In business finance, there’s a sexy term called”Burn Rate” (BR). It refers to the rate at which a company is spending its cash reserves. It is a way of measuring how quickly a company is using up its cash to cover operating expenses and other costs. The burn rate is typically expressed on a monthly basis, indicating how much money the company is “burning” through each month. Using the available capital the company has and its Burn rate, the company can work out how many months or years of “cash runway” it has.
Now that’s all fine and dandy but how does this burn rate stuff apply to you and your FIRE journey? Well gentle reader, continue perusing this short article where I will take you through;
- What is your Personal Burn Rate (PBR)
- How to calculate your PBR
- Benefits of knowing your Personal Burn Rate
- The Magical Moment
What is Your Personal Burn Rate?
Simply put, it’s the amount of cash you are sending out the door each month in expenses. In my case, whilst here in Panama and providing I keep my food deliveries in check lol, my PBR is around $1818.3 per month or as I like it, $60.61 per day. All figures are in USD.
Gather up all the relevant expense data
The PBR is only as good as the expense data that we use to create it. We need to gather up all the recent statements and bills etc. So, depending on your spending habits, this could be as easy as logging into your Wise account and seeing an account summary or digging through your bottom draw looking for each account you have with all three banks for the previous 12 months. Perhaps there’s a lesson in here for you somewhere 🙂
Review all your spending for the previous 12 months. I mean ALL of it. This will help you to get the most accurate Personal Burn Rate possible and will minimise the chances of you being ambushed later by Fidos obedience classes and the eye watering cost associated with them.
Here’s a few examples of my cost categories to get you started
Rent
Groceries
Weekly cleaner
Uni fees
Insurance
Uber
Uber eats
Eating out
Entertainment
Scooter rental
Apps
etc etc
How to Calculate your Personal Burn Rate
The easy bit. Once you have these annual expenses tallied up, divide them into 12 and boom there’s your monthly PBR. This isn’t exactly modern drone aerodynamics, it’s rather straightforward.
Personal Burn Rate = Total Annual Expenses / 12 = Monthly Expenses
I have taken this little further and have broken it down to a daily Personal Burn Rate because I generate income 5 days per week and that way works best for me. But, you do you. If you get paid weekly, fortnightly or quarterly it’s all the same.
Couples, Thrupples and Families? Now you can obviously apply this to any group BUT, the more people you include, the further into the bank statement you should delve. For a family of four I would go back 2-3 years and also include some extra $$ to allow for Sallys braces, Stevie’s Roblox subscription and Fidos tendency to eat a rugby sock every two weeks and the resulting vet visit.
Now that we’re here, if your cash going out is less than the cash coming in then pat yourself on the back, you’re in a better spot than some people.
Benefits of knowing your Personal Burn Rate
Knowing your PBR is crucial for several reasons, especially in managing your finances effectively and working towards FIRE. Here’s a few;
- Budgeting and financial management… obviously
- Tracking your financial health
- Allows you to maximise investment capital to help speed up your freedom
- Allows you to easily gauge how much FU money you need put aside
- Career choice and flexibility ( Burn rate helps FU Money which helps with creating options
- Lifestyle adjustments ( Can you take a more relaxed and lower paying role that you enjoy more or cut down to 4 days a week etc?)
- Confidence and generally just accepting less shit at your job because you have a fat pile of cash to fall back on.
The Magical Moment
The point in time when you realise that your passive income now consistently exceeds your personal burn rate is a transformative milestone in your financial journey. You bloody did it! This magical moment signifies financial independence and opens up a world of possibilities. Here’s what you can expect:
Key Benefits
- Financial Security: Relax knowing your expenses are covered.
- Career Flexibility/Options: Choose to leave your job, pursue passion projects, or work part-time.
- Lifestyle Options: Relocate, travel travel travel, enjoy your hobbies, get new hobbies.
- Financial Growth: Reinvest extra income to grow your wealth faster and hit SUPER FAT FIRE if you fancy it.
- Personal Development Opportunities: Learn another language, focus on your health, read the classics, walk shelter dogs or give back to the community any way you like.
Reaching financial independence through passive income exceeding your burn rate grants you the freedom to live life on your terms. It provides security, opens up new opportunities, and allows you to focus on what truly matters to you.
In conclusion
Understanding your personal burn rate—the monthly cash outflow—is crucial for managing your finances, especially for those aiming to hit FIRE. Your PBR aids in budgeting, tracking fiscal health, optimising investments, evaluating FU money needs, making career decisions, and adjusting your lifestyle. Once this concept is in hand, your mission is to grow your passive income to the point where it surpasses your PBR. This is Financial freedom and it’s a feeling like no other but if truth be told this is where life actually begins. From here it’s a brand new world and it waits for no-one, so get after it.
Cheers
Andy
July 2024
Panama – I’m melting again
