Feeling the Burn Rate

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When I was a little kid, my family really didn’t spend much money at all. We raised a lot of our own food with two huge gardens (and a lot of canning), my father’s side gig as a small-scale commercial fisherman, and a lot of chickens in a chicken pen. We didn’t have cable and just enjoyed five channels that we could pick up on the antenna (ABC, NBC, CBS, PBS, and Fox). We lived in a pretty small house in a rural area. Our cars were bought used and driven into oblivion, then replaced with another used car. We didn’t have cell phones or home internet or Netflix or anything like that. My mom bought almost everything in store brand form when she went grocery shopping.

In short, the actual annual expenses were pretty low. I’m willing to bet that they added up to less than $20,000 per year.

At the same time, however, my parents didn’t earn a lot of money. My mom was a stay-at-home mom, which certainly helped with the home economy but didn’t bring in dollars. My dad worked in a factory some/most of the time, but the factory struggled and frequently had mass layoffs (with the continual promise of rehiring when orders picked up), so he often had to rely on his commercial fishing side gig to bring in income (and food).

Like many American families, this translated into variable spending. In years when there wasn’t a lot of income, things were lean. There wasn’t any extra spending at all. The holidays would be pretty tight and there wasn’t any money for things like extracurricular activities, though there was always food on the table and a roof over our head and clothes on our backs. In other years, there would be more money and at least some of that was spent on unnecessary stuff. There would be a ton of birthday and Christmas presents, for example, and a couple of times we even went on short trips around the Midwest (summer vacations typically didn’t involve any travel at all when I was young).

Along the way, my parents did two really wise financial things.

One, they never allowed much debt to accumulate. There was a mortgage on our home that was paid off at some point in my childhood, and there were occasionally car loans from the local bank that were paid off quickly, but there was never any credit card debt or other debts. It just didn’t exist.

Two, they kept a very nice emergency fund at a credit union associated with where my father worked. My parents had money automatically taken out of his paycheck and put into his credit union account, and that money would come in handy in emergencies, like a layoff or a car breakdown or something like that.

What does this mean? It means that, for almost every single year when I was young, my parents spent less money than they brought in. Even though our family’s income was relatively low, my parents were wise enough to never allow our spending to even match that income. They kept our spending even lower.

The result was that, over the years, and particularly after my brothers moved out and I left for college, my parents became at least somewhat financially prosperous. When a 401(k) became available at my father’s workplace, he started contributing to it. They actually inched up the money they were contributing to the credit union. They were able to travel a little and actually went on some family vacations with us and our children, something that would have never worked when we were younger.

Even now, between my father’s pension and Social Security, they still spend less than they bring in and they still put aside money in the credit union for emergencies and future expenses.

The life they have, and have always had, is quite stable. They’re not at significant risk of having that life fall apart because they couldn’t pay the bills.

In other words, their “burn rate” – the money they have to spend to maintain their normal lifestyle – has almost always been significantly below their income level. On occasion, they’ve splurged above it, but that’s only when there was significant extra money they’ve accumulated because their income was quite a bit higher than their burn rate.

(Of course, part of the problem was that when I was a kid, I didn’t see this. What I saw is that whenever my parents had a bump in income from something, like my father returning to work and getting a bonus or a really good run with his fishing, they would splurge a little, and thus I associated a rise in income with an increase in spending. That was a very poor lesson for me to learn, and I wish I had understood the big picture. We’ll get back to this a bit later.)

Right now, Sarah and I are in the same boat. Our “burn rate” is significantly lower than our household income. We intentionally choose to spend a whole lot less than we bring in, and that excess money is almost entirely going into retirement savings so that, ideally, we can stop working as early as possible.

In other words, we want to reach a point where our investment income can cover our “burn rate” for the rest of our lives, and Social Security is just the icing on the cake.

A High Burn Rate

Here’s the catch, though: modern society practically begs people to have a “burn rate” that’s pretty close to their actual income, or even above it. Modern culture lauds having an affluent standard of living, with a huge house and expensive cars and expensive food and drink and tons of digital goodies and lots of services.

That situation is otherwise known as living paycheck to paycheck, and it’s a state that somewhere around 80% of Americans find themselves in, depending on what statistics you’re looking at.

If that’s your situation – your “burn rate” matches your income – there are a bunch of bad consequences. I’ll summarize by grouping them into three big issues.

One, you’re not building any wealth. You’re not preparing for retirement, which means that you’re hoping that Social Security can sustain you or that you can work until the day you drop dead. You’re not preparing for any other life goals that you might have that have any sort of money requirement. All you’re doing is buying stuff in the moment.

Two, you’re not prepared to handle any sort of unexpected event in life. If something bad happens, you have no way to handle them. You’re either hoping that credit cards can pull you through it or you’re going to be selling stuff off very rapidly. It’s going to be incredibly stressful.

Three, if your income falls, you’ll simultaneously have to deal with radical lifestyle changes at the same time. What if you lose your job and can’t get a job that pays as well? Not only are you going through the life crisis of finding a new job, you’re also dealing with a complete collapse of your lifestyle, an adjustment that’s uncomfortable at best.

But what do you gain from that?

Your standard of living in terms of material goods and luxury experiences is as high as it can get. That’s really what you’re gaining. Money doesn’t buy love or friendship. It does buy stuff and experiences.

That’s a tradeoff that 80% of Americans make. It’s a tradeoff I made for many years. It’s a tradeoff that left me with a ton of background stress and a pretty miserable life in many ways, although I had a lot of nice trappings. It’s a tradeoff I never, ever, ever want to return to.

I would far rather have a lower burn rate.

A Low Burn Rate

Having a low burn rate means that you’re simply keeping your spending low enough that it adds up to significantly less than you earn. Your annual spending is way below that of your annual level of income, not because you’re earning a ton, but because you’re intentionally choosing to keep your spending low.

The benefits and drawbacks of this approach are almost the complete opposite of that of a high burn rate.

You’re building wealth. If you choose a very low burn rate, you are going to build wealth almost regardless of your level of income. The bigger the gap between your burn rate and income, the faster your wealth grows. The lower your burn rate, the easier it is to reach a point where your investment income can fund your burn rate, at which point you never have to work for money again unless you choose to do so.

You can handle almost any kind of emergency. Because you’re building wealth, you have money in the bank for whatever may come. The longer you hold your burn rate low, the more true this becomes.

If your income falls, your lifestyle won’t change unless the drop is enormous. Most income declines for people with a low burn rate end up just taking the form of slower wealth building. Their lifestyle doesn’t really change much at all unless the income drop is enormous. Switching jobs or being without a job for a few months is often not felt at all in terms of lifestyle.

The downside, of course, is that your standard of living in terms of material goods and luxury experiences isn’t as high as it could be. Things like friendships and love and your internal life and things like that are unchanged regardless of your burn rate. All that really changes with a lower burn rate is that you don’t spend as much money on stuff as you possibly could.

You Choose Your Burn Rate

The thing that most people don’t truly appreciate in all of this is that you choose your own burn rate. You decide exactly how much of your income you’re going to live off of. It’s a decision that’s almost completely under your own control.

Take Daniel Norris, for example. He’s a Major League baseball pitcher earning millions of dollars per year and he lives out of a 1970s-era Volkswagen van. Seriously. There’s even a short film about Daniel and his van.

Daniel’s burn rate is very, very low. He’s very obviously at a point where the money he’s made off of his baseball career can fund his lifestyle many, many times over. He continues to pitch because he loves to pitch. He lives in the van because he loves the freedom and simplicity of it.

Daniel’s story is emblematic of a bigger truth regarding how we spend our money: most of the things we really want in our lives can’t be bought. You can’t go to a store shelf and buy personal freedom. You can’t buy love on Amazon. You can’t buy the feeling of being in a flow state – swept away by something such that you lose track of time and place – on eBay. You can’t purchase the feeling of a hug from someone who cares about you at Target.

However, we often spend money buying things that promise those feelings and experiences, whether they deliver them or not. Much of what we look for in media, for example, is a flow state, where we’re drawn deeply into the story or idea. That’s part the feeling we crave when we sit down for a movie or a TV show or a good book – we want to get lost in it, to be sucked into the plot or the characters or the concepts. It feels good. The best movies and books and television do that for us; the bad stuff leaves us looking at our watches.

So many of the things we spend our money on boils down to those feelings. Big houses are about safety and security and environments where we can have the feelings we crave. Expensive foods. Expensive cars. It boils down to feelings, once we get past the very basic requirements of basic food, water, basic clothing, and basic shelter, and the tools needed to acquire those basic things.

A low burn rate is really about figuring out how to get those feelings without spending money chasing them. I want to get lost in a good book, because that’s a tremendous feeling, but I can get there with a book checked out from the library just as efficiently as one that I spent my money on. I want to enjoy a delicious meal, but I can make one from home out of pretty inexpensive ingredients and not go to a restaurant where I shell out the cash. I want to relax in a beautiful green space that makes me feel peaceful, but I can do that for free at the park instead of having a huge home with a sunroom or a conservatory or a greenhouse.

Another interesting aspect is that as your burn rate increases, you’re chasing increasingly minor differences. There’s a huge jump in quality of life when moving from a tent to an efficiency apartment, for example, but the change in quality of life when going from a 2,000 square foot home to a 2,600 square foot home isn’t very big. The thing is, the increase in cost is usually bigger with the home jump than it is to jump from a tent.

Switching from walking to having a beater car to get to work is a huge change, but switching from driving a Toyota to a Lexus to work isn’t a big shift. However, the walking-to-beater cost is much, much less than the Toyota-to-Lexus cost.

In the end, a low burn rate is really about finding cost efficient ways to have the basics and the additional feelings in your life that you want without throwing more and more money chasing smaller and smaller “upgrades” in how you feel. There’s a balance, and the point where spending more money turns into diminishing returns is surprisingly low.

But that’s a topic for another day.

Final Thoughts

If you want to have a rich, low stress life with incomparable freedom, the best way to do that is to have a life with a low burn rate, where the maintenance of your lifestyle costs as little as possible. It might not be a life with luxury trappings, but those luxury trappings are often all about chasing feelings that you can already find in a low burn rate lifestyle if you look close enough.

The challenge is finding those feelings in a low burn rate lifestyle and knowing when exactly you’re just throwing more and more money away for smaller and smaller returns compared to what you can already have for free.

Keep your burn rate low. There’s always greener grass on the other side, but as long as you already have good things, chasing that greener grass won’t get you anything you don’t already have.

Good luck.

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