What is the most important number in your financial plan? Most will quickly respond with “how big my portfolio is,” while others will think for a moment, and then conclude that it’s “how much ROI I can get.” Those may be a part of your money goals, but aren’t quite what we’re looking for.
But few will find the real answer—the number that truly dictates every other number in your plan, and the one that will help you follow the golden rule of money! Also, it is the one that you have the most control over: your burn rate!
What is a burn rate?
In simple terms, a burn rate is how much money you are spending on a month-to-month basis. In Money Vehicle terms, a burn rate is equal to your Past and Present Choices for a month’s time.
In other words, your burn rate is the amount of money you “burn” through to support your lifestyle. Right now, you just need to look at living in the present—this month—and ask yourself a simple question: “How much do you need to support your current lifestyle?”
That number, the amount you need, is your burn rate.
How to calculate your burn rate from a Money Vehicle perspective
When you begin to use the “Money Buckets,” you realize that your burn rate only addresses two of your choices. This calculation will not include your Future Choice, Society Choice, or even your Compassion Choice, because all of those can and will change depending on life’s situation.
Step 1: Add up all of your Past Choices
That includes your debts, bills, and subscriptions—the items or expenditures that you have already committed to for the month
Example: I am paying $600 in student loans, a $400 credit card statement, a $300 car payment, $1,000 in rent, $300 in other bills, and $200 in subscriptions, which combine to create $2,800 of Past Choices.
Step 2: Add up your Present Choices
This includes your food, entertainment, and daily needs—the items that you will choose to purchase throughout the month.
Example: It costs me $600 to eat, $100 to get around, $250 to keep myself entertained, and $150 on other miscellaneous things, which add up to $1,000 of Present Choices.
Step 3: Add your Past and Present to find your Burn Rate
From our previous two steps, we know that the equation becomes this:
$2,800 + $1,000 = $3,800 a month
Step 4: Multiply by 12
To find your annual lifestyle burn rate, multiply thef figure from step 3 by 12:
$3,800 x 12 months = $45,600
Why knowing your burn rate is important
This number becomes the most important figure in your plan because it is the personalized guidance to finding how your plan works!
Your burn rate shows you:
- How much your “Corona Cushion” (Emergency Fund) should be—take your monthly burn rate (step 3) and multiply it by six. This will give you six months of your lifestyle expenses.
- How much your Freedom Number is—this is based on the traditional 4% model and is calculated by taking your annual lifestyle burn rate (Step 4) and multiplying it by 25. So, $45,600 x 25 = $1,140,000.
- How you should be invested in your portfolio—the first thing an investment portfolio is meant to do is immunize the liabilities of your future by protecting your cash needs. If you know that on an annual basis you will need a certain amount of money to live on, then your investment portfolio should begin by protecting that number over the next two to ten years.
- How long you’ll need to work to achieve your freedom number—now that you know your Freedom Number, you can build your strategy around how you can achieve it. Specifically, it tells you how many more years will it take you to reach that number, and what do you need to put away on an annual or monthly basis to achieve it!
Remember: money is a verb. It’s something that you can control. Your burn rate is merely a measurement of your lifestyle of that money verb in action. Also, if you need help keeping tabs on your spending, or any other aspect of your financial health, it can help to grab an accountability partner!
Try calculating your burn rate today! Then, send this article to TWO people you think would benefit from the Money Vehicle Movement Newsletter!
More from Money Vehicle:
