A question that my friends and I have discussed often relates to burn rate. Usually the phrase "burn rate" is used in connection with how much money a particular start-up uses/burns per month or per year. We like to use it to discuss how much money we burn over a particular time period.
Why Does Burn Rate Matter?
Burn rate matters because when you have a better understanding of where your money goes, you can feel like you have more control over your finances. Figuring out your burn rate, however, doesn't mean budgeting. In a burn rate exercise, you are just trying to determine how much you spend in total over some period of time. When you start giving yourself spending restrictions, then you get into budgeting.
How Do You Figure Out Your Burn Rate?
You make a spreadsheet (of course) similar to what the Match.com banker made. Your spreadsheet will need to list all of your expenses broken down by month and then totaled for the year. That's your best guess at your approximate burn rate.
What Do I Do with My Burn Rate?
Once you figure out your burn rate, you'll be able to answer some important questions that will give you a better handle on your own financial flexibility:
1. Savings: How much money do you really save a year?
2. Job Options: Thinking of changing jobs? If you didn't change anything with your current spending, how much money would you need to earn pre-tax in order to a) breakeven, b) save $10,000/year, or c) reach some other savings plan?
3. Taking a Break: If you really had thoughts about just leaving your job and taking a break, would you have enough money to survive? Based on your burn rate and the amount of savings you have, how long could your break last? How much savings would you want to preserve?
What is Your Burn Rate?
If you don't know your burn rate, take an hour to figure it out. I've created a burn rate template that you can use to get started. To get the template, just fill out the form below!