My Money, My Choices
Gail Vaz-Oxlade is a personal finance writer, television host and radio broadcaster. Every Wednesday, she arms Metro readers with tips to keep spending in check.
How to calculate your burn rate
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Have you ever heard the term “burn rate?” It refers to how fast you burn through your money.
It’s a term borrowed from the corporate world that refers to the rate at which a new company uses up its venture capital to finance overhead before generating a profit.
As consumers, we are whipping through our money at such a clip that we need a new term to describe our total lack of self-control and inability to see the future consequences.
Nobody has been paying much attention to the idea of cash management in the last… well… EVER. In fact, most people who talk about financial planning don’t even bring up the idea of cash management.
What is cash management? It’s exactly what it sounds like. It’s the management of your cash on a day-to-day basis. It’s what I focus on when I work with people to get them back in touch with their money and keep them focused on managing it so it doesn’t run out.
Cash management has traditionally been the domain of bankers, but bankers are doing such a crappy job of dealing with this area of their customers’ financial planning that some investment houses jumped on the bandwagon a while back. It was short-lived.
Too bad. No doubt their initial enthusiasm spoke to the lack of investing that’s resulting because of all that debt out there. After all, if your credit cards, lines of credit, car loans — however it is you’ve chosen to borrow — are now eating up $300, $500 or $700 a month in interest, how could you possibly have money to invest? Of course, the investment houses didn’t do a much better job of this whole cash management thing than the banks do. Sigh. Sometimes I feel like a lone voice in the wilderness.
In all the TV shows I’ve made, and there have been over 180 episodes, I have never worked with anyone who didn’t have to change their lifestyle to change their outcome. If you could just keep doing the same old, same old, without creating problems and wreaking havoc on your family’s peace of mind, then nobody would be talking about it. And we certainly would not have needed to adapt the term “burn rate” to describe our rabid spending.
So, there is a big problem. And it’s not going to go away until we admit that we’ve made some mistakes and commit to doing things differently.
People can get out of debt; it takes determination and gumption. People can live within their means; it takes planning and discipline. People can be happy NOT spending money; it takes having a real life.
Do you want to blithely shop yourself into the financial dumper, or do you want to become fully conscious of how you’re using your money so that you can make it work for you? Wouldn’t it be nice to not have to work any harder than absolutely necessary to have the life you want?
While small savings may seem inconsequential compared to the pleasure you derive from spending the money, that’s a very shortsighted approach to using money as a tool. Sure, $5 a day on coffee and snacks may not add up to a whole helluva lot in five or 10 years, but the more than $75,000 you have after 30 years (assuming just a two per cent return) is much better than the alternative: zilch. Manage even one per cent more in return over the 30 years and you’ll have almost $90,000. That’ll go a long way to making your life more comfortable in the future.
Still not convinced? Well, since the average Canadian receives about the same from Old Age Security and the Canada Pension Plan, you can look forward to an income of about $12,000 a year if you don’t take some steps today. Imagine living on $12,000 a year right now.
Did you just shiver?
How to calculate your ‘burn rate’
If you’ve decided to take charge, why not calculate your burn rate? It’ll take about a week, and here’s how you do it:
1. Make yourself up a tracking sheet. Put the days of the week across the top and some typical categories down the left-hand side. Include stuff like coffee, snacks, lunch, cigs, gas, magazines, newspapers, ... everything on which you spend money in a day.
2. Leave lots of blanks on the left because you’ll be amazed at what you’ll add when you see all the places where you’re spending money.
3. As you go through your week, write down what you’re spending. You’re going to add it up, so there should be a column on the far right for Total Spent for the week for each category you’ve included on your worksheet.
4. Identify the point at which you spent $100 on non-essentials. That’s your burn rate. Did it take you a whole week? Five days? Less than three days? What were your biggest areas of weakness? Eating out? Kids or grands? Bad habits?
Want to be smarter about your money? Go to mymoneymychoices.com and follow the roadmap to success.