Happy SMART Day Everyone!
Most of us are familiar with the pain of heartburn. And if you check you’ll find that news sources say close to 40% of all Americans suffer from it at least once a month. But what about cash-burn? Chances are the same numbers of Americans suffer from this common affliction as well. But what is cash-burn and how does it happen? Even more important—what’s the cure?
Cash-burn is an economic term used to describe the flow of cash out of our company or our individual households in excess of our income or savings. Economists study the cash-burn of corporations to determine how healthy they are and how long they are likely to be in business. But cash-burn also applies to every family we know. Sure, it costs everyone a certain amount of money to live—but many people are literally burning up their cash in unsustainable ways and that can lead to a series case of cash-burn.
Cash-burn is easy to spot in any household that routinely burns through more cash than they generate in income. And doesn’t matter whether individuals make a lot of money or a modest amount. If a person spends more than they make—they are going backwards. People can avoid the inevitable for a while if they have credit cards, can get a second mortgage on their home, or purchase items on credit. But just as with large corporations, eventually the company will run out of credit and cash, and be forced into closing their doors. While companies and individuals like to stay optimistic about their chances to turn things around—it’s often too big a hole to climb out from. At that point, they will likely have a bad case of both cash-burn and heartburn at the same time!
What are some of the symptoms? Symptoms can range from a trouble sleeping at night, to all-out panic. In the initial stages, most people will deny there is even a problem. But after it has been going on for any length of time, and creditors start calling the house, it will be impossible to ignore. As the stress grows, a person’s mood, temperament and relationships will suffer. Another common symptom is blame-shifting—which is pointing fingers at the economy, your boss, the neighbors and even the President. Unfortunately, no matter how much you blame-shift, your conditions will only increase.
Okay, so cash-burn is painful. But what is the cure? The good news is that it doesn’t take a visit to the doctor—but it does take some discipline. Here are a few necessary steps to heal yourself from the condition:
1) Be completely honest with yourself about how much money you bring home each week/month. I’m not talking about the gross amount before taxes, I’m talking about the amount you can take home and deposit in your bank account.
2) Determine exactly what your fixed-need costs are. These costs are your rent or mortgage payment; your car payment, food, and any other item that is critical for you and your family to live.
3) Determine what your “likes” are vs. your “needs.” Likes are those things that you enjoy and really like in your life but you could do without if necessary. This is probably the hardest list you’ll be making because most of us like to believe that what we like is more important than not. For example, Thom loves to have coffee lattes with soymilk. He gets them at the local coffee shop most days of the week and they cost $4.15/each. While he really, really “likes” them, the truth is that they are not a need and if he cut them out, he could save himself nearly $125/month. By determining this list you are identifying things that you could cut out of your life, even if just temporarily, and save yourself serious cash-burn. Once you make the list then determine how much they are costing you—be honest!
4) Now deduct your fixed-need costs from your take home pay. If you still have a negative then something has to come off that list of fixed-needs (and forget about your “likes”at least for now!). For example, many people need a car—but you may not need to lease a $50,000 vehicle. Figure out how to turn in, or sell, that vehicle and get a more modest vehicle with less monthly cost.
If by some chance you find that you have more income than fixed-need costs, then you can go through your “like” list and include things you really, really appreciate. Your challenge is not to include them all—but to determine which of them has the highest value to your quality of life. If you can eliminate half of them—and you might have to to make sure you are not suffering from cash-burn—then attempt to eliminate the ones that cost the most and don’t bring in the greatest amount of pleasure.
And there you have it. Cash-burn only happens when people spend more than they make. Of course, it is possible to cure the problem by dramatically increasing your income so that you make more than you spend. But for chronic sufferers of this condition, you will likely just start spending even more, until once again you are burning through your cash. Even people who earn hundreds of thousands of dollars can spend more than they make—anyone ever heard of Mike Tyson? Only by being honest with ourselves and paying attention, can this condition be cured for once and for all.
So, while there is no easy solution to make the problem go away—the good news is that it doesn’t have to be a painful or heartbreaking experience. The peace of mind that comes from living within your means more than makes up for the hedonistic benefit of driving a car you really can’t afford, or wearing clothes or make-up that uses up rent money, or buying lattes every day instead of healthy food for your table. You may even find that once you cure your cash-burn condition that you sleep better, have better relationships and focus on things that create more contentment and well-being in your life on a regular basis. Curing cash-burn is certainly a SMART way to live 365.
“Beware of little expenses; a small leak will sink a great ship.” ~Benjamin Franklin
“There are plenty of ways to get ahead. The first is so basic I’m almost embarrassed to say it: spend less than you earn.” ~Paul Clitheroe