Visualizing Net Worth as Income

This week I thought we’d talk about the latest addition to my monthly expense reports post, the graph that calculates approximate yearly wage based on net worth. See the graph below for an example.

How is it calculated?

At its core, this is just a different way of visualizing the same data as my net worth. I’m just showing it based on my withdrawal assumptions.

The equation I use to calculate the value is simple: R*NW(t)

Where R equals the safe withdrawal rate I’m using, NW(t) equals the net worth at date t.

Basically you calculate the yearly salary that your portfolio can support, based on your safe withdrawal rate, and then convert that into an approximate hourly wage.

I may add in the future a comparison to a few different potential withdrawal rates (say 0.5% on each side). Maybe one for my actual anticipated withdrawal rate, one for 0.5% on each side, and one for 4% if it falls outside of those ranges.

You’d just divide it by 2080 to make it hourly.

What’s the point?

I like to see data in all sorts of different forms. It changes how you approach it. You can just graph your net worth over time as you approach your goals. But that’s just one way to look at it, I have some goal, say FIRE, and some number needed to be there. Another way would be to take your net worth and convert it into a yearly/hourly wage. Now you’re envisioning the same data as providing so much money per unit time, if you do it yearly then it is the equivalent of a salary. If you convert it to hourly, it’s now an hourly wage.

You can take this number and compare it to a job, or some other kind of standard income opportunity, to see how it is equivalent. It can let you know that your portfolio has replaced your job as the main driver of sustainable income. In some ways, it quantifies how hard your money is working for you as far as finally accessing it.

What About with FIRE?

This is still a FIRE blog, so we’ll tie it all back into FIRE.

We’ll start with the BaristaFIRE model. In that, you’re replacing some portion of your income with appreciation from your portfolio while working some less stressful or reduced hours at your current job.

Based on this calculation you can say that your portfolio will safely provide some number, we’ll say my FIRE number comes out to the equivalent of $22/hr. Currently, my portfolio can provide about $3.50/hr or so. If I wanted to go the BaristaFIRE route right now, the job would need to provide about $18-$19/hr. Now I could look to see what jobs I could get that could match that amount or I could reevaluate my goals and say I need it to provide closer to $7-$10/hr instead and that would change this calculus.

For full FIRE, where it’s replacing all your needed income with your portfolio’s value. Currently my portfolio could provide about $7,000/yr. My planned expenses for FIRE are about $48,000/yr. So I’d need to either cut my expenses by $42,000/yr or save more.

Wrapping it Up

So there you have it, just another graph to visualize the same data in a different way. I like seeing all the different ways you can approach the data since it let’s you think about things in different ways. I like to try a few different ways to approach the data. We’ll see if I stick with it and keep to this method or if I replace it with something else. For now, I like the idea though.

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