burn rate n: the rate at which a company (esp. start-up) uses its cash to survive, the money spent each month above incoming cash flow. [Source: Webster’s English Dictionary]
Burn rate is a term commonly used in technology start-ups and research-based biotech companies, whose products would take years (if at all) to hit the market. It is also a good indicator of how long the company is likely to survive without raising money. Sadly, the term in now applied to personal finance to refer to how fast households spend their discretionary cash.
A survey sponsored by Mackenzie Investments found that an average Canadian spends $100 of discretionary income in just four days (works out to $9,125 per year), mostly on entertainment and dining out (31%), spending on children or grandchildren (22%) and home purchases (21%). The press release also offers tips for managing the burn rate (Pay yourself first etc.). Popular personal finance author David Bach just calls it the “Latte Factor”.
Mackenzie Investments’ snazzy website invites visitors to find out their burn rate and asks humorously: “Can you afford to keep your husband (or wife or kids)?” For instance, it asks, “would your husband choose a large regular coffee ($1.40) or a grande gourmet blend ($3.75)?” and shows how choosing a lower burn rate and investing the difference adds to your wealth.
