Episode 004 - Feel the BURN RATE

In this episode we look at the first stage in setting up a life for financial sustainability - getting your expenses under control and your BURN RATE. BURN RATE is critical to having the flexibility to move towards a life based on passive income generation (or financial sustainability as we call it) and we show you the truth behind the concept that $1 saved = $3 earned.

In this episode we look at the first stage in setting up a life for financial sustainability - getting your expenses under control and your BURN RATE. BURN RATE is critical to having the flexibility to move towards a life based on passive income generation (or financial sustainability as we call it) and we show you the truth behind the concept that $1 saved = $3 earned.

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Show Notes

In the first episode, we introduced the context of why you would want to live unconstrained. The freedom that comes with the unconstrained lifestyle is incredible. You get your life choices back, you get your freedom back , your ability to travel and the release of stress from the day to day grind that we have all found ourselves subject to. In our second episode, I introduced the concept of Financial Sustainability and that we are all participants in a capitalistic system and need to embrace the art of business to thrive in that system. The core goal here is to make Net Profit in our lives - not focus only on net income.

In this episode, we will dive into the next part of the methodology of Financial Sustainability - getting control of your BURN RATE.

The default position most of us have when it comes to working or beginning a career is to start with the income first. This is the “sexy” way to look at work. You value yourself based on how much you make. I’m a ABC professional and I make $XYZ per year. I mentioned this in our second episode as a flawed way to look at one’s value. It isn’t about your income. It is about your net profit - what you keep after you have made your money. Not how much you make.

We live in a world where social culture shuns this ideology. We have governments than run trillion dollar deficits because they are running at a loss. Yes, that’s right - a loss. Because in business terms if you don’t make a profit by using the very simple formula of income less costs = profit, and that profit number is negative, it is the definition of LOSS. Yes, we are running a LOSS. Do we hold elected officials accountable for poor management? Nope. If that was a corporation, they’d boot out the CEO at the next shareholder’s meeting. But not with govt. So the fiction is sold to the people that making a profit isn’t important. Amazon didn’t make a profit for 15 years. Yet they are worth a lot of money. This is the essence of a Ponzi scheme, but that is for another show. The thing is that you don’t have a multi-million dollar marketing machine behind you to spin fiction into fact, so we have to get real. If you don’t have a profit, you better change that because you will have to hold a ton of debt (probably credit card debt) to cover your losses. And that debt represents the very handcuffs that shackle you.

The first part of working out your financial position is to have good and regular accounting. This means not only capturing how much you make, but your expenses.

If you are correctly accounting for your expenses, you will know the value of something we call THE BURN RATE (insert audio here). Your burn rate is how much money you need to make in order to show a net profit and not a net loss. If you account each month for total income less total expenses, then you should know this number. Ideally you have at least 12 months of reports of profit & loss statements for you, so that you don’t forget to include those non-monthly expenses, like property tax payments or annual renewals for insurance, etc. We can always factor those things back over the 12 month period as we know them. But you should be able to state your burn rate within about 10% accuracy. The lower the better.

We have far more control over our expenses than our income - mainly because income is provided to us by a third party. It could be an employer, social security, pension, income from investments, or money you make in your own business if you are self-employed. Income goes up and down depending on factors we have little control over. But expenses are something we decided to have, and we have direct control over. Sure, there are large items like your mortgage that you made a decision on and you don’t have as much flexibility over as other smaller items. But if you look at the suitability of your home with your lifestyle needs, it may be that by looking critically at each line item in the expenses on your profit & loss statement, you can make a short or longer term decision as to whether they are suitable. There are probably some obvious things you can see and change - maybe things like insurance policies. There could be more competitive offerings out there that you could switch to. Maybe phone plans - there could be better suited or more competitive offerings out there that you could switch to. By making small changes like that to a recurring monthly bill, the impact of the change over time can be huge. But until you see the totality of your expenses, you won’t be aware of exactly how much things are costing you.

Expenses are the key to being unconstrained - because they are the most targeted weakness in all of us. We spend money because we are psychologically triggered to do so. You drive down the freeway and the big signs you pass on the side of the road subliminaly tell you to spend money. They tell you that you deserve product X, that your status would be increased if you owned product Y, or that your family need to have product Z to avoid the Zombie apocalypse.

This is a cop out. We are in control of our own decisions and what I’ve found is that most of us lost that control a long time ago. We are working 60 hours a week, and we succumb to going with the herd because we have no energy to apply critical thinking to any decison. We don’t trade off the pros and cons of each decision adequately because that takes time - time we just don’t have. So we just say Yes because in our psychology, we all want to be liked and that’s how you get more positive reaction.

This is a trap that we have to recognize and we have to manage. The truth is that if you had minimal expenses, you would not need to be working 60 hours a week. However if you are doing that to acquire income producing assets, then you are forgiven. But for most of us that is not the case. It is a downward spiral - you spend money, creating a need to work, which then removes the opportunity of critical thinking, so you spend.... You can see where this is going.

You might say, “But Myles, I’m better than that. I like to think I’m smarter than the average person.”. OK, so why is your garage full of junk? Why is it full of past purchase decisions that you are not actively using today? Why is it that so many Americans have to spend more money to buy storage lockers to put all of those unnecessary purchases in, only to see them get sold on Storage Wars or some Internet storage unit auction site when they forget to pay the rent?

The key thing is that owning things is an ongoing cost. You need more real estate to contain those things. You need to climate control that real estate. You need to dust and keep those things in good shape. You can quickly become a slave to those things, where your time is about attending to your stuff rather than attending to your freedom. I’m not saying we are all extreme hoarders, but that just demonstrates the level of hypnosis that some of us have fallen into. We have to change this.

There are a few general rules that help with keeping a low burn rate:

1. Slow down

Anytime you spend money, you should have some clarity to really trade off the decision before just stumbling into saying Yes to the expense. This is particularly true of larger purchases, but even a $50 purchase can be critically analyzed. If you are being pressured by a sales person to make a decison because if you don’t do it right then, the opportunity will be lost, then walk away. They are playing on our weakness to FOMO (Fear of Missing Out). There is a 95% chance that the sales person has a commission target and you are just part of their income strategy. That’s great for them; that’s bad for you.

I work on the basis that if any decision is greater than a number I feel comfortable with (let’s say $100), I will wait at least 24 hours before I make that decision. You’d be surprised that 75% of what would have been immediate purchase decisions become less important 1 or 2 days later. No longer do you “have to have it”. Now you don’t care so much and you’ve probably moved on to something else. This is clarity playing out over time. An important part of the strategy.

2. Involve your spouse or significant other

Don’t be afraid to say to a sales person, “I need to talk with my husband” or “I need to talk with my wife”. This is particularly valuable if they are not there at the time. Not only will it build a far better relationship with you because you are respecting the other person, but being part of a team helps you see things that maybe you are not seeing. Again, it forces the slowing down of decisions.

3. Don’t use shopping as a social or relaxation strategy

I hate the term “retail therapy”. It just shows that the person is lacking in some need and trying to use spending money to fulfill it. It is like those that are alcoholics, take drugs or over eat. It isn’t helping. It is better to recognize a problem and find a way to deal with it. If you spend time with nature, reading a book, going to sporting events, holidays with the family, etc. you will be far happier than spending time at the mall.

4. Stop buying crap online

Yes, it is super convenient to shop on Amazon. But stop it. They are just subliminally luring you into purchasing stuff you don’t need. They will learn your weaknesses and they will exploit them. That’s what big tech does. It isn’t just Amazon, but they are the 100 pound gorrilla in this space. Unless you are purchasing critical items that you would buy anyway, and doing it online because it is cheaper, close the browser and go read a book.

5. Take advantage of free things

You’d be surprised just what incredible things are offered to you for free at your local library. Or rather than paying for cable TV, what about getting an “over the air” antenna and setting up something like a Tablo TV unit to capture high quality, digital broadcasts of the free to air channels that are all around you. Do you need a $100 a month cable TV package? Analyze your media habits critically and determine if you really need to be spending money like that.

6. Realize the total cost of things

Some expense items appear to be affordable, but they are not when you factor in the ongoing costs associated with them. For example, a car is almost a critical item we all need. But do you need to purchase a new one? Manufacturers will build a shelf-life into any product these days because they want repetitive business, but that could be the very reason that you should buy something older that can be serviced rather than become entrapped in newer technology that is designed to be thrown away in 4-5 years. But also factor in the repair and maintenance costs of the items you buy. If you buy something exotic, the costs of ownership over time may be 10x what it would be for a more regular domestic version of the same thing. Make sure you understand your true requirements before you go searching for a solution to them. If you put the solution ahead the need, you are buying blind and it probably won’t end well.

7. Secondhand should be job #1

You need to retrain your brain to go for used before new. Not only will you save a huge amount of money, but you are reducing waste, landfills and the cost of disposing of items before they have met the end of their natural life. If you think that going to the local thrift store is beneath you, then you’ve got a problem. If you only want to buy clothes that are new with tags, realize that after one wearing of those clothes, you will wash them and they will come out looking exactly like the used version of the same clothing that was at the thrift store. If you paid $50 for a sweater vs. $10 at the local Goodwill for something similar, compare the same product after you’ve worn & washed it, and realize that the one wearing you just had cost you $40 that you can never have back. It is like the guy who buys the new car, and watches the value of it plummet as they drive it off the lot. What is the point of that?

8. Shop local

If you want to increase your property values, have a better community, reduce pollution and commute time, etc. you need to realize that keeping your business local goes a long way to helping that. If you buy everything on a credit card from China, then the money doesn’t come back. They are not buying your products in any great number so you can hear the great sucking sound as your money leaves your domestic region. But if you go to the local farmer’s market and spend your money, the local community is empowered with income. That money goes into local taxes that pave roads, or pay for local police force or make schools stronger, reduces crime, etc. And if the vendor who receives your money does the same thing, then the circle of life continues. Look after your neighbors rather than some corporation that you will never meet at the local coffee shop.

9. Cash is king - never spend money you don’t have

You should never spend money you don’t have. Your parents told you that, right? But we do. We use credit cards for everything by default. We end up (often without realizing it) falling into massive debt that erodes our freedom, reduces our assets and often puts people into bankruptcy. If you only spend the cash you have, then you will find you spend about 3x less on things.

10. Sell the crap you don’t use

Important statement here. You don’t own things. The things own you. Yes, that’s right. Your things create a burden on you, increasing your stress, and needing you to attend to them. In the second law of thermodynamics, the universe and its entropy will devalue and eventually destroy what you have. So how about you make those things you no longer care about, someone else’s problem? You won’t need a bigger garage, you won’t need to spend all of your spring time dusting stuff you haven’t used in years. Even donating stuff makes sense because there is a cost of keeping things - the real estate cost you have to incur to house them, the utility bills for climate control to stop them from naturally degrading faster, etc.

You should have an eBay account, and enjoy the art of using it. You should have a garage sale at least once a year, and you should be happy to donate the stuff that is too hard to sell to your local Goodwill or Savers just to give back to your community. If you are not using it, why do you keep it?

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A wise friend of mine once said (which I wholeheartedly agree with), that $1 saved is worth $3 earned. Why? Because of the costs of earning the money that comes with the generation of income. If you save all the costs to earn the $1, and reduce the need to earn the dollar because your costs are decreased, you can quickly see how to reverse the trend and return you back to net profit.

So let’s put this in context with the average salary earner. If you earn $75,000 a year and live in Los Angeles, are you a success or a failure? Here’s how the numbers work out so you be the judge:

• Taxes - $15,000

• Cost of a car & fuel per month - $600 ($7200 per year)

• Cost of new clothes, etc. $2000 per year

• Cost of parking (maybe provided by your employer, maybe not) $2500

• Buying lunch each day (250 working days per year, $12 per day = $3,000

• Total costs to work: $30,000

• You keep $45,000

So what is the cost to live in Los Angeles? According to Rentcafe, the average rent of an apartment in LA is $2,384 per month (https://www.rentcafe.com/average-rent-market-trends/us/ca/los-angeles/)

That is almost $30,000 per year. So you get $15,000 left (about $1200 a month) for food, TV, phone, Internet, going out, etc. For the average urban dweller, that isn’t going to cut it. You are out of money, and welcome to the 80% - you are living pay check to pay check.

Maybe there are some hacks you can use here - like share a place, or car pool, or don’t eat out so much, etc. That might just carve of 30% of your costs, but it comes at a cost of convenience and quality.

But if you changed your paradigm, didn’t need to live in the urban jungle and found a way to save 50% of your burn rate, you could reduce your income generation down substantially - particularly if that income generation didn’t have a lot of direct costs associated with it. If you didn’t have a job, you wouldn’t have to commute. If you didn’t have a job, you wouldn’t have to eat out. If you didn’t have a job, you wouldn’t need lots of expensive clothes. Etc. This is the key part of starting to becoming unconstrained. Not having a job.

As I said in the first episode, the rich don’t have jobs. The 1% don’t have jobs. Why? Because they understand the math and they understand you focus on net profit - not net revenue.

But here’s the biggest message out of this.... 80% of people don’t even know these numbers for themselves. They are just using credit cards to fund the deficit without often realizing they have a deficit. Then one day they look down at a $20,000 credit card debt and wonder how that happened. Either then they come face to face with the reality, or they just take out a home equity loan or some other stupid debt to pay another debt off. And they continue further on their merry life, knowing that a year or so later they will be back in the same disaster yet again.

If you knew your costs per month to live, your BURN RATE, then you could assess whether working for someone actually makes sense. Because with this analysis you could consider some alternative options:

a. What if you didn’t live in Los Angeles, but in a place that costs 1/2 the amount to live?

b. What if you worked from home and didn’t have all those costs of commuting, parking, eating out, clothing, etc?

c. What if you didn’t need to earn $75K and therefore wasn’t subjected to paying the same amount in taxes because you qualify for a lower tax rate? Or that your income was considered a capital gain rather than pure income, and taxed at a far lower rate?

There could be dozens of different scenarios you could look at. I mean some people even go to the extreme of living as digital nomads in Changmei, Thailand where they earn their income on the Internet, and can live for $1,000 a month in style.

You see, first getting a hold of your current burn rate allows you to make more strategic decisions on what you really want. It sets a starting point of which you can begin to work out your options. If you can get the burn rate down to a minimum without disrupting the quality of your life, then you can find a way to make the income you need out of passive income means and be unconstrained. Because I would suggest to you that at least 50% of the costs you are paying for now are only there to support a flawed paradigm of working for someone for a living. If you didn’t have to do that, you could choose where and when you worked, not have to impress your boss or co-workers, not have to live a facade of an existence, drive a more practical car, live in a more practical place, shop locally, eat organic food and reduce your need for healthcare, etc. These things come with you regaining control of your time so YOU choose what life you want rather than living up to an ideal that someone else sets and therefore be constrained by what they say is your life.

If you only needed to earn $40,000 a year, about $3,500 a month, then it is far easier to do that with passive income than to start at some level that is out of reach for some time.

You see what I’m doing here? I’m setting you up so that you can live a more frugal life, but you are really getting prepared to change the way that your income needs to be made. That will become the subject for future episodes because that is the more interesting part of this equation. But if you don’t have control of your accouting, and minimize your burn rate, you won’t be able to do this. Think of your burn rate as the “boot camp” for Financial Sustainability. Your expense fitness will determine your ability to run the marathon of creating passive income. Once you have competed that, then it just naturally and organically comes back into you with little labor effort.

So you have to do you. You have to work out your burn rate, and immediately start to cut things out of it that don’t serve you. You have to be willing to be criticized for driving a crappy car because you don’t have a car payment. Or riding a bicycle or taking the bus. Because you don’t need to spend $500 a month for a car that won’t go up in value. Or you choose the cheaper phone even though your friends will ask you, “Why did you buy that when you could have had this?” not realizing that they are paying $200 a month for their financing of the phone + cell phone plan, and you are paying $50.

The one thing we have available to us is very affordable travel. This means you could live in one place affordably, but visit your clients, employers, etc. in another more expensive place periodically, but not live there. This keeps your costs way down - even if you have to pay for an airline ticket once in a while. This is crucial if you want to keep control of costs. And who would want to live in a concrete jungle anyway?

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I leave you with this point to think about. When people who have spent a lifetime working in a corporation or larger organization get the opportunity to retire, what do they do? The first thing is probably to travel because they regained control of their time and they hope to see the world because they spent most of their lives being unable to do that. But what happens when they get back?

Most of the time, they will find ways to start to cut their expenses down. They may have already begun that process prior to retirement, but the truth is that they are looking down the barrel at an undetermined number of years they have left to live, yet they expect to be living on a fixed income of some sort. Maybe it is the dividends or interest from their IRAs or 401Ks. Maybe it is social security. Maybe a pension. But they don’t have the income producing power they used to have when they worked. So things get downsized really quickly. They embrace frugal living.

This transition can be a disaster for many. The stress of change that it causes is horrible. They are being forced to have to downsize in order to survive, and that shouldn’t be the reward at the end of devoting your working life to a career. A better option would have been to build up those habits throughout your life because then if you choose not to work, it isn’t a huge distance to travel from your life before retirement to your life after retirement. I don’t see the whole point, personally, of retirement. It should be simply that you work because you love doing what you do, and you’ll probably do it until the day you die. But on your terms and not saddled with the massive baggage of debt and unnecessary expenses. The sooner you focus on cutting down on those expenses, the closer you are to freedom. And if you follow the path of Financial Sustainability, you may never want to retire ever - maybe change what you do as your passion, but never stop doing what you are passionate about.

Until next time....