Quick Inflation Tax Explanation
So new data from the Bureau of Labor Statistics shows that inflation is skyrocketing.
The consumer price index is showing that inflation has jumped to 4.2% year over year.
So quick math here… Basically, if you had $100 this month last year, well it’s worth about $96 today just based on that 4.2% inflation rate.
But it’s actually worth less than that because inflation has been positive month over month as well.
Take a look at the actual consumer price index measurement of inflation over the last 16 months.
Basically, the average inflation for last year was 1.4% and it’s heating up more, averaging 2.4% this year.
Why is Inflation Happening?
Now, why is this happening? Well, of course, there has been so much free money going out into the economy.
And here on our blog, we’ve talked about a few of them such as PPP loans, EIDL loans, business grants you can get for your business, and so on.
This free money coupled with a lack of production/supplies is what is leading to a hidden inflation tax in 2021.
In this post, we want to explain the inflation tax, talk about what you can do to avoid it, especially if you are someone who is getting business grants/loans/credit.
This is so that we can position inflation as your friend and not your enemy.
Crazy Inflation Predictions
Now what’s interesting is that most of the free money started hitting people’s accounts in May. Yet, we had some explosive inflation numbers in April.
So some people are predicting that inflation could go even higher than 4.2%.
The craziest forecast we’ve heard so far is some people are predicting a 20% rise in inflation.
So, that would mean $100 today would be worth $80 if the rise did happen, which sounds horrible. And this essentially is what we are referring to when we say inflation tax is hidden.
Because instead of you actually paying taxes on your tax return, it’s just something that happens when you show up to a store and everything costs more than what it used to be.
There are times when inflation is good and when inflation is bad. So, let’s look at the pros of inflation first.
Why is Inflation Good?
So typically, inflation is a signal of growth.
This means when the price of overall goods goes up, that usually is due to an increase in demand.
That increase in demand then leads to more jobs and more business opportunities. This in turn leads to more spending power and an increase in demand.
So there’s this positive cycle which is very conducive to growth.
However, the opposite of inflation is deflation which is not very conducive for growth.
So the demand for goods goes down because people have less money, or there is a supply issue, etc.
And as a result, everything else follows deflates.
And the worst outcome is that people lose their livelihoods – their businesses, cars, houses, etc. This is what everyone wants to avoid.
So that’s why inflation can be a very good thing for our economy overall.
If you think of a new basketball player who is getting better year after year after year, that’s like inflation.
But if that basketball player suddenly has a bad injury then it can take months or years to recover. And sometimes, they never do. Now that’s similar to deflation.
Why is Inflation Bad?
So now, why can inflation be a bad thing for you?
Well, as we have shown so far, a hidden inflation tax can destroy your purchasing power, especially if rises quickly to rates of 5%, 10%, or 20%.
Your cash will become trash. And there are examples of other countries.
But we’re not going to dive into a history lesson here, instead, we want to jump straight into what you could do if you are worried about inflation.
Since we’re a company that primarily helps businesses then we’re going to first focus on what businesses can do.
And at the end of this post, we will talk a little bit more about what the average person can do.
So now let’s talk about the things you can do to avoid an inflation tax if you have a business.
5 Tips That Businesses Can Do to Avoid Inflation Tax
1. Beat the inflation rate
So we’ve established cash can be trash. BUT in business, cash can be the difference between starting up or staying in business. So of course, you need cash as a business.
The question is, what are you going to do with your cash?
So you have an influx of cash, maybe you received a grant or you have an investor.
At the very least, your goal should be to use the cash responsibly.
That is to generate more cash, and the cash return rate should be higher than the inflation rate.
So after you cover all your business expenses, after you pay your employees, after you pay yourself, your net cash should be higher than the overall inflation rate.
That is month over a month, or a year over a year.
2. Master cash flow
So one great thing about business is that you likely have some recurring expenses which force you NOT to hold on to cash and continue to be productive.
But now is the time to get even more disciplined when it comes to managing your cash flow.
And one of the BEST things you can do is make sure your cash flow is as predictable as possible.
This means you can reasonably estimate what you are going to make next month as revenue, and what you are going to spend as far as expenses go.
And with those two things, you are able to get to an estimated profit.
Based on the level of profits, you can decide or put this away, as an emergency fund for your business. Or, are you going to reinvest these profits back into the business?
Either way, when you are able to anticipate your cash flow then you can start planning now on what to do with the cash.
3. Lock in prices now
This one goes along with our second point of mastering cash flow.
So what you want to do is lock in prices now for goods and services that you know you will need in the long term.
Now, this tip will likely come easier for experienced business owners because they know what they spend money on every year.
But for new businesses, you need to think really hard about what it is that your business needs.
And if you discover that it’s a long-term need after testing of course, then try to lock in a long-term rate.
Most vendors and online SaaS companies prefer you to do an annual contract because that also gives them predictable cash flow.
So do some digging, thinking, and research to figure out what prices you need to lock-in.
4. Invest in business assets
So remember when inflation goes up, so does the price of goods. So when that goes up, you will have to pay a lot more money for it.
So if there is a business asset that you need right now, something that you know you’ll need for sure, let’s say you run a manufacturing plant and you need new equipment.
Well, if you anticipate the cost of that equipment going up due to inflation and you need it for your business, making the investment makes sense.
Because in the worst-case scenario, if your business does fail then at least you have an asset that you can potentially sell at a higher price.
Plus depreciation benefits, but we’ll save that for another time.
The point is to invest in business assets that could end up appreciating in value as inflation rises.
You could also invest in a rental property, a piece of real estate in a great area that your business can operate in and own. And, as inflation increases the price of your property can go up as well.
Or maybe you invest in a business asset like a website, or NFT, or social media presence. All of which you could sell later on if you needed to.
5. Look at accepting other forms of currency
Cryptocurrencies like bitcoin are becoming more popular and many people believe that they will hold their value if the inflation of cash goes out of control.
So if you’re in the inflation camp then maybe you want to get a jump and start researching how to accept other forms of currency.
Now we’re not saying that you actually need to set this up now, although some people are like this website here from Cardone have already started accepting bitcoin.
Of course, you heard of companies like Tesla also accepting bitcoin. Although they recently pulled that back.
The point is, they’ve started researching it, and you can do the same.
Companies like PayPal are also starting to accept cryptocurrency. Plus, we’re sure other big payment processors will join the party as well.
So those are our top 5 tips for businesses if you want to avoid the inflation tax.
Now, If you are personally worried about inflation then the biggest thing you can do is make more investments.
Save up for an emergency fund, try to have 6-12 months of expenses accounted for. And then make more investments like real estate for yourself or as a rental property.
You could invest in stocks, cryptocurrencies, or gold. Or other proven assets that go up as inflation rises.
If you want more advice on wealth management, then we can definitely help you with that. Contact us today for more details.