Have you seen the FIRE Prowess Gauge from the Swan? Have you taken the challenge, faced your demons and calculated your score? No? Well the first step is to make this simple calculation:
FIRE Prowess = Change in Net Worth / Total Gross Income
If you have tracked your net worth with spreadsheets or Personal Capital and you have your tax return to hand then this is a pretty quick calculation. But that’s the subject of another post.
Here we are gonna test how FIERY you are. Do you know how to get to FIRE and power your way to financial independence? Let’s see…
We are going to look at four quick case studies, and you have to order them from the highest to the lowest FIRE Prowess score. No calculators allowed please, you just need to assess the situation and shoot from the hip. Use your gut, trust your instinct, use the Force; I don’t care, but don’t overthink it. I’m purposely going to hold back some of the figures so you number-heads can’t go straight to a spreadsheet.
Case Study 1 – Rajit is a 22 year old student with relatively low earnings. But over the year he has taken on a side-hustle for an additional $5k income and paid down $10k of a $100k student loan.
Case Study 2 – Ed and Edwina are in their late 40’s and have amassed savings of $1,000,000 and are close to pulling the trigger on retirement. They have a pretty high joint income and are saving around 50% of income and have enjoyed the decent stock market returns recently.
Case Study 3 – Tamsin is 25 and has paid off her debts and through a recent inheritance has saved a respectable $200,000. Her salary is $30,000 and she is saving around 20% of income each year. She is nervous about the stock market and has over half her assets in cash.
Case Study 4 – Trevor and Tania are in their 30’s and have just received a good pay rise and not succumbed to lifestyle inflation. This has allowed them to to save 70% of their income each year. On top of their $500k savings they feel pretty good.
Ok – what do you think? Put them in order from highest FIRE Prowess to the lowest.
Scroll down for the results…
|Case Study||Start net worth||End net worth||Income||FIRE Score|
|2||Ed and Edwina||1,000,000||1,120,000||100,000||120%|
|4||Trevor and Tania||500,000||591,000||80,000||114%|
How did you do? How many did you get ordered in the correct place?
In terms of my assumptions I assumed that everyone got a 7% return on their investments, except Tamsin who only returned 3%. For simplicity I didn’t add interest to Rajit’s debt, and I made a ton of other simplifications. (Hey it’s Friday I need to prepare for the weekend!)
What is clear is that as your FIRE progress continues it becomes a self-fulfilling snowball. Money makes money. Ed and Edwina are earning large sums from the compounding effect of their savings. In comparison poor Rajit is yet to get on the ladder. Paying down debt is so important, but once you are at zero net worth the climb can be quite rapid. You will notice that Tamsin really suffered by having such a conservative investment strategy. You need to be able to sleep at night and invest in a way that you are comfortable with, but with decades ahead of you, it pays not to be too conservative in your investment strategy.
Count the number of case studies you placed in the correct order and give yourself a rating below.
- All four in the correct order! You are a burning bonfire lighting the way and roasting marshmallows – yay!
- Two in the correct order. A cozy patio firepit with cheery talk and few cold beers!
- One in the correct order. A couple of logs short of a roaring flame!
- None in the correct order. Oh dear! A sputtering flame that can hopefully be nursed back to life.
Hope you had fun with that. Leave some comments below if you want more quizzes or want to make a serious point.