIRE. On that basis, I’ve been a consistent performer near the 1.0x mark. What this means is that I have historically, and consistently, increased my net worth on a yearly basis by my pre-tax income. Once I hit my FIRE-Starter, it will be even easier for me to achieve >1.0x as my investments bring in more and more on a tax efficient basis and driving bigger and bigger increases in my net worth.
How to read your FIRE Prowess Gauge:
It’s hard for me to be judgmental. I have always had a strong interest in personal finance. I started investing before I even graduated college. While Lucy and I haven’t always made big money, we also haven’t really made any big mistakes on our journey toward FIRE. Lucy and I reached millionaire status by age 30. Not to toot my own horn, but I would consider my FIRE Prowess to be relatively high compared to the general public. But compared among others on the road to FIRE, I might be middle of the pack.
If over the last 5 years your FIRE Prowess is:
- Negative or 0.0x – Not even on the path toward retirement, let alone FIRE. If you aren’t saving and investing any money and your net worth isn’t growing then it is time to make some changes and develop positive financial habits. It may be a change to a frugal lifestyle or getting an advance degree to take the next step in your career.
- 0.0x to 0.25x – You’re conscious of your retirement and know you should plan for it, but early retirement may not be on your radar at this point.
- .25x to 0.50x – You’ve got the ball rolling and you’re certainly trying! Keep investing wisely, perhaps add a side-hustle or few lifestyle tweaks to lower expenses and FIRE can be within your grasp.
- .50x to 0.75x – 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!
- .75x to 1.0x – FIRE is on your mind and you are performing in overdrive right now!
- 1.0x and over – You are killing it! Don’t make any stupid mistakes and FIRE will be within your grasp in no time. In this scenario, your net worth is more than your lifetime earnings which Joe at Retire By 40 recently wrote about. This is certainly a tough milestone to reach, but maybe one day I can make this claim!
One note that might be worth noting at this point is that the Swan FIRE Prowess Gauge is a tool for those still on the road to FIRE and earning a wage. The calc gets skewed once you are retired and no longer pulling in a working wage; plus your numerator will be screwy depending on how much you withdraw, etc.
We’re in the Trust Tree!
I view the Swan FIRE Prowess Gauge as a tool not that unlike how many folks calculate their savings rate, except the Swan FIRE Prowess Gauge actually means something. It is an easily comparable measure and it is relative across income and lifestyles and ages. For instance, I can easily compare my Swan FIRE Prowess from 2016 to when I first started out in 2008 and because the gauge is relative to my change in net worth it brings them in line and measurable to each other.
You can even compare your score to others to see how you’re doing. Like I said above, compared to the general population my Swan FIRE Prowess is likely high, but compared to others on the path toward FIRE I am nothing special. I guess I won’t know for sure though until I hear from you all…but don’t worry, this is a safe place…
Compare all you want! Use the Swan FIRE Prowess as a tool to measure your own prowess, how it has evolved over time (hopefully improving over time!), and to learn from others as you strive for self-improvement.
If other FIRE bloggers out there want to calculate and share your FIRE Prowess score either in the comments or a future article, that’s great! And if you let me know I will link back to your article in this post for folks to reference, learn and grow. That’s what’s great about this FIRE blogger community, we are all here to encourage others.
Time to be honest with yourself, how’s your Swan FIRE Prowess? Are you doing what you need to to retire early or are there changes you can make to correct your path toward FIRE?
What do you think of the Swan FIRE Prowess? Any suggestions you have to improve it and make it an even more useful tool? Let’s talk about it in the comments below!
Thanks for taking a look!
The Green Swan