As the Covid-19 pandemic lingers in 2021, maintaining separation between your business and personal lives can feel like an impossible dream. Articles about the need for work-life balance proliferate. But I find there is one area where many high-net-worth individuals and busy professionals can benefit from running their personal life more like a business — cash burn rate.
What is Cash Burn Rate?
The burn rate is typically used to describe the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations. It is a measure of negative cash flow. The burn rate is usually quoted in terms of cash spent per month.
In the case of an individual, a personal cash burn rate means you are spending more than you are earning, often by using credit and dipping into savings.
How to Calculate a Personal Burn Rate
We calculate a client’s personal burn rate by tracking all income and expenses, as well as their assets. This is a daily money management service that can provide insights and save you a great deal of time versus doing it yourself.
Each month we download all checking account and credit card transactions using a personal financial software package such as Quicken, or a spreadsheet. We strive to categorize everything; we’re most successful when we have a client that is willing to spend a little time with us reviewing the transactions once or twice a month.
Tracking of assets is also required. This is not necessarily done through Quicken. Many clients simply share their investment statements with us in order to monitor their values. Real estate holding values are estimated from an online source such as Trulia. We will also track non-credit card liabilities such as mortgages, student loans, etc.
This provides us with an excellent snapshot of our client’s net worth. Tracking this month to month allows us (or you) to determine if there is a personal burn rate or if you are adding value by generating a monthly surplus.
Burn Rate and Retirement
We have used this methodology to help our older clients determine how long their funds will last if they might need home health care or to move to senior housing.
Our client’s financial advisory team provides us with a conservative estimate of their investment growth. Then, we divide the monthly spending into the assets to come up with a fair estimate of how long our clients’ money will last. This enables the client, their family members and other advisors to make educated decisions for the future.
While you might not need all of your personal life to operate like a business, it can help to borrow some common sustainable cash management practices to provide some peace of mind. Isn’t that something everybody wants?
By Peter Gordon, is a Certified Daily Money Manager™ (CDMM®) and member of the AADMM New York Chapter Executive Committee. Peter leads the team.at New York Financial Organizers in Forest Hills, New York.