According to Websters Dictonary “burn rate” is the “rate at which a company uses its cash to survive, the money spent each month above incoming cash flow”.
The term “burn rate” was “coined” and came into vogue in the late ‘90’s it became popularized along with the dotcom craze.
Essentially, “burn rate” applied to technogy start-ups and biotech companies. Typically these type of companies made products would take years (if at all) to hit the market. It is also a good indicator of how long the company is likely to survive without raising money.
However, now the term is being applied to personal finance to refer to how fast households spend their discretionary cash.
A recent survey sponsored by Mackenzie Financial found that an average Canadian spends $100 of discretionary income in just 4 days! $100 in four days means $760 per month or a “burn rate” of $9,125 per year.
This “burn rate” indicates how quickly we as Canadian consumers spend our discretionary money.– money that could be invested, saved or used to reduce debt.
Furthermore, over two thirds of Canadians surveyed said that spending brings them happiness and over 40% would choose spending over investing.
Saving and investing may not be as much fun as spending, but it is important to know how to do both well.
Making wise spending choices can help you live comfortably today and when you retire.
I think that this is especially timely seeing as we have just come off our traditional RRSP season.
Ask yourself: Were you able to contribute to your RRSP this year? Are you pleased with the amount that you put away?
If the answer to these questions is no – then you better check out your “burn rate”.
Check out the Press Release here.
Find out your “burn rate” here.
Visit www.burnrate.ca to see how certain life choices can impact your “burn rate” — and how the savings from smart spending choices can add up when invested.
Tips for managing your Burn Rate:
1. Switch to cash for three weeks. Take cash out on Sunday night and that’s it for the week.
2. Track your spending and cash flow each week for four weeks to see where it goes.
3. Pay yourself first; create automatic deductions for saving and investing from your account before you can spend the money.
4. Don’t shop under pressure. Create a holiday/birthday closet that you contribute to all year long.
5. If you get the urge to buy something, try to set aside an equivalent amount for an investment.
Here is a neat way to put purchases into perspective: Start with your salary_______________________ (A)
Number of hours you work per week____________ (B)
Number of weeks you work per year____________ (C)
Multiply Line B by Line C __________________ (D)
The number on Line D is the number of hours you work per year.
Divide Line A by Line D _____________________ (E)
The number on line E is how much you earn per HOUR.
Here's an example:
Start with your salary______$40,000__________ (A)
Number of hours you work per week____40____ (B)
Number of weeks you work per year____50_____ (C)
Multiply Line B by Line C _______2000_______ (D)
The number on Line D is the number of hours you work per year.
Divide Line A by Line D ________$20_________ (E)
The number on line E is how much you earn per HOUR.
Let's say you are considering a big new TV that costs $3000.
Divide the cost of the item by your hourly wage and you'll see how long you'll need to work to pay for it.
In this example 3000/20 = 150 hours. You'll have to work almost one full month to pay off that TV.
And remember that's one full month if you didn't have any other bills to pay...like heat, light and telephone.
Of course, you do work to pay the bills but this exercise can help you put those optional spending choices into perspective.
Is that TV worth 150 hours...four WEEKS of your life?
It’s up to you!
To Your Success,
Mark Huber, CFP
PS: Questions or comments? Let me know here.
mailto:mhuber@money-moves.com?subject=AskMarkFromBlog
