Do you know your cash burn rate? Here’s why it matters.

Most people know how much they earn, but far fewer know how fast they spend it. That’s why it’s important to understand your personal cash burn rate.

A cash burn rate is a comparison of how much money you spend to how much you earn. The higher your burn rate, the harder it is to save money.

As a financial educator and former NFCC-certified credit counselor, I've helped thousands of households examine their spending and improve their finances. Here's how I recommend using the concept of a personal cash burn rate to get on the right track.

What is your personal cash burn rate?

A cash burn rate is the rate at which you spend the money you earn.

If your cash burn rate is 100%, that means you spend exactly the same amount you take home each month. Of course, spending less is better for your finances. If your cash burn rate is below 100%, you can potentially accomplish goals such as paying off debt, saving money, or contributing to your retirement account(s). In other words, you can actively improve your financial security.

However, a 2024 survey from the Federal Reserve found that nearly half of U.S. adults spend more than they earn. If you fall into this group, you may be facing any or all of the following financial problems:

Your savings balance is shrinking
Your net worth is decreasing
You rely on borrowing money to cover expenses
Your credit card debt is growing
You're not saving money for retirement

Burn rate vs. budget: What's the difference?

Burn rates and budgets are two different things, but they're definitely complementary. To accurately calculate your personal cash burn rate, it helps to create a budget first.

If you're budget-averse (like many people), don't get nervous just yet. Creating a budget can be as simple as making a list of your income versus expenses. To make sure the list is accurate, I recommend reviewing your last three months' worth of financial transactions in your checking account, credit cards, and payment apps.

Once you have your list of expenses, you can calculate your personal cash burn rate. If the rate is too high, it's time to start looking for ways to adjust your budget and improve your cash flow.

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How to calculate your cash burn rate

To calculate your cash burn rate, add up your monthly income and spending figures. Of course, these amounts will fluctuate from month to month, so do your best to calculate averages.

For example, if your vehicle registration costs $300 per year, add $25 ($300 divided by 12 months) to your monthly spending figure. Be sure to include other annual or occasional expenses too, such as holiday gifts, travel, car repairs, and taxes.

Here's the formula to calculate your personal cash burn rate:

(Average monthly spending / Net monthly income) x 100 = Cash burn rate

Example 1:

($7,500 spending / $7,000 net income) x 100 = 107.14%

Example 2:

($5,500 spending / $7,000 net income) x 100 = 78.57%

How to interpret your burn rate

How low should your cash burn rate be? There's no perfect rate to aspire to, but financial experts will typically encourage you to save 20% of your income, whether it goes toward your emergency fund, retirement account, or otherwise. That means the ideal personal cash burn rate is 80% or lower.

If your cash burn rate is above 80%, look over your income and spending to determine the problem.

For many Americans, including high earners, the rising cost of living has driven up their cash burn rate. In fact, a 2025 Harris Poll found that 64% of people who earned six figures reported being in survival mode, with necessities such as groceries and healthcare being their most challenging expenses to cover.

Of course, bad financial habits can make a tough situation even worse. If you've avoided looking at your budget or setting boundaries on your spending, there's a good chance you're missing opportunities to save money. In my experience with counseling people on their finances, I've found the vast majority avoid reviewing their spending habits and creating budgets.

But if you want to get on the right track, there are simple ways to get started. Here are a few ways you can lower your personal cash burn rate:

Review your most recent financial statements and look for negative patterns, such as overspending on restaurants or rideshares. Choose at least one spending category you can cut for three months.
Cancel autopay for subscriptions and memberships you're not using.
Aim to increase your income annually, whether through switching jobs, a pay raise, taking on a side gig, or increasing the rates for your services.
Set up an automatic contribution to savings from every paycheck; that way, it's harder to spend every dollar you earn.