Do you know what you spend in a month? What your "burn rate" is? This number is every bit as important as how much you make. After all, it's one part of the equation Income - Expenses = Savings. Surely you know what your monthly income is, or at least have a very good estimate. Without knowing your monthly expenses, though, there is no way to know what your monthly savings could be, and therefore, no way to plan for your future.
Every person/family has a different burn rate, obviously. I live and work on a boat and cruise around the world. Someone else lives in a suburban home and commutes to the city for work. Another lives on a farm in the mountains and works from home. Still another travels the U.S. working from inside their R.V.
Each year the Bureau of Labor Statistics puts out a report detailing consumer expenditures. This gives us a good baseline to use for the average American's spending. I've tracked my expenses this past month here in Puerto Vallarta on the boat for comparison. The BLS study shows that the percentage spent on any given category stays remarkably consistent across different incomes, so for this example I've used a higher than average American family taking home $100,000/year as I believe those reading this likely have higher than average incomes.
I'm in no way trying to claim that my family is "normal" as far as this lifestyle goes. There are certainly categories that will make people scratch their heads. For instance, because we spend so little time in the U.S., paying over $1,000/mo for health insurance has been something we have always chosen to do without. Very rarely this causes a monthly spike in our expenses, but over time has averaged out to a tiny fraction of what we'd have paid for coverage in the U.S.
You can see that there are significant savings in the housing section. This month we paid $820 for a space in a marina here in Puerto Vallarta during hurricane season. There will be other months throughout the year where our housing will be $0 as we travel and anchor out. We always pay cash for our boats, so there are no "mortgage" payments, and no obligatory insurance costs that would be associated with a boat loan.
The point of knowing your "Burn" isn't so you can compare it to others, it is so you can determine where changes can be made to improve your personal financial health, and to help yourself move forward on your life's goals.
Surely, we all know the simple equation Income - Expenses = Savings. But this equation can be mixed up. And I think the mixed-up version is one that makes a lot more sense, especially for those with concrete financial goals that they are striving to achieve.
By putting savings on the left side of the equation we emphasize the need to save, versus our need to spend. I think this is important because we tend to view savings as something we can do only if we're lucky enough to have something left over after expenses each month. Prioritizing savings first puts the onus on us to limit our expenses instead of limiting our savings.
Once you've determined how much you need to save in order to achieve the goal you are trying to reach you can see how much money you have left each month for expenses.
Let's look at the example again and say that this person has determined that their goal will require two years of saving $30,000 per year. We know their income is $100,000, and their savings number is now $30,000, which leaves them with $70,000/yr, or $5,833/mo for expenses. Previously they were spending $6,818 on expenses, so they need to figure out a way to lower that number by $985/mo.
People tend to view their expenses as fixed. Take the $2,305 housing number above. Most likely that number is indeed fixed, so long as you choose to continue living there. But are there other options? Can you live closer to work? Can you downsize to a 2-bedroom and have your kids share a room instead of having their own? There are a lot of questions you can ask yourself, but the answer likely comes down to deciding what you value more—your current home/lifestyle, or the goal you intend to work towards.
Transportation expenses are another one that just about everyone can bring down if they are willing to make changes. The savings often come at the expense of convenience. When I was first starting out in the trading business my wife and I decided to sell my car in order to fund my trading account. At the time that meant we commuted together, and I would need to spend three extra hours a day at the Minneapolis Grain Exchange, because market hours were significantly shorter than a normal nine-to-five job. I used that extra time to study the markets. Over twenty years later we still have never had two cars—instead we travel the world in a boat or motorhome. That single decision, to "sacrifice" convenience, may be the reason I am where I am today.
Going through your prior expenses and asking yourself the question, "What do I value more?" will lead you to really examine where you are and where you want to be. With the right outlook, just about any dream is possible. Start out slowly and a snowball effect is likely to follow.
Living, trading, and running a business from a boat is pretty amazing. Just ten years ago the idea of doing all of this would have seemed impossible. While technically it may have been doable, it would have been a near constant headache, mostly due to internet connectivity. These days, almost nothing stands in the way of a mobile lifestyle, whether retired, or working, or some mixture of both. This past year I've gone from Bonaire to Aruba on our boat, to across the US via vintage motorhome, and am now heading to our new boat in Mexico. Life is different in every location, but work and trading remain the same. The world is wide open to us vagabonds.
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