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Do you know your cash burn rate?

December 7th, 2009 · 1 Comment

An aspiring entrepreneur is going to quit his job, and start a business. According to his business plan, he will need to survive 12 to 18 months without a regular paycheck. He wants to maintain his current life style. How much money does he need to save before he makes the jump to entrepreneurship?

John was laid off last week. His severance package will last for another 6 weeks. Given the depressing state of current job market, he probably will need several months to search for a job. Will he have enough cash to support his family until he gets his next job?

Michael and Mary will have an addition to their family in a few months. They rents an apartment in San Jose, CA, but they would like to buy a house in a good school district in the Silicon Valley. Although they both have six-figure income, it’d still be a little bit of stretch financially for them to purchase a single family house in the expensive Palo Alto, CA. Can they really afford such a house given their current level of expenses?

To answer any of the three questions above, you need to know how much cash you’re burning each month.

You might argue that expense is different from cash burned. For example, you can borrow $1,000 on your credit card, but only pay off $50 in cash this month. The $1,000 plus interests are the actual expense, while the $50 is the cash payment for this month.

For the sack of this article, I’m focusing on the fifty dollars cash payment. It’s your obligation to have the cash to make the payment.

Cash is king. Ironically, I know very few people who know their monthly burn rate. Every month, they have their paycheck directly deposited to their bank account. But, they don’t really track how much are spent each month.

You should know your cash burn rate before you get burned financially. It’s really personal finance 101. 🙂

Here is how I track my cash burn rate.

I use a single checking account to pay off my bills. Every month, I’ll download a copy of the monthly statement from the bank web site. I’ll add all of the expense items, which gives me the cash burn rate for the month. Having a single bank account to pay off bills make this process simple and easy.

To drill down my expenses, I go to Mint.com, which automatically uploads all of my bills, and generates nice charts to show me the sources of my cash expenditures. It also lets me set and track budget goals.

It only takes a few minutes each month, but give me a lot of peace of mind.

Do you know your cash burn rate? If the answer is no, I suggest you to spend an hour to get a better understanding of your cash burn rate.

Know your cash burn rate before you get burned financially. 🙂

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Tags: Personal Finance

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