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Why That Salary Increase May Not Beat Inflation
| June 16, 2008 | Posted by Roshawn Watson under Uncategorized |
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By: Roshawn Watson
The Bureau of Labor Statistics (BLS) said that inflation increased by 4% last year, so it begs the question if you received a 4% pay increase, you are keeping up, right? As is with most great questions, the answer is it depends.
Inflation affects consumers whenever they spend (or save) money. Accordingly, each month the BLS sends out people to evaluate the prices of about 80,000 products and services, including food, beverages, housing, apparel, transportation and medical care. This helps track price fluctuations over time.
A second determinant of inflation is that most consumers will spend more on specific products and services, such as housing. Thus, the BLS gives certain items like housing more weight than apparel. Ultimately, the BLS comes up with a CPI (consumer price index), an estimate of inflation over time.
This may be great as an estimate; however, what is most pertinent to you and I is “how inflation affects us, individually?” Certain consumers will spend proportionately more on specific products and services than other consumers. “If your consumption spending does not look like that typical family, then you could be experiencing more or less inflation” says Dan Seiver.
For example, if your job involves driving, and you are not
reimbursed for gas by your company, you may be feeling the pains of inflation greater than the typical American family. This is because increases gas prices have exceeded the overall inflationary rate.
Another consideration is taxes: even if your income did increase by 4%, it is possible that increases in income taxes may still leave you behind inflation (at least somewhat). As Suze Orman and Warren Buffet have stated, the general question of whether the US economy is in recession is not as important as to whether your dollars are receding (due to inflation). Consider adjusting your spending, savings, and investments accordingly, so that you can ride out any economic storm.
Although the knee-jerk reactions of many as inflation rises is to limit spending primarily to necessities while cutting out optional expenditures. While this is a good start, it is also important to consider your savings and investments too. If you can find any room in your budget, having a strong emergency fund is key. For most, this would mean 3 to 6 months worth of expenses. Some even suggest boosting it to eight months, given the fact that job losses are worse than they have been in five years. Having a strong emergency fund can prevent having to put necessities on a credit card or a line of credit in an emergency.
I am also keenly aware that some may consider increasing their investments during these times. If you are in a position to invest or increase your investments, consider investing long-term (rather than gambling with short-term trades). Don’t be lured into a long-term c.d. just because of fear of the economy because in the end, smart investors come out ahead. Overall, stocks have out-performed every other asset class. Regardless of whether your salary is ahead or behind inflation, careful financial-planning will help your family excel, even in turbulent financial times.
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Copyright 2008, Roshawn Watson, Pharm.D. All Rights Reserved.
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Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.
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