Burn rate is a phrase I have always hated; it has rather morbid implications. I first encountered the term while working with dot com executives in the late 1990s who effortlessly dropped the term to describe the amount of cash the company was burning (spending) per month. They divided the burn rate by the cash in the bank to determine how long the company could survive without turning a profit. Unfortunately for most, it predicted the date of their company’s death too well. I adopt the term because it leaves no mystery. Cash flow is your oxygen – without it you die. Your personal burn rate is amount of money you are spending per month to support your lifestyle. Run out of money and the family does not survive.
Which brings us to the check question. How big of a check can you write TODAY if something really bad happens? If you had 24 hours to raise capital, how much could you get? The impact of financial trauma, whether it be the sickness of a child, death or disability of a spouse, or loss of job, will depend on the size of this number relative to your family burn rate. Dividing your 24 hour number by the family burn rate tells you how many months you have to either fix or adapt to your new circumstances. I target 36 months or 3 years of liquid capital for my clients. In my experience that is how long it takes to recover from a traumatic financial event.
To help people monitor the ability to survive the unexpected, I developed the Cash Flow Stress Test to help people focus on the importance of the 24-hour number which should improve their ability to survive financial trauma.
There is a benefit to passing the cash flow stress test that far outweighs the ability to survive trauma. Freedom! Freedom to leave a job you hate; freedom to start a new company; freedom to do nothing which gives you the power to do anything. Having liquid resources empowers you and your family to live life on your terms. The 24-hour number is a critical component in ensuring family happiness forever (and protecting it too).