Sometimes in life there are those often repeated statements that everyone says and it assumed to be correct because everyone is saying it.
Right now that seems to be:
“If your pay rate is not keeping up with inflation, then you are losing money”.
I have seen this everywhere, even among the ‘experts’.
And with inflation around 7%, that would mean a pay rise of 7%.
But this simply isn’t true, for a couple of reasons.
1/. Your personal inflation rate is different to the average
7% is the inflation rate for the country as a whole. Yet, your own spending is very personal to you and is not representative of the county. Your spending may be more than the inflation figure, especially if you are renting, drive to work, building a house, and have a family to feed. Whereas, your personal inflation figure may be lower, especially if you have a mortgage, don’t drive much, and have less mouths to feed.
In other words, inflation doesn’t affect everyone the same, so a generalised statement that your pay needs to increase with inflation doesn’t account for your personal situation.
2/. income inflation and spending inflation are different numbers
Secondly, even if your own personal inflation rate is more than inflation, you still might not need a pay rise to match inflation to keep up with costs.
The key reason here is your savings rate. If you save a good chunk of your income, you are far less affected by inflation than someone who spends all their money.
Let’s take a couple earning $100,000 in the hand income. Their annual expenses are $70,000. Let’s assume their expenses increase by 7% with the general rate of inflation in this example, their expenses next year will be around $74,900. $4,900 more. For them to increase their income by $4,900 they would need an increase of just 4.9%. Still a lot, but no where near the level of inflation.
Whereas, someone earning AND spending $100,000 would need their income to increase by the same rate of inflation. This is why inflation affects lower income earners much more than higher income earners. There is less fat in the budget to save, so the full impact of inflation is more keenly felt.
Someone saving more than 30% of income, would need a raise of even less than the 4.9% above.
If you check out the second calculator on this page, you can punch in your own numbers based on your own savings rate to see how much of a pay rise you may need. Would be great if you can share the resource to a wider net than I can achieve in this humble blog to help dispel some common thinking.
I just wanted to highlight this as some people may be making sub optimal career decisions based on an incorrect read of the situation.
If your personal inflation rate is less than the average AND if you save money each month, then you will not need as much of an income rise to meet inflation.
Some people may be making decisions to find new work to match inflation when it may not be necessary.
If you want a new job, then go for it. It’s a great time to be job hopping. But if you are only doing so because of inflation and money, then just be careful with your analysis, especially if it means you are leaving an ideal job on a lower pay for a less ideal job only on a slightly higher pay.
People often ask for asset recommendations and ways to beat inflation. As always, nothing beats an ability to save more money.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here