In the startup world burn rate refers to the amount of money the company is losing on a monthly basis. It is usually mentioned in the same breath as the number of months remaining until the business runs out of money (e.g. $200k in the bank losing $20k per month gives 10 months of runway). For entrepreneurs getting ready to go out on their own, I like to talk through personal burn rate. Personal burn rate, as you might have guessed, is the same idea as a startup burn rate but for personal finances.
Here are a few thoughts on personal burn rate:
- Lifestyle modification is typically needed to lengthen the runway and lower the burn rate
- For entrepreneurs with no family, mortgage, or kids the monthly expenses can usually get under $2k/month comfortably, especially in a city like Atlanta
- Many people talk about 6-12 months of runway but everything takes twice as long and costs twice as much so I recommend 18-24 months of runway
- Even if you’re not going to make the entrepreneurial plunge tomorrow it’s a good personal finance exercise to divide your savings by your average monthly expenses in order to calculate your current runway
The personal finance side of taking the entrepreneurial plunge isn’t talked about as much as the corporate side. It’s important for entrepreneurs to calculate their personal burn rate and make the appropriate modifications when possible.
What else? What do you think of personal burn rate?