In today’s episode, I’m going to talk about a specific metric that can have a massive influence on your financial success.
Many people know that I highly suggest that you don’t just focus on measuring net worth as a metric or key performance indicator of success.
Instead, I recommend that you also come up with a series of metrics that can help you understand how you track as an investor.
“Burn rate” comes from the corporate world, meaning how quickly you burn through cash and capital reserves.
In the context of lifestyle burn rate, I use this word to describe what percentage of your active annual income you’re spending.
How Alex Hormozi Started in Business
The other day, I was listening to a podcast by Alex Hormozi, who is a successful entrepreneur. I really love listening to some of his very polarising advice.
In that particular episode, he described his journey and how his living expenses have changed over a decade, from sleeping on the floor to banking multiple millions of dollars in cash after tax every month.
I find it fascinating because he’s someone who values stewardship.
He has a little mental anguish and a fear of not having enough.
He described how when he first started his business. He slept on the floor of the company to save rent.
But within a short period, he got to a point where he was banking over a million dollars after tax per month.
The answer was not a lot when he described what changed from a lifestyle expenditure perspective.
He had no fancy car and didn’t buy a house until he had six or seven million dollars in the bank.
He described that he values business success over money and acknowledged that there’s a little bit of a scarcity mindset that goes on.
He also talked about how, over the years, he and his wife decided to sell out all their material possessions, use one car, and return to renting after buying a home.
It’s a fascinating case study on extremism regarding lifestyle burn rate.
He now pays a significant amount of money on rent, and he also spends a bit on private flights and restaurants.
But outside of that, he doesn’t spend his money on lavish holidays, cars, or houses.
From the money value perspective, it’s clear that that doesn’t bring him any joy.
In my experience, you might pay less attention to your lifestyle burn rate if you have the luxury of a high income.
But if achieving stability and financial freedom sooner is important to you, then paying attention to this as a key metric is super important.
If you take your total household spending after tax and divide it by your average household income (after tax), that gives you your lifestyle burn rate.
For example:
If your household is generating $200,000 after tax and you’re spending only half of that, you would have a 50% lifestyle burn rate.
I know everyone has different experiences and burdens around the way they live their lives.
That’s why I’m advocating that you bring a level of mindfulness to this number.
There’s no right or wrong and no good or bad.
If you want to create wealth, you’ve got to generate it yourself, especially if you don’t have the luxury of being handed a lot of capital from wherever or winning the lottery.
Your capacity to set aside money to fuel your investing is really fundamental and crucial here.
Why Lifestyle Burn Rate Significantly Increase Over Time
The question I have explored with many people is why their lifestyle burn rate has significantly increased over time.
For most people, it’s been subconscious, particularly for entrepreneurs who work really hard.
When profits or dividends finally arrive, there’s this deep-seated “I deserve to spend more” mindset.
This can also be coloured by the fact that the person you choose to have as your life partner can be a great shaper of what happens to your lifestyle burn rate.
The closer you and your life partner can talk about money values and what matters to you, the faster you will get to your desired outcome.
I’ve often noticed that it’s harder to get where you want to go when two people in a relationship are on completely different pages with different values and expectations.
Client Case Study
I’ve had a long-term client who has worked so hard in his business, but his wife has very little interest in money and doesn’t appreciate the pressure he’s under.
His wife works part-time and doesn’t get paid a lot of money. For her, the money shows up when it is needed.
From her point of view, there’s no challenge around booking expensive holidays, wanting to live in a very lavish house, and so on.
Because they’re not on the same page with this, he’s had to be creative about how he creates fuel for investing.
To be honest, it hasn’t been that easy.
This is just an example of why the lifestyle burn rate is worth looking at, not only from the numbers point of view but also how it has come to the level that it’s at.
The Reason Why You’re Investing
If you’re someone who has so much money left over to fuel investing, then power to you.
But for most people, we must remember why we’re investing.
Most of us want to take $1 out of our pockets today and try to grow it for tomorrow because we want to look after our future selves.
That’s one of the reasons why I love alternative investing because it creates that runway to replace your primary income.
The longer the runway, the higher your lifestyle burn rate can afford to be.
If you’re someone who wants to knuckle down and get to where you want to go, then you must give this your attention.
To start with, you can ask yourself, “What is my lifestyle burn rate number?”
Once you understand that number, then you can now pull it apart.
Nowadays, mortgages, food, groceries, and many other things are getting expensive.
But if you were to articulate the difference between discretionary and non-discretionary income, I’d argue that there’s limited discretion around how you control your level of spending.
On the flip side, there can be massive financial and money leaks from mindlessly purchasing.
When we invest, we talk about capital allocations across asset classes. We also make detailed plans about what and when we’re going to buy and its impact.
It’s also the same with spending your money.
You need to drill down into your day-to-day expenses and work out what your values are and what you’re consciously and impulsively spending money on.
Once you’ve got a handle on that, then that’s great. But if you haven’t already, go and look for my video on YouTube, where I talk about guerrilla tactics around money management.
Final Thoughts
The capacity to fulfil your lifestyle needs is important.
But there are many people out there who will spend tens of thousands of dollars on things they don’t really need or realise are costing them so much.
To some degree, for most people, there’s always a level of compromise that’s required.
If you want to invest in assets that will grow over time or if you want to invest in your future self, there’s got to be a level of reasonable compromise in lifestyle to achieve both.
Part of this game is working out the things that bring you the most joy and making sure you allocate funds for those.
At the same time, you must also be careful about setting aside money to invest in growing your wealth.
There are so many books on this stuff. One of the best ones I read when I was young was The Richest Man in Babylon.
It’s a fabulous book to give a teenager, and it’s certainly one that I’ve read and reread as an adult.
In the book, there’s this idea that you need to pay yourself first and set aside that money to fuel your overall wealth for your future.
Then worry about what’s left to spend rather than the other way around.
Instead of getting embroiled in deep budgeting like allocating $2 for coffee or $10 for a cocktail, you’re better off allocating at the highest level and then automating the management of those buckets.
I’m not suggesting that you track this from month to month. What I’m suggesting is that it could be part of your new financial year housekeeping,
You analyse your lifestyle burn rate and then check it every 12 months.
Many people don’t notice the conscious and unconscious creep that can happen in that metric.
The lifestyle burn rate matters because I’ve seen far too often that many people squirrel, save, and try to invest when they can least afford it.
Then, as their lifestyle improves and they can afford to set aside a larger lump sum of capital to fuel their investing, they stop because they’re a little worn out.
They want to spend the money, which is completely understandable. But the important thing is never to lose sight of the long game.
If you can track your lifestyle burn rate as frequently as possible, or at least annually, you can gain insights into what’s happening in your financial household.
You can see how that influences your results, giving you a deeper analysis of what can and can’t be done about it.
Whether you’re a new investor or a serious professional investor, I highly encourage that you continue to monitor and track what’s happening with your lifestyle burn rate.
If you’re a business owner feeling frustrated that despite doing everything right in the property investing playbook and you’re no closer to financial freedom, then head over to www.inkosiwealth.com to learn more about how you can use alternative investments to catapult your investing income and blend strategies to shave decades off your timeline to financial freedom.
If you’re interested in understanding how to create wealth through alternative strategies, please check out my programs, where I help you catapult your investment income and blend strategies to shave decades off your timeline to financial freedom.
Or, you’re welcome to get in touch today, book a call with me, and I would be happy to talk you through it – no obligation!
