Thursday, July 7, 2011

Burn rate

My major long term financial goal is to become financially independent, which I define as having a net worth of more than 20 times 25 times my yearly expenses. This means that I can live comfortably from the interest of my portfolio the rest of my life. From now on I will calculate my financial burn rate every month and post it in this blog. Burn rate means how long (how many years) it would take to run out of cash if I no longer had an income, and if I first had to pay off all my debts.

(net worth)  /  (total expenses last 12 months) = burn rate

My goal is to have a burn rate of more than 20 years before I am 40 years old. At the moment my net worth is negative. Therefore my burn rate is also a negative number.

Clarifications:
  • As mentioned above, my burn rate is the time I would "survive" after all my debts first have been paid off. I could of course have "survived" a lot longer without paying off my debts first, but then I would be living on borrowed money. 
  • When I buy a house, my equity in that house will probably not be included in the calculation of my burn rate. This is because I can not live off the value of the house without selling it. Items such as cars, appliances, furniture etc. will also be held outside the equation for the same reasons. I will elaborate more on these and other details later.

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