Personal Burn Rate

Burn Rate
Image by thelapd via Flickr

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?

5 thoughts on “Personal Burn Rate

  1. For me, Parkinson’s Law always applies. Liftoff tends to occur simultaneously with fuel exhaustion. As you approach the bottom of your barrel, the sense of urgency heightens, efficiency increases, operating loss decreases, and it finally all comes together at the last possible moment. The amount of runway *used* (both for the family and for the business) increases or decreases based on the amount of runway *available*.

  2. It’s true that the sense of urgency heightens as you approach ‘the bottom of the barrel’; however, I believe the amount of runway you need varies by the type of business. If you’re entering an existing, established market, Parkinson’s Law applies. On the other hand, if you’re creating a new market, the adoption process takes 2 steps — first, we understand how the technology adds value and second, we want to buy from you. In essence, the sales cycle can be longer and additional personal runway can give an entrepreneur time to pilot/refine the offering and defer raising capital. I’ve seen many entrepreneurs with great ideas that were considered ‘before their time’. With enough runway, it may have turned out differently.

  3. Don’t forget “opportunity cost”. how much are you losing by not drawing a salary at a real job?

    also, try your best to “draw the line in the sand”, i.e., when you’re out of budgeted money, then stop. don’t start tapping on your credit card. many times i’ve seen entrepreneurs think that if they just get “x” or to “y”, then they’ve turned the corner and the business will start rolling in. they keep thinking they’re right on the cusp. but a year later, and 3 maxed out credit cards later, they are still at square 1.

  4. I offer you also calculate spousal and mental burn rate. Both are taxed by the long hours and focus a startup requires.

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