The Amplifier Effect: Supporting the Local Economy

We’ve grown accustomed to hearing this: “Support the local economy”, or “Shop Local”. This, quite honestly, used to have an entirely different meaning to me than it does today. I would remember to make the occasional purchase, maybe of a shirt or a Christmas gift for a relative, and give myself a pat on the back. I’d shopped local. I’m supporting the local economy. However, the true notion of supporting the local economy goes much deeper than this. 

The point of this writing is to show the amplified effects of shopping and investing locally, and show how you can make changes to responsibly support your local economy. 

The local economic circle

Think of your local economy as a circle. The circle includes all of the people, organizations (schools, charities, social organizations, churches, etc), and businesses in the community. Money flows into the circle from the outside via spending in local businesses, paychecks to workers, and government programs. 

Once cash comes into the circle, it can be recycled & reused by circulating it through local businesses. For example, initial income to individuals is spent at local stores, who spend their earnings at local restaurants, which deposit their earnings into the local bank, who provides liquidity in the form of loans to other local establishments. A net inflow of $1 million, for example, can be multiplied by a moderate factor (research estimates have ranged anywhere between 1.3x to 2.0x) when spent within the local economy. This means that the initial inflow could translate to anywhere between $1.3 to $2 million once cycled through some of the local businesses. This is the magic of the multiplier.

The most important thing to remember, however? Once the money leaves the local economic circle, it never returns. This is, quite literally, like a hole in the bucket. The key to a prospering local economy is keeping as much of the inflow within the circle as possible.

Now that we’ve formed an idea of the local economy, let’s talk about how to support it.

First, evaluate your spending

The first step to effectively supporting your local economy is to evaluate your spending and understand where your money is going. Without doing this, you will never be in a position to effectively support yourself, your family and your community. Those that are able to contribute the most to others have first situated themselves to be in a position to contribute.

When you assess your spending, you have to evaluate two factors. 

First, think about what your money is going towards. A simple way to do this is to take a look at your three-month bank and credit card statements and put spending into categories. An example breakdown is food/dining, essentials, housing, transportation and clothing/entertainment. Look at your monthly spending and see how it compares month-over-month. 

Once you’ve evaluated how much you’re spending, you have a better picture of your situation and an idea of what changes you can make. You may realize that you’re spending too much in a category. Maybe you need to cut back to build a cushion before you make any further commitments, and that’s okay.

The next is thinking about where your spending is physically going. To truly gauge this correctly you have to go one level further with a more granular approach. You have to break each expense down to the company or institution at which you’re spending, and think about where that institution is focused. Beyond just the location of the storefront, where are these companies investing their time and earnings?

Now think about the nonobvious categories

The first categories most people evaluate are dining and entertainment. This makes sense, as it is where much of our paycheck goes and is what we can easily change on a whim. But it’s important to think about the not-so-obvious categories as well.

If you have an auto loan, what institution is that loan through? How about your insurance or mortgage loan? If you have credit card debt or a personal loan you are working to pay off, have you considered re-financing with a local institution to possibly lower your interest rate? 

When you evaluate all of these, you may find that you not only have the ability to pull some of this spending into your local circle, but you may also be able to make changes that save cash. These categories may require a bit more effort, but they matter just as much as the others. And the investment you make in a local institution such a bank comes right back around as an investment in the community, in the form of small business loans to other local businesses. 

Image by stanbalik from Pixabay

Making the change to support local while spending responsibly

Now that you’ve evaluated your spending and have an idea of where and to what your money is going towards, you can start to take action. A simple exercise you can do first is to establish a budget. It can be percentage-driven or a specific amount, like no more than X amount per week on dining. Another thing to remember is that it does not have to be a drastic change overnight. Ease your way into your budget over the course of a couple of months if you need to.

Next comes your local budget. Try this: take the total amount you’ve spent over the last three months in a certain category, and split it into two buckets. Percentage of the total spent at a local establishment vs percentage outside of the local circle. Once you have a base percentage, set a target for percentage spent locally and start working towards it! 

Engage your community

Now that you’re on track and are working toward spending smartly and within your local economy, the fun can begin! Engaging with local businesses to understand more about their background and offerings is the best way to maximize your ability to support while still making responsible spending decisions. 

Your local restaurant may have a weekly special. Your local home decor store may have an upcoming sale. Oftentimes, boutiques and clothing stores will have the ability to order an item for the same price you could find it online, even if they don’t carry it in the store. Your coffee shop may have a Bring-Your-Own-Mug discount, making it doable within your budget to visit a few days a week. All you have to do is ask and engage.

Think you could save on insurance or secure a lower interest rate for a loan? Talk to one of your local agents or bankers to understand what options may be present. We talk about this in more detail here.

When it’s time to think about shopping for others, whether for Christmas, birthdays, or other occasions, a gift card can be a great tool. Gift cards keep the spending within the community and even act as small, no-interest loans to the business. 

Responsible and intentional spending will build your local economy

Now that you have a starting point and actionable steps, you can work to incorporate responsible and intentional spending into your routine. Thinking about how you can support and being in the position to take action will enable you to have a hand in building your local economy.

Check out our Financial Planning process at jatowealth.com/our-process