What’s Your Burn Rate?
Time to do some math...sorry.
Do you know what your burn rate is? If you’re a small business owner or happen to watch the TV show Shark Tank, you may be familiar with the term. In its simplest form, Burn Rate can be defined as the rate at which an enterprise spends money, especially venture capital, in excess of income. The concept has always pertained more so to the business industry but in today’s age of uncertainty and the future of our economy, you as the individual and simply as a household, should be well aware of this figure. It may help to illustrate to you how long you can last if the unfortunate day comes when you find yourself in a position where you lose your job for an extended period of time.
Let’s simplify this a little bit. Use your household monthly budget as a starting point. Don’t have one? Well, that’s a bigger part of the problem but keep listening and maybe you’ll decide it’s time to implement one for a better understanding of your personal finances. Believe it or not, most people are spending more than they bring in without even realizing it. Sometimes when you see just how much more you spend than you save it can be extremely disheartening. Welcome to the Struggle State.
Break it Down
Sorry, back to the budget...So lets say you evaluate your expenses and you see that you’re spending about $3,000 per month on expenses ranging from big stuff like your mortgage all the way down to the most common of goods like your toiletries. For argument sake, lets say you make a salary of $50,000/year. After taxes, take home pay would be $3,300/month. Congratulations. You’re saving a total of $300 each month after your “operational costs”.
I’m going to be generous here. We’re going to assume you’ve been able to save that extra money for the last year without touching it. You have a “surplus” or savings in reserves of $3,600 for a rainy day. And the storm, she’s a comin…
Bam...You lose your job. You’ll be out of work for an undetermined amount of time. Your income of $3,300 per month vanishes and you’re relying on unemployment that pays out $400/week for a total of $1,600/month essentially cutting your take home pay in half. By not working and saving on things like fuel, eating out, etc I will assume you’re able to bring down your expenses to $2,600/month. Still, you’re now spending much more than you’re bringing in. You will be burning through $1,000 per month now until you find a new job.
Now you have to start tapping into that fat stack of savings you worked so hard to stock pile. Your Burn Rate of $1000 per month only allows you to live your current situation for 3 months and about a week before you need to start finding other ways to pay for your lifestyle. See why it’s so important to know these kind of things?
Know Your Numbers
As we approach the unknowns of this economy we have to do a better job of equating our household to the way you have to run a business. Ultimately the practices required to be successful in both capacities are very similar. Ignoring the issues at hand will not make them go away but being prepared for when the time comes will help you to better navigate the waters.
I implore you to task yourself with creating a budget and figuring out exactly how long you can go without a paycheck before burning through your entire war chest. Operate your personal life as if it were a Fortune 500 Company and not like one primed to go out of business before the end of the year. Although, in these times, they might be one in the same...
Stay with StruggleState.com for more information as we navigate through the ever changing economic landscape.