The Cost of Working and the Myth of Inflation

As an accountant I like to chop things into little bits to understand the data. A balance sheet or profit and loss statement provides valuable information about a business. Chopping the financial statements into bits gives me a better view and understanding of the inner working of the firm; comparing earning from month-to-month or year-over-year shows if the business is growing and if profitability is on track.

Individuals face the same financial decisions businesses do. The income and expense categories are different, as they are from business to business. Let me illustrate a different way of reviewing your personal finances. You drive to work daily and fill the car up with gas every week or so. Most people would view this expense as a $50 fill-up when the expense takes place. This gives a broad and deceptive overview of the cost of going to work. If we chop the data we get this: gas is around $4 a gallon as I write and if you drive 30 miles round-trip to work and your vehicle gets 30 miles to the gallon, it costs you $4 a day just to drive to work. If you drive an SUV it gets very expensive fast. (I used easy numbers. Here is the formula: price of gas/vehicles MPG=cost of gas per mile driven x miles driven=cost of trip.)

We can break this down even further. Four dollar gas in a vehicle that gets 30 MPG used 13.3 cents of gas per mile. This cost excludes all other auto expenses (depreciation, insurance, tires, oil changes and repairs). If you had to drop 13 cents into a jar every mile you drove, would you view gas price differently? Would you change your driving habits? Maybe drive the speed limit, coast into stops, and accelerate slowly? Hard research proves doing so increases fuel efficiency by 20% or more. That would cut the cost of gas per mile by 2.66 cents or about $200 per year just driving to work. Two hundred dollars is a small sum, but added to multiple area of living expenses grows to a tidy tax-free sum. (You do not pay taxes on reduced personal costs.)

What does inflation have to do with this? First, inflation is difficult to calculate. If car prices remain stable but the new models contain extra features, is this not deflation? Your new iPhone has more apps or more free minutes than the last cell plan for 10% more. Is this inflation or more purchased stuff in the form of a package deal?

Inflation in a single product in theory changes people's behaviors. Gas price goes up so the vacation in closer to home or cancelled. The drive to work is slower. Conservative driving can increase gas mileage 20% which equates to an 80 cents drop in the gas price for you with $4 at the pump prices. Higher beef prices leads people to buy more chicken. It works with most products. If one price goes up a replacement or substitute is found.

Thinking about what things really cost in the most basic units provides additional information to manage your finances. With the economy struggling and inflation in food and energy, it is a good idea to manage money better than ever. You will reach your goals quicker when you know where you started, where you are, and where you are going. It is a good idea to understand what each step costs.