By Mark Wright, OD, FCOVD,
and Carole Burns, OD, FCOVD
Dec. 29, 2021
Is it possible to take in more money this year than last year and actually lose money? In other words, if you received a raise this year that gave you more money than last year, aren’t you ahead of the game? The answer is, in that specific situation, if your raise was not higher than the rate of inflation, then even though you have more money in your pocket, the buying power of that money is less than last year.
Let’s put numbers to this to help understand the concept. If you made $100,000 the previous year and received a 5 percent raise, then this year, your new income would be $105,000. The annualized inflation for this year is 6.8 percent.i That means the buying power of $105,000 this year was actually $97,860. Even though you received more money, that money, due to inflation, purchased less.
Here’s an example of how inflation makes your money worth less. Consider the price of a gallon of gasoline from January to December 2021. January 2021, the average national price of a gallon of gasoline was $2.25. The average national price of a gallon of gasoline today is $3.29.ii In other words, $100 will buy fewer gallons of gasoline today than at the beginning of the year: 30.4 gallons (12/21) versus 44.4 gallons (1/21).
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There are three major issues we all need to consider:
1) If the practice did not grow the gross revenue collected more than 6.8 percent in 2021, then the practice lost money over the previous year (even though the dollars in the bank number may be higher this year).
2) Inflation not only impacts your income, it also impacts your savings and investing.
3) Inflation for 2022 looks like it will continue to rise. The best guesses right now for the 2022 inflation rate are somewhere between 3 percent and 5 percent.
Take this week to consider the impact of inflation and factor this into your goal-setting for next year.