Track your Personal "Burn Rate"

In following businesses, one of the criteria for financial health and viability is the "burn rate" relative to income, assets, or capital. If we are expected to manage our personal estates and finances in a businesslike manner, it only makes sense that we should track our spending over time, to identify trends and alarms.

The first step is to segment spending into different categories - as businesses do. Some folks are content with the "shoebox accounting system", but that will not reveal the numbers as readily or accurately as a more methodical approach. As this is not academic, I will use general terms which can be applied or modified for different households or enterprises.

1. Distinguish between planned and unplanned expenses. This is a measure of what spending is done in a premeditated and deliberate manner, as opposed to the spontaneous and impulsive decisions.

2. For planned expenses, separate fixed from variable charges. Fixed charges can include recurring payments for mortgages, debts and charges. This is the metric that many banks and lending agencies review in order to qualify the capacity of an individual to handle a loan. In contrast, variable charges can be seasonal to reflect irregular spikes. Some annual expenses (i.e. tuition costs, automotive license, etc.) can place additional strains on income and savings.

3. Unplanned expenses are made in response or reaction to an event, and can range from minor adjustments to major commitments. For tracking, the expenses can be further classified as predictable (i.e. flat tire requires a replacement at a fixed cost), or extraordinary (i.e. emergency flight to visit a sick parent in a different city).

4. The level of detail should be practical and suitable for decision making. It may be better to cluster expenses under $100 into a general category than to attempt to spend the time reconciling every latte or chocolate bar consumed. Categorizing by cost also indicates common behavior patterns. If each trip to the major big box retailer costs over $200, or a night out at the pub comes to a minimum $100 per visit, it might be a sign of some wasteful spending patterns.

5. Once the burn rate is tracked, it is helpful to review the expenses and determine what can be reduced or eliminated. In order to hit targets for savings and investments, certain existing expenses must be selected for reduction or removal.

6. Pay Yourself First! By introducing the savings plans as part of your burn with a higher priority, it has a higher visibility.

It is easier to control your spending than your income. The process of building wealth through thrift comes from shifting resources from excessive expense towards wealth-building opportunities. Don't burn your fortune down, build it up.