Are you someone who wants to build wealth, ignore Wall Street and get on with your life? If so, you have come to the right place. But I must warn you, the first step doesn’t have anything to do with stocks and bonds. The first step in this adventure is to find a simple way to keep track of your monthly burn rate (expenses).
Of all the financial suggestions I have offered up over the years, this straightforward exercise tops the list, in terms of importance. Keep track of your monthly burn rate.
Please note that I am not encouraging you to make a “budget”, which can seem like an overwhelming burden and restraint, as it is for me. In fact I don’t budget. I have tried to, and it doesn’t work for me. Some people are great at setting a budget and sticking to it. I am not one of those. This is not about budgeting, it is about “keeping track.”
Keeping track is at the heart of financial planning. For most people, including me, the overriding question seems to be, “Am I on track to maintain my current lifestyle for the rest of my life, and if not, what changes need to be made?”
It is difficult, if not impossible, to answer this question without a financial plan. A primary factor that goes in to analyzing this is how much money you are saving (or spending, if you are retired), and what dollar amount your portfolio needs to reach, to sustain you for the rest of your life.
Keeping track allows me the personal freedom to know that I am in charge of my financial future. Because of my line of work as a financial advisor, every day I wake up and tune in to the news of the global economy. Is German’s growth rate for real? Are Irish banks in trouble? Is deflation going to trump inflation? Should I buy gold futures or wheat futures?
I have to admit I enjoy tuning in to the dynamics of world affairs. As an investor, these events are largely irrelevant to my investing success, and whether I reach my financial goals. What is relevant to my financial success is how much I am saving for today for my retirement down the road.
The same holds true for someone who is retired and needs to keep track of their spending. Is your burn rate $4,000, $8,000, or $15,000 a month? This figure will have a profound impact on whether or not your “glide path” through retirement will see you through safely, or whether your portfolio will crash and burn long before your time is up. If you are spending $15,000 a month, and your glide path indicates you should only be spending $10,000, isn’t it better that you have this awareness today, rather than ten years from now? On the flip side, if you are only spending $4,000, but find out that you could be safely spending $8,000 a month, that awareness allows you the freedom to make choices aligned with your lifestyle values.
Keeping track of your monthly burn rate allows you the freedom, at the end of the year, to analyze whether or not your spending is aligned with what is important to you. For instance, if you are spending $X,000 dollars a year on dining out, are you getting $X,000 dollars of enjoyment, or would those dollars be better spent elsewhere, offering you more enjoyment or fulfillment? Or. . . maybe you could save and invest those dollars, allowing you more freedom when the time comes to retire sometime down the road.
Keeping track of your monthly burn rate is quick and easy, once you have a system in place that works for you. We’ll cover that next time. In the meantime, if you have a tracking system that works for you, send us a comment, we’d like to hear about it and share it with others.