Calculate your personal burn rate to find out
If you’ve ever dreamed of quitting your job, or not working at all, you’ve probably also wondered how long you could support your lifestyle right now if you didn’t work.
What is a burn rate
This financial indicator can be measured, and it’s called a burn rate. It’s one of the first numbers in your personal finances to know in order to gauge your financial health, and to know if you are on track to stop working one day, otherwise known as Financial Independence, or FI.
The higher your burn rate, the longer you can support your lifestyle without getting a paycheck. A healthy burn rate is 6. Once you have reached financial independence, which is the point when work becomes a choice, your burn rate will be 300.
Calculate your burn rate
Your burn rate can be calculated by adding up the amount of money you have in the bank and dividing it by your monthly expenses. A burn rate of 6 means that you have 6 months of expenses saved in case you are unable to work.
For example, let’s say you have $36,000 in the bank between your savings, retirement, and investment accounts, and your expenses are $6000 a month. Your burn rate is 6.
What is financial independence
Financial Independence is also a measurable number, and it is based on years of research to determine how much money you can safely withdraw from savings and investments without outliving your money. Financial experts agree that 4% is a safe withdrawal rate, and that translates to needing 25-times your annual expenses saved in order to be Financially Independent.
Calculate your financial independence number
Therefore, 25x your annual expenses is your FI number.
While your burn rate helps you gauge how free you are right now, your FI number tells you where you are trying to go. Your job is to close the gap between where you are now and financial independence.
How to increase your burn rate
How do you close the gap? By increasing income, reducing expenses, and saving more money. You can do all of these with intention, action, and by tracking your money.
Being good at personal finance comes down to one thing: awareness. When you know your numbers, you can make decisions that will take you toward financial freedom instead of away from it.
The seemingly small spending decisions we make every day make a big impact on our finances. We live in a world that wants us to spend, trains us to spend, and enables us to spend on things we don’t need. Spending can become toxic and addictive, and the repercussions of needless spending can be devastating.
And it can prevent you from becoming FI, which is why you need a system. Use my wealth strategy to project where you want your dollars to go, and Mint to hold you accountable.
Once you know where your dollars are coming from, tell them where you want them to go. This process of knowing how much is coming in and managing how much is going out and to where it is going, is how you can make financial independence a reality.
Knowing your burn rate, or how many months you can support your lifestyle without getting a paycheck, will give you give you pause before you spend and security before you make a big move, such as quitting your job or starting something new.
How to increase your burn rate
If you’ve calculated your burn rate and it’s low, there is good news. You can increase your burn rate by increasing your income and by decreasing your expenses.. so that you can save more.
Increase your income
You can increase your income by monetizing a skill, resource, or personal interest you have right now by providing value to others. The entire world is your marketplace, and you can connect with it online. Money is infinite, and more is being created every day. You can participate in the abundance that is all around us, waiting for you to claim, by setting an intention to increase your income and taking action to provide value to others in exchange for money.
Decrease your expenses
Finally, laser-beam focus on spending on only what you need, increases your burn rate too. The lower your expenses, the higher your burn rate. So do everything you can to only spend on things that are taking you closer to your financial goals and not on anything else, unless it’s planned and part of your overall financial wellbeing!
Knowing your numbers is powerful
Knowing your numbers, both your burn rate and your financial independence number, are positively crucial if you want to be financially free. This awareness is the first step to making work a choice when you are ready to stop working.
Holly Morphew is an Accredited Financial Counselor® and financial coach based in Denver, CO. Her book Simple Wealth is a best seller in personal finance, money management, debt elimination, credit repair, real estate, wealth management, women & business, and personal transformation. Need help with your personal finances? Schedule a free consultation.