Keep Your Burn Rate Low

In Paul Graham’s A Student’s Guide to Startups he talks about the importance of a low burn rate in an early-stage startup:

But regardless of the source of your problems, a low burn rate gives you more opportunity to recover from them. And since most startups make all kinds of mistakes at first, room to recover from mistakes is a valuable thing to have.

While this advice is targeted at startups, a low burn rate is an incredible asset no matter what your life situation.

The secret superpower that a low burn rate buys you is optionality. For every dollar you don’t spend on an Uber, capucchino or $15 lunch in the city today, you have the option to spend that dollar on something else tomorrow. You can’t predict exactly what opportunities you’ll be given tomorrow, but having more money saved up will allow you to exploit more of them. Bootstrapping a new startup, dealing with a family emergency or just leaving an intolerable job without a new one in place are all common scenarios made easier with a financial cushion.

There’s also a certain psychological advantage to being stingy, particularly when you’re young. Hedonic adaptation causes us to quickly take for granted our daily status quo – it’s the reason you’re not overcome with gratitude every time you get to use indoor plumbing. While a static status quo will be adapted to, a slowly improving situation brings satisfaction. By keeping a low burn rate early, you bank both money and future satisfaction credits, which you cash in when you eventually start growing your lifestyle.

A common objection is that when living in a high cost of living area (something that I also advocate if that’s where your best opportunities are) it’s impossible to save money. While it’s true that the same budget will get you a lot further in Montana than Mountain View, it’s emphatically not true that the average software developer in New York City or San Francisco can’t start saving up a nest egg. As an existence proof, my family of 3 lives a comfortable – though not luxurious – life on the SF peninsula with an annual budget that’s about 55% of the area’s median household income. This may sound extreme, but it’s definitely achievable and has only required a moderate investment of time in optimizing our spending habits. There’s certainly no natural law that your spending must grow to match your income.

Published on October 17, 2017

Get Email Updates

I'll send you an update when a new blog post is up or I have something important to share. No spam.