Understanding your ‘burn’
- 3rd of June 2016
Burn is a term I sometimes use to describe for your monthly expenses or commitments , that is how much money do you ‘burn’ through each month. I know some people on very good incomes but their burn is equally as high and means at anytime if their income stops or reduces their commitments will remain and put them in a vulnerable position.
It is a worthwhile exercise to review your current burn and have a clearer understanding of your financial position. I do most of my spending on credit card so totaling the last 12months spending then dividing by 12 shows me my monthly average. I can then add in my mortgage, rates and other non credit card spending to give me my total spend, or burn. If I minus this from my monthly after tax income I should be left with my monthly savings.
This information is very useful and will allow the understanding of the following:
- Savings – (if any) being able to save money is incredibly important in being able to get ahead financially
- Mortgage commitment
- Short term debt, and how much of your money is spent on it
- Ongoing commitments; that is your spending outside of mortgage and other debt .
By understanding this information it can give you some good insight into your current financial position and also future position:
Having regular savings means you are living within your means which is a great achievement.
If a lot of your current burn is mortgage and short term debt then focusing on these and getting rid of them as quickly as possible will put you in a far better financial position.
The ongoing commitments will give you an understanding of your possible income needs at retirement and allow you to start planning for that level of income.
The information contained in this article is of a general nature and should not be taken as advice. It reflects the opinions of the writer only and does not necessarily reflect the opinions of New Zealand Home Loans.