How To Cut Your Burn Rate And Save More Money

The earliest humans roamed the Earth about 2.4 million years ago. They hunted, lived in caves, and burned wood to stay alive and warm.

Since then, most aspects of life have changed. Yet, a few remain the same, such as everyone having basic needs they need to satisfy. However, instead of burning wood, nowadays most people burn cash!

Too many people spend close to everything they make. They work hard but have little to show for it. Their high burn rate makes it almost impossible for them to save, get ahead, and achieve their financial goals!

What Is A Burn Rate?

Life requires money. You need it to buy your top expenses and to pay for the things that satisfy your needs and wants.

Your burn rate is the percentage of your income that you spend each month. It also shows the amount of cash you need to earn to cover all your expenses and breakeven.

Each month, you start off in a theoretical financial hole. You have bills coming due that must get paid no matter what. Charges for things like rent/mortgage, utilities, and insurance. If these aren’t satisfied, then you’ll suffer the consequences.

For example, imagine you make $50 an hour and your total expenses are $6,000 per month. You need to make at least that amount every month to cover your costs. This also means that you must work 120 hours a month to breakeven. Failing to do either forces you to pull money from savings or take on debt to make ends meet. Putting you on the path to bigger financial problems.

Why Your Burn Rate Is Important

Over time, most people will earn and therefore spend more money. As their lifestyle creeps higher, their ability to reach their plans for the future gets impacted.

The higher your burn rate, the more money you must earn to survive. Putting added pressure and stress on you. Both of which can affect your financial wellbeing and overall health.

Once money gets spent, it’s gone forever. It loses the ability to work for you, compound, and grow your nest egg.

But, money that isn’t used for consumption gets saved. As it accumulates, you begin to build a cash runway. Funds that you can use for survival in the event of a financial emergency.

A cash runway starts to open up options for you, too. It gives you some degree of financial freedom which you can use to pursue opportunities outside your 9-5.

For example, imagine you have a cash runway of $20,000. If your burn rate is $4,000 per month, then you can survive for 5 months without any income. But, if you find ways to be frugal with money, then you’ll create more time to pursue your interests!

Also, your burn rate determines your ability to create wealth. The higher it is, the lower your savings ratio will be. Giving you less money to invest, delaying the achievement of your goals!

How To Calculate Your Burn Rate

Look at your total income and spending over the last year or for as long as you have data available. Review your pay and see if you’ve received any irregular income or had any financial windfalls. If you did, subtract these amounts from your total. Then, divide your income by the number of months data that you have. The result is your average monthly income.

Next, explore your spending history. Include all your one time costs and emergency expenses, too. These events and random charges always seem to have a way of happening. Then, divide this amount by your month’s worth of data and you have your average monthly spending.

Last, divide your average monthly spending by your income. The resulting figure is your burn rate.

A burn rate less than 1 shows that you’re living below your means. You’re saving money and making progress towards your goals!

But, a burn rate greater than 1 indicates that you’re living above your means. You’re spending more than you make and are cash flow negative. More than likely you’re draining your savings and taking on debt. A pattern that leads to financial hardship and often ends in bankruptcy.

Reducing Your Burn Rate

Your burn rate is a function of your income and your spending. When you make changes in one or both of them, your burn rate goes down.

As a tightwad, I find that it’s easiest to focus on your monthly expenses first. Begin by prioritizing your spending. Assign all your charges to a category and then list them in order of importance. Next, write your average monthly spending beside each one.

You should notice that you spend most on items listed at the top. Then, less on each of the following as you work your way down.

If you don’t, then you aren’t spending based on priority. Instead, your expenses are scattered and random. Adjust your consumption of these items and reduce them in your budget. The result is a lower burn rate!

Classifying and ranking your spending shows you all the places your money is going, too. Review each one and its corresponding dollar amount. Then, determine if you’re consuming more than you should or are comfortable with.

I did this exercise early in my journey to financial freedom. It revealed that I was spending more than I was comfortable with at bars and restaurants. Excess consumption that didn’t align with my values or goals. So, I reduced this item in my budget which lowered my burn rate and allowed me to achieve my goal faster!

The other component of your burn rate is income. Find ways to increase your earnings. Consider looking for a higher paying job, starting a side hustle, or investing in cash-flowing assets.