Monitoring Financial Health: Burn Rate

by | | Other Cool Stuff, Retirement

Burn rate

What is Burn Rate?

Burn Rate is a key indicator of your financial health. It’s the percentage of your annual gross income that goes to living expenses.

Annual Living Expenses / Total Personal Income = Burn Rate

Example: If you spend $12K/month and your annual gross income is $300K, your Burn Rate is 48.0%. ($12K * 12) / $300K = 48.0%.

Living expenses exclude debt payments, savings, and taxes. (Those are captured in Debt Rate, Savings Rate, and Tax Rate.)

So, if part of the $12K is a $1,500 mortgage payment, your living expenses would be $10,500/month and your Burn Rate would be 42.0%.

Why is Burn Rate Important?

Simply put, Burn Rate is important because it affects everything:

  • How many shifts you must work to afford your lifestyle.
  • How fast you can pay down debt.
  • How much insurance you need.
  • How much investment risk you should take.
  • Most importantly, how much you can save.

A lower Burn Rate enables a higher Savings Rate, and a higher Savings Rate lets you cut back on shifts sooner. This reduces burnout and improves quality of life.

Annual Living Expenses

To figure your Burn Rate, you need to know your annual living expenses. Many people don’t know, and most of us guess too low.

This is understandable, but knowing where your money is going is critical to monitoring your financial health. So, it’s worthwhile to track your spending.

Tracking vs. Budgeting

People often confuse tracking and budgeting. This post focuses only on tracking.

“Tracking” means knowing where your money is going. No judgment; no goal-setting; just awareness.

“Budgeting” means setting targets for how much you’ll spend in each area. It sounds like a financial diet: not fun, hard to stick to.

Don’t worry about budgeting right now! Just track.

Ways to Track Spending

Here are two ways to track spending:

  • Use an app like Mint or YNAB that connects to your bank accounts and credit cards.
  • Review your bank and credit card statements.

Burn Rate Ranges

This chart shows average Burn Rates by income range.

Income

Burn Rate

$0 - $100,000

50% - 70%

$100,000 - $250,000

45% - 65%

$250,000 - $500,000

40% - 60%

$500,000 and up

30% - 50%

Generally, your Burn Rate should decrease as your income goes up. (As you earn more, save some instead of spending it all.)

Correlating Factors

Understanding the correlation between these factors and your Burn Rate will help you determine if your Burn Rate is appropriate or not.

Savings Rate

Low Burn Rate = High Savings Rate

If you spend less, you have more cash flow available to save, and vise versa.

Income

High Income = High Tax Rate

With a higher Tax Rate, you have a lower percentage of your income to spend, if your Savings Rate and Debt Rate stay the same.

Age

Older = Low Burn Rate

Raising a family is expensive. Eventually, the kids leave the nest and expenses tend to drop.

Cost of Living

High Cost of Living = High Burn Rate

If you live in New York or San Francisco, you may not be able to avoid a higher than average Burn Rate. Similarly, large families have a higher Burn Rate than DINKs (dual income no kids).

Improving Your Burn Rate

To improve your Burn Rate, you’ll need to identify what’s holding you back.

Spending Not Tracked

Again, knowing where your money is going is critical to monitoring your financial health. Common reasons why people don’t track their spending:

  • Not knowing how.
  • Not putting in the time.
  • Past emotional experiences with money.

If you want to improve your Burn Rate, start tracking your spending. Often, just being aware of how much you spend on certain things leads you to spend less.

Spending Not Intentional

Are you intentional about your spending? Take time to answer the question, “Why is money important to me?”

Next, review your credit card statement for expenses that aren’t aligned with what’s important to you. Bonus: you’ll also find some charges for things you don’t even use anymore.

Eliminate these expenses and automate the same amount toward your savings. Now you have a lower Burn Rate and higher Savings Rate.

Summary

  1. Pay attention to your spending. Tracking = awareness.
  2. Find wasted money.
  3. Automate savings.
  4. Repeat.

This can be hard (like eating more vegetables and exercising) and boring (like watching a tree grow), but the financial reward for doing this consistently is substantial!

Is your Burn Rate healthy? Are you tracking and monitoring your Burn Rate over time? That’s where we come in. Schedule a FREE Financial Pulse Assessment™. This is a 3-step process to get clarity on your finances and “test drive” our services.

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