Control Your Burn Rate & Debt



Controlling Your Burn Rate and Debt is Mandatory for a Secure Retirement

Your burn rate is the single most important variable in preparing for a secure retirement, which is why it’s the first retirement planning success driver.

We define burn rate as the cash you spend to support your day-to-day life. Lowering your burn rate – saving money by cutting your spending– is foundational to building and retaining wealth, both during your working years and in retirement.

Why it matters so much is that if your burn rate consumes all of your disposable income, it will be impossible to save money for future events, including retirement.

In fact, living too large will rob you of the secure retirement you deserve.

Debt can magnify the damage because it enables you to live beyond your income for a sustained period, but with a heavy eventual price.

In order to prepare for the brighter financial future you deserve, your burn rate must be persistently below your total income. There is no other way to build wealth.

My aunt and uncle leveraged the power of a low burn rate during the decades leading up to their retirement. They spent on things that brought them value and pleasure, including the expense of a large powerboat and boat club membership, which were not a small expenditures for their middle class income.

But on things that didn’t bring them as much value, like clothes, trips, entertainment, or fine dining, they were extraordinarily frugal.

It was this smart spending that helped them free up consistent and significant cash to save for retirement.

It allowed them to save early and automatically for their secure retirement. Further, they took on as little debt as possible. By paying cash when they could, and paying down their mortgage on an accelerated time table, they reduced their interest costs and placed that extra cash towards retirement.


Controlling Your Burn Rate and Debt’s Retirement Preparation Power

This first power is obvious, which is the lower your burn rate and debt repayment is in relation to your income, the more of your income you’ll have left over to fund retirement.

The cash you save has immense power.

With an employer sponsored 401k, you will likely receive matching funds up to a certain percentage of your contributions in relation to your income. With the match, you’re essentially getting a guaranteed annual bonus from you company.

What you contribute, plus what they contribute, grows and compounds tax free until you begin making withdraws in retirement.

But if your burn rate consumes all of your income, you won’t be able to contribute, which means you’ll be denied this source of free money. That’s a huge price to pay.

The second power of controlling your burn rate is less obvious, but its benefit is massive.

When you learn to permanently live on less than your income, you can carry your savvy money management skills into retirement.

The result is that with your annual expenses lower in retirement, you’ll need less money in order to reach financial freedom so that you can retire. Ultimately, you win double when you cut your spending as you save more and you need less to retire.

In our opinion, much of the current retirement advice is wrong in one major way: fixation is on income replacement.

Many experts will argue whether you need to replace 70%, 80%, 100% or whatever of your current income in your post working years.

We believe this is equivalent to looking through the wrong end of the telescope.

The concept of income replacement as the primary target is simply dead wrong. Instead, retirement planning should be about figuring out how to cover all your expenses in your retirement years.

That’s the target that really matters.

This is a critical distinction because you have more immediate and long term control over your expenses than you do your income.

A dollar you cut from spending today has the immediate affect of adding to your wealth and generating return for you for the rest of your life.

Take action and the results created by saving a dollar are 100% guaranteed. This never fails to increase your wealth.

Actions to increase the income from your career are also important, but the outcome isn’t always immediate and results are not guaranteed.

If it was more widely understood that spending control is your largest lever in retirement preparation, people would actually feel better because it’s something over which they have more control over versus factors like the health of the economy, interest rates, whether their employer grants raises, etc.

Controlling your burn rate and debt may not be glamorous, but it’s the most powerful device you have in preparing for the retirement you deserve.


How to Maximize the Advantages of Controlling Your Burn Rate and Debt

Ideally, understanding the power of controlling living expenses will, on its own, provide motivation to aggressively review annual budgets to reduce spending and free up cash for savings.

After your living expenses are well below your income, maximum benefit can be reached by extinguishing as much debt as possible, and certainly all debt that’s credit card and consumer installment loan related.

Debt is a financial cancer on your ability to grow your wealth prior to retirement, and it can outright destroy your financial health when you enter retirement.

While during your working years some debt is necessary (to buy a house, finance a car, start a business, pay for college), most of it is avoidable.

Debt is the ugly byproduct of a lifestyle that is larger than what is realistic.

Ultimately, it gives us the ability to live beyond our means temporarily, with a heavy long term price.

This is especially true when that debt finances things that have no change of increasing in value, like cars, furniture, trips, dining out, clothing and other expenses.

In fact, dining out, as harmless as it seems, is actually one of the biggest reasons people cannot get their finances under control.

Recent research by Harris Poll, on behalf of Sun Trust Banks, showed that of survey respondents who believed they were not saving enough, 68% blamed dining out as the number one reason.

And when that dining out is paid for by credit cards, those meals can end up costing years of interest before they’re finally paid off. And by then the dinners are a distant memory.

Is it worth ruining your retirement over a few dinners out every week?

When you take on debt in any form, instead of earning return on your cash, you pay the financial institution up to 600% more in return on their money than you can earn on yours.


The Bottom Line

Your spending, relative to your income, both before and during retirement, is the single biggest factor in determining whether or not you can succeed in creating a secure retirement.

Debt amplifies the damage of living beyond your means. Control both and you will be able to create the retirement you deserve.

Remember, you need to prepare for your own secure retirement because no one else is looking out for you.

More than ever, Retirement Is All On You!


⇒Next: 2. Save Early & Automatically


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