Using Your Lifestyle Burn Rate to Manage Risk

The Two Ends of Spectrum 

Let me share my observations on how people tend to handle their income when they start earning more.  

There are two extremes that I’ve noticed. 

On one end of the spectrum, people tend to increase their spending as their income grows. This is common among those who didn’t come from a wealthy background but landed a high-paying job or started a successful business.  

They feel like they deserve to enjoy the fruits of their labour and want to prove to others that they’ve made it. For instance, Mike Tyson, a former boxer who earned millions, spent a lot of money on lavish things like jewellery, pigeons, and even exotic pets like lions and Siberian cats.  

He later admitted that he was trying to make himself feel better and show people who doubted him that he could be successful. 

On the other end, some people continue to live frugally even after becoming wealthy.  

An example is Warren Buffet, who still lives in the same house he bought 60 years ago.  

Some people feel guilty about spending money on themselves and continue to live like university students; others also fall somewhere between these two extremes.Currently, overspending and indebtedness are causing financial hardship globally.  

Some are more focused on enjoying their lives now than investing in their future selves, which can lead to negative impacts such as child development problems, health issues, violence, drug addiction, and gambling.  

These problems create a toxic environment that can affect others beyond their own world.

Why You Need to Understand Lifestyle Burn Rate 

Statistics show that one in three people believe that money is a significant cause of stress in their lives, and one in four people struggle to make ends meet.  

Financial hardship is more prevalent among young, low-income earners, and those living in rural and regional areas. It often arises from not having enough money for emergencies, followed by not having money for basic necessities like food or paying bills.  

Many people don’t value the idea of living within their means anymore. 

If you’re a new or young investor, it’s important to understand the concept of lifestyle burn rate.  

This key performance indicator (KPI) measures how much you spend annually compared to your net after-tax household income. 

To calculate your lifestyle burn rate, add all your annual expenses and divide by your net after-tax household income. 

For example, if your income after tax is $60,000 and you spend $50,000 annually, your lifestyle burn rate is $50,000 divided by $60,000.

How Does Your Lifestyle Burn Rate Impact Your Personal Risk Position?

In my 20 years of coaching, I’ve noticed that most people’s lifestyle burn rate tends to rise as their families grow or they have more financial responsibilities.  

It’s natural for your lifestyle burn rate to increase in these situations. But I’ve also seen that people become less mindful about tracking their spending as time goes by.  

This can be a problem because the world is becoming more expensive, affecting everyone, regardless of their wealth or assets. 

So, the critical question to ask yourself is how your lifestyle burn rate affects your personal risk position.  

Living within your means and being able to save money for investing is like driving a lightweight car.  

It makes you more nimble, uses less energy, and helps you accelerate faster to harness more power effectively. 

If you can get by on less, you’ll be less vulnerable to the rising cost of living.  

For example, having strong cash reserves can protect you when interest rates rise, especially if you own property. 

One extreme example is a client of mine who wanted to hold at least six months of cash buffer for each investment property they owned.  

They lived a frugal lifestyle until they had enough cash reserves in place to cover all expenses for at least six months per property.  

This gave them peace of mind and protected them if anything went wrong, like a vacant property or rising interest rates. 

Living on less gives you more money to invest in wealth-building opportunities, which can be especially helpful during tough times.  

You might have heard sayings like the market can be unpredictable for longer than you can afford to stay in it or that it’s difficult to buy when prices are falling rapidly, so it’s hard to know when to enter the market. 

But one of the biggest challenges for investors during a crisis is the feeling of missing out on opportunities because they don’t have enough money or the ability to take advantage of them. This frustration is common among investors, and I can confidently speak about it because I’ve experienced it many times. 

Throughout history, great wealth transfers have occurred during times of crisis like the Great Depression and the global financial crisis.  

The ultra-wealthy take advantage by making calculated investments that pay off big while others struggle to survive. 

As regular investors, we may not be able to make billions or even millions, but we can still make small investments that greatly impact our overall wealth.  

The final consideration here is that the lower your lifestyle burn rate, the more you can build up savings and liquidity during uncertain times to give you the ultimate protection to weather the storms of the market. 

Emergency buffers are crucial, but many people only have enough to last a few weeks.  

For example, I had a client earning millions a year who only had enough to last six weeks because of their high expenses. Another client was paying $40,000 per year for various insurances, but as they built up their own savings, they gradually reduced their premiums and self-insured. 

You need to manage your lifestyle burn rate to give yourself an edge in managing risk during a downturn. This is not optional if you want to thrive in difficult times.  

So here are three things I want to leave with you today to help you understand what you can do from a pragmatic perspective.

Key Takeaway #1: Evaluate Your Lifestyle Burn Rate Every Month 

For the first one, when did you last look at your lifestyle burn rate?  

Regularly evaluating your lifestyle burn rate, especially during economic uncertainty like we’re experiencing now, is more important than ever.  

Even if you already measured it in the past, it’s worth revisiting every month as the cost of living can change quickly. 

Although some things, like the cost of food, may stabilise, interest rates are still going up, which can affect your overall expenses, so you must be aware of any changes in your burn rate, even if you’re not making extravagant purchases. 

During times of economic growth, people tend to monitor their expenses less, but during uncertain times, it’s crucial to stay on top of them. 

While you may not be able to do much about rising interest rates, you can adjust your spending on luxury items and other discretionary expenses to manage your finances better.

Key Takeaway #2: Get Real and Commit 

Next, I want you to be honest with yourself and commit, because keeping things in perspective during tough times is very crucial.  

Remember that everything moves in cycles, and we won’t be stuck with high inflation and interest rates forever. To be in a position to take advantage of opportunities that arise, we need to be prepared by being responsible with our money and making sacrifices in the short term to benefit in the long term. 

I’m not saying you should starve yourself, but try to be mindful of your spending and commit to making changes for at least six months. 

Let me share an example from my own family. 

A few years ago, my sister was building a house, and construction costs went way over budget. So, they challenged themselves to not spend any money on non-essential things for six months.  

It ended up being a fun game for them, and they learned that they didn’t really need a lot of the things they were spending money on before.  

This is the concept of “getting real and committing—focusing on what you really need and not wasting money on things that don’t matter.  

It might be a tough decision, but taking control of your spending can also be empowering.  

So, the second thing I’m asking you to do is to commit to being mindful of your spending and only focusing on what you truly need.

Key Takeaway #3: Make an Overview of Assets and Expenses 

The third thing I suggest is to look at all your assets and expenses and see if you have a sufficient cash buffer. This is especially important if you’re already investing your money. 

If you find that you don’t have enough money saved up, there are two things you can do. 

First, you could try to make more money by working more or finding other ways to earn money. 

Second, you could look closely at all your expenses and see where you can cut back on things you don’t need.  

It’s really necessary to have enough money saved up for emergencies, so make sure you take the time to look at your finances and make any necessary changes. 

Today, we talked about a lot of things. But the most important thing to remember is that we want to be investors who don’t just thrive when market conditions are good.  

We need to be careful with our money and focus on protecting what we have. Even if you can’t invest more right now, it’s okay. Just make sure you’re doing what you can to keep yourself safe.