The 7 FIRE Metrics That Matter: Part 1 — Net Worth & Savings Rate
In the recent budgeting article, I mentioned how the monthly check-in for the 9 steps in the Your Money or Your Life process moved me to finally embrace creating a real and usable budget.
A budget helps you stay on track for your goal of Time Freedom and never needing to work for a paycheck again (involuntarily).
However, the real objective is to know your numbers.
What numbers am I referring to here?
They are what I call the 7 FIRE Metrics That Matter. These include:
Net Worth
Savings Rate
Withdrawal Rate
Return On Investments
Cash Flow
Bare Necessities
Cross-Over Point
Today, I want to start to cover these a bit more so that you know what I mean.
Net Worth
Your net worth is one of the most important numbers you want to know.
You want to know it so well that you can easily tell someone an accurate ballpark figure, without looking, if ever asked.
You Probably do not want to tell someone, and in most cases, that could be a bad idea.
Personally, I don’t share it unless I am working with someone who “gets this stuff.”
But my point is that you know it, inside and out.
Here is what I did to get to this number.
The first time I calculated this was for a class I had in college.
My net worth was something close to a negative $10,000.
Debt was my leading financially savvy strategy at the time.
I had a credit card that was maxed out. Then I would request a new, higher credit limit and max it out again.
The limit started at $1,000.
Then the credit card company bumped it up to $2,000 because I was paying the minimum on time each month for a period of time.
Then I got them to take me to $3,000.
Finally, I got it to $4,000 so I could buy a Korg keyboard and learn how to play piano. Ha!
(I learned a bit, but I am a very primitive player.)
Plus, I had two student loans of about $8,000.
Thus, my total debt was about $12,000.
On the assets side, I had my Left Over pay that week, probably $200.
Perhaps $200–$500 in checking and savings.
There was a car I owned outright.
I had tried to sell it for $500 to a co-worker and he turned me down.
And I figured I owned about $500 worth of “stuff.” I was probably being generous.
Nobody wants your old stuff.
Don’t try to count it.
Thus, about $1,500+ in assets minus $12,000 in debt = ($10,500).
That was my total (negative) net worth.
For FIRE, though, there is a very important number you also want to know.
Liquid net worth.
Obviously, I had negative liquid net worth back then, too.
But assume I didn’t have the credit card or student loan debt.
If I had no debt, my liquid net worth would have been my pay for the week + checking/savings, or:
$200 + $500 = about $700.
No Debt. No Car Payment. No House payment, it helps a lot to increase this metric.
also, if you can’t convert an asset to Cash in 2 day or less, it is not Liquid.
Thus, I left my car out of the estimatation.
That was the Start.
I was on my way, folks.
Savings Rate
My first attempt at a savings rate was also while I was in college and working as a bartender for tips.
Each night after work, I would count up my tips and divide them in half.
Half went to spending cash, and the other half went to what I would call “short-term” savings, to cover car insurance, repairs, emergencies, vacations, etc.
I kept it in a chest of drawers, hidden under clothes.
Fort Knox this was not.
That amount would build up, and I would quickly take it down every other month.
This is called treading water.
Once I got out of my fancy graduate degree program and got my fancy corporate job, my savings rate went to 15%.
I had read a little bit of personal finance stuff and heard you wanted to do at least 10%.
My 401(k) allowed me to go up to 15%, so I did it.
Oh boy!
I thought I was set.
I calculated that I would have $1 million by the time I was 48.
It didn’t quite work out that way.
I was getting job offers that increased my salary.
So, we moved. Then we moved again. Then we moved again.
Unfortunately, we also had lifestyle inflation.
The debt kept growing, and the bills just kept coming.
Then there was a separation, divorce, and I was back at nearly zero.
I believe I was at $16,000 in my 401(k) after the divorce.
And guess what?
I didn’t care about the money.
There are way more important things in life than money, sometimes.
But then came the 2008 Great Recession.
I lost the total value of over $600,000 in RSUs I had not exercised because the company went belly up.
Oops.
Guess I should have sold those when I could have.
Thus, I was sitting there thinking, this isn’t going so well, is it?
What to do?
I raised my 401(k) contributions to 25%.
How could I do that?
I am really not sure. I just did.
It was my boot camp on how to live frugally.
But guess what?
I calculated how long it would take for me to get to around $800,000 with the new 25% savings rate.
and I saw it was going to be a long, long, long time.
It became clear that I could basically resign myself to retiring at normal retirement age.
Nothing wrong with that, but it was not what I was after.
What did I do?
I signed up for a PhD program, adding tuition, travel, books, and other new expenses.
Yes, I am a slow learner.
My point is there will be challenges.
If you are like me, You might make some dumb decisions.
But, I never gave up.
I paid off all my non-mortgage debt by 2011.
I started investing in a brokerage account by mid-2012.
I moved my savings rate up to 30%, and then 35%.
eventually I took it to 50% for the last five years I worked.
In the last year I worked, I had it up to almost 70%.
That was all good, but, if you can help it …
Don’t take my path.
Get your dang savings rate up as high as possible and as soon as possible.
In conclusion …
these are two of the most important 7 FIRE Metrics That Matter.
Mr. Money Mustache achieved much of his fame based on Savings Rate, from his one blog article, “The Shockingly Simple Math Behind Early Retirement.”
https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
In that article, he shows that if you can live on 20% of your take-home pay, you can retire in five years.
In my earlier examples, if I had stayed at a 15% savings rate, it would have taken me perhaps 43 years to retire according to his chart.
His math assumes you are only getting 5% ROI, and living on 4% and spending the equivalent of 85% of your take-home pay after retirement.
At a 25% savings rate, it Might have taken me 32 years.
That sounds about right.
I believe I was looking at 20+ more years when I forecasted where I wanted to be, a net worth of about $800,000.
That would have taken me until about 2028 to achieve.
And…
In my opinion, Net Worth is something you want to always see grow.
Keep it going up until you are ready to shed your assets.
You will do this by either giving them away before or when you pass.
And In My opinion, don’t follow the stupid advice to “die with zero.”
that is advice that might work for those with a $100 Million Net Worth or more.
but not so great for schleps like us.
Bottom line, Net Worth is a very important number both pre- and post-FIRE.
I used it to gauge where I was on the journey.
I now use it to make sure I am growing my assets to cover living expenses and inflation.
It is also a number you need to understand for some of the other metrics.
We’ll cover some more of those in the next article.