When we hear the term burn rate, we usually think about it in the business sense. In the private sector, burn rate refers to the amount of cash a start-up spends each month, an important metric to calculate for any small company. But about what your personal burn rate? This is something we should look at everyday of our lives.
Indeed, for a large portion of the adult population, our cash management skills are very weak. We’re almost inept when it comes to managing, calculating and handling our personal finances. This doesn’t bode well for our future because the more we spend the less we’ll have for emergencies, rainy days and our winter years.
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This is where the burn rate enters. On a micro level, the burn rate is defined as how quickly you burn through your money in a week or a month. In other words, how long does your money last as soon as you receive your paycheck(s)? The answer to that inquiry could be frightening.
For millions of people, the burn rate can be quite high. Just think about: rent, bills, entertainment, clothes and those daily purchases of Starbucks or Tim Hortons. Not to mention high debt amounts that come with enormous monthly debt servicing payments with interest, which can eat up hundreds of dollars per month.
Simply put: if you’re horrendous at cash management then it’s likely your burn rate is immense.
Here are three ways to calculate your burn rate (for one week):
Start a Spreadsheet for One Week
First, open up a spreadsheet and save the file with the name “Burn Rate – Week 1.” Insert the days of the week at the top of the file and write down categories on the left-hand side. This could include pretty much anything you spend money on a Monday or a Saturday: coffee, food, clothes, alcohol, cigarettes and so on.
It is recommended to have a lot of blanks because you’ll probably visit other places too.
Keep Track of What You’re Spending
As the week goes by, keep track of what you’re spending. This can be as simple as carrying a notebook, or a tablet, and writing down every single purchase you made, whether it’s gasoline or a tea biscuit, $50 or 50 cents. On the right-hand side of the tracking sheet, you must have “Total Spent” for each day and each week for every category written down on your spreadsheet.
Determine When You Reached $100 on Non-Essentials
Finally, find out when exactly you spent $100 on non-essentials. When you come to this conclusion, this is your personal burn rate. Now, reaching this feat may have taken two days or an entire week. Also, ask yourself: what were my largest weaknesses? Was it coffee or lunch? Cigarettes or beer? Now that you know the burn rate you can do something about it.
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Final Thoughts
We’re not the greatest at money, which is why our national savings rate is in the low single digits. Not even the economic collapse has really opened our eyes at the financial dangers of not tucking away money for a stormy day or practicing fiscal restraint. Once you start adding all our purchases up in the week, you’ll be surprised at how much you waste your hard earned dollars.
You can always put it this way: if you earn $15 per hour and you regularly smoke then you’re spending one hour of your day just to purchase a pack of cigarettes. Is that really living? Even wasting $2 per day on coffee can lead to cash mismanagement: $2 Monday to Friday is $10 a week, $40 per month and $480 every year.
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