Being an entrepreneur is exciting, nerve-wracking, rewarding, and stressful, all at the same time. It can be daunting when you’re first starting out on your own, particularly if you’re making the jump from a steady, well paid, salaried job.
However, there is nothing like having the endless possibilities that can only come from being your own boss right in front of you.
A common line that many entrepreneurs repeat is “they could never go back to a 9-5”, though not all actually take action to make sure that happens.
Getting your personal finances in order is an important part of this as, if you’re able to build up your own cash reserves and lower your personal burn rate, you’ll be able to survive any economic disaster life throws at you.
Why a Low Personal Burn Rate is Important
In finance, “burn rate” refers to how quickly a company will use up its supply of cash. However, you can also use this concept for your personal finances, calculating your personal burn rate.
Your personal burn rate is how much money you spend (burn through) each month/year. This includes essential things like rent/mortgage, utilities, and food, as well as non-essential things like meals out, fancy gadgets, and clothes that you don’t absolutely need.
The higher your personal burn rate, the more money you need to earn. During the good times, while business is booming and you’re making loads of cash, this may not be too much of a concern to you.
But when the good times come to an end, as they always do (think the dot com bubble and the 2008 financial crisis), a high burn right could become a huge problem for you. Firstly, because you will need to quickly slash your spending and try to get out of financial commitments. Secondly, because you’ll have no savings due to spending everything you earned.
A low personal burn rate means you can continue to live comfortably either on a lower personal income, or by using your savings while your business recovers or whilst you find a new income stream.
A low personal burn rate is also important as it helps to cater for sick days, vacation time, and emergencies where you may not be able to work. Many 9-5 jobs have sick pay and paid holidays that you can fall back on, but this isn’t the case when you’re your own boss.
How to Achieve a Low Personal Burn Rate
A low personal burn rate is achieved by simply spending less. It may mean making some sacrifices like not upgrading your smartphone as frequently, choosing to live in a cheaper apartment/house, and opting to dine out less.
This is why many entrepreneurs choose to live with their parents well into their 20s (or longer), or share a house with several friends as both options are typically much cheaper.
It doesn’t mean you have to go without things you enjoy though. Instead, you can find alternative options that are just as fun.
For example, if you enjoy playing games, there are plenty of free versions of popular titles that can be played instead. Free-to-play games have really taken off in recent years, with several big names entering the mix.
One of these is Call of Duty: Warzone. This is a free-to-play version of the popular first-person shooter than runs on the same game engine as Modern Warfare. Meanwhile, lovers of card games can use the free-to-play PokerStars game to play in ring games and tournaments from a computer or mobile device.
If music if your life, then free subscriptions on Spotify and Deezer can save you money, while movie lovers can take advantage of free trials with services like Disney+.
Hosting dinner parties or organising a picnic with friends is much cheaper than eating in restaurants but it can be just as fun. Doing your workouts at home, the park, or the beach instead of in a gym can also be just as effective and you can find plenty of guides online to help you.
Using other money-saving techniques like clipping coupons, using rewards credit cards, and bulk buying can also help you spend less each month.
Make Your Savings Work for You
Once you’ve managed to get your personal burn rate down so that you’re putting away a chunk of cash each month, you need to make sure it’s working as hard as you.
You will likely want to have a mix of cash savings and investments in assets like bonds and stocks to help grow your net worth. If you manage to invest enough into income-generating assets, you may eventually be able to cover your day-to-day expenses from the dividends and interest payments from these.
Arthur Smith is blogger and freelance writer. Traveler, street food lover, PC owner from day one. His interests always have been computers, technology both mobile and IoT and how all this impact our daily life.