Are you a hole in your community's leaky bucket?

When our business leaders, planners, and politicians look at ways to revitalize local towns and rural areas, the usual proposed solutions are to find ways to bring more money into the community. Typical approaches to bringing in money involve promoting tourism, agriculture, corporate relocations and other forms of inward investments. What is often overlooked is the important concept of money flow within the community.

Think of your local economy as a bucket and bringing in money to your community is like pouring water in the bucket. The bucket is going to have some holes in it and some of the water will leak out. Some of the holes can’t be fixed so you will always have a leaky bucket. The state and federal government will collect taxes, for example. Those are holes that can’t be fixed.

The idea of the leaky bucket illustrates the importance of money flow through a community. The more holes in the bucket, the more frequently the community needs to refill the bucket (bring in outside investments). By the same token,  fewer holes in the bucket (more money circulating within the community), the less frequently the community has to look for outside money to revive the local economy.

Let’s put the illustration in simple dollar and cents. Some studies suggest that for every dollar spent at a locally owned and operated business, sixty-eight cents stays in the community. The same dollar spent at a nationally owned store sees thirteen cents staying in the community. Now an important concept comes into play, a concept called the multiplier effect.

A consumer spends a dollar at a locally owned and operated business, of which sixty-eight cents will remain in the community with the remainder of the dollar having been leaked out of the bucket through taxes, utility costs, vendor purchases, and the like. If the sixty-eight cents that remained in the community is spent by that business owner or employee (through his pay) at another locally owned and operated business, forty-six cents remains in the local community. If the person who received the forty-six cents continues the trend of spending locally, the money will pass through eight more hands before the leaky bucket has taken it down to two cents.

If a consumer spends the dollar at a nationally owned chain instead of a locally owned and operated business, thirteen cents will remain in the community.   If the employee who received the thirteen cents in his pay (the rest of the dollar having leaked to the owner and upper management in another state, taxes, utility costs, vendor purchases and the like) spends it at another nationally owned business, only two cents remain in the community.

From this simple example, you can see how fast your community needs to find more outside money to regenerate your local economy. Your dollar spent at a locally owned and operated business will pass through nine of your friends’ and neighbors’ hands before it has practically vanished from your community. Your dollar spent at nationally owned businesses would only pass through one of your friend’s or neighbor’s hands before it has practically vanished from your community.

In the real world, it isn’t always practical, and sometimes not even possible, to spend your money exclusively at locally owned and operated businesses. But you do have the power to slow the leak. Several independent studies have concluded that a 10% shift in our spending habits to support locally owned and operated businesses would create hundreds of new jobs and tens, if not hundreds, of millions of dollars in new economic activity.

Posted by Five Drunk Rednecks