Small Business Owners: Take Inflation Into Account
When planning for the future, it is imperative that entrepreneurs take inflation into account. The 3% figure that you hear in the media is really just core inflation. A few years ago the government decided not to include food and energy (two areas where costs have increased most for consumers) in this number. When these and some other key items are properly accounted for, the actual inflation rate may be in the 8-9% range.
So what does that really mean?
Say you have $1 that you want to maintain over the course of 10 years. You do not want to grow the money, or lose it. You just want your dollar at the end of those 10 years. If you keep it in a drawer you will not maintain that $1. Even with the misleading rate of 3%, at the end of year one you have $0.97 and it steadily decreases from there until you have about seventy cents.
We must also realize that whatever the rate is, it will not be the one that applies to us. This is because inflation is specific to individuals, not groups. If you are elderly then the cost of drugs are critical. If you are a teenager you are more concerned the pricing of communication devices and music. If you own an electrical contracting business the cost of copper is on your mind.
It is easy for busy small business owners to focus solely on dollars needed today, but we need to always factor in all deductions. Besides inflation, you have taxes and fees. When choosing an investment strategy or pursuing a business opportunity, think ‘final ROI’. Using the top tax rate and the real inflation rate, a planned $100 profit is really less than $50. Ensure to build in extra income so your money is worth what you need it to be when you are ready to use it.
