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The invisible pay cut is real

Posted:
News

With inflation rising higher than wage growth, you may be worse off than you were 12 months ago.

Inflation describes the increase in prices over time. You might have paid $3.50 for a small flat white 5 years ago, but today you're paying $4.50. This is normal, but when inflation moves much faster than wage growth, you can end up paying more for everything while earning comparatively less.

And that's exactly what's happening in Australia right now.

Let's take a quick look at the hard numbers, then explain how you end up with an invisible pay cut:

Put together, these 2 figures show that the cost of ordinary essentials has risen faster than people's wages. In effect, the average person needs to spend more money for the same products. And their salary has not risen fast enough to match that.

Here's a simple example using the last two financial years:

  • Your expenses in 2020/21 = $45,000
  • Your salary in 2020/21 = $60,000

Now let's apply inflation and wage growth to those numbers in 2022:

  • Your expenses in 2021/22 = $47,295
  • Your salary in 2021/22 = $61,440

So technically you may have had a pay rise in 2022. You earned over $1,400 more than you did the year before. But thanks to inflation, you're actually worse off (-$855) than where you were a year before. And if you haven't actually had a pay rise, you're even worse off.

One way to overcome this problem is to place your wealth somewhere that ultimately appreciates faster than inflation, but with savings accounts offering rates below inflation (most are around 1%), this can be difficult.


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