A lot has been written in recent months about rising inflation and the impact that this is having on living standards.
I often write about ‘lifestyle inflation’. This is where someone’s lifestyle or spending often increases as fast as (or even faster) than their earnings as they earn more or receive bonuses or pay rises.
Lifestyle inflation is very dangerous as it prevents you from ever reaching financial freedom. If your expenses are increasing at the same (or a higher) rate as your income, then this means that you will not be able to save and invest for the future.
The inflation we have at the moment has nothing to do with Lifestyle however. The inflation that we are seeing here at home in the UK, in the US and around the world is what I call ‘real inflation’.
For those not in the know, inflation is simply the rate by which prices increase across an economy, usually measured by taking a sample ‘basket’ of goods and services and tracking their prices over time. If a loaf of bread costs £1 last year and £1.05 this year, then inflation on bread is running at around 5%.
At the moment, inflation in the UK and US is running in the 6-8% range and it seems that things may get worse before they get better. What’s more, the 6-8% range mentioned is just the average rate of inflation.
Some things are increasing by much, much more. In the UK, many home energy bills will increase by over 50% this year (with more rises potentially set to come). It was also reported that the cost of washing machines (yes – there are people out there who track the prices of washing machines!) increased by more than 10% in 2021.
The reason I call this ‘real inflation’ is that it impacts on everyone. We are not talking about price increases on Bollinger Champagne and 1st Class air fares – we are talking about inflation on the food we eat, the heating for our homes and the fuel for our cars. This is inflation that impacts on pretty much everyone.
Well, one option would of course be to do nothing. We could accept our fate, and simply resign to the fact that this year we will have less disposable income to spend on lifestyle, enjoyment or, perhaps most importantly, saving and investing. Many people out there will probably just think that there is nothing that they can do about it and that will be the end of it.
BUT, there are many things that you can do, right now, to help protect you from this increase to the cost of living. In fact, if you do several of these things or if you do them for enough time, you may even end 2022 better off than how you started.
So, what can you do to stave off the inflation threat – here are my top 3 tips:
Many people put up with sub standard pay rises year after year. Assuming that you are performing reasonably well in your role, you should be expecting a raise that at least keeps pace with inflation. Bear in mind that a pay rise that matches inflation simply maintains your current standard of living. A raise of zero or anything less than the rate of inflation means your living standards will likely go down this year!
If you are performing particularly well in your role or if your job role is in demand (as many are at the moment), then your raise should really be above the rate of inflation.
People often feel nervous or uncertain about asking for a raise, but if you are confident in your performance, you should have nothing to fear – I have written a detailed post about negotiating a raise here.
A side hustle can be a great way to top up your income. There are ton of great side hustle ideas that can earn you anything from $5 to $100 a day and even more in some cases.
A side hustle is a great way to earn some additional income. If this is something you wish to explore, ideally you should try to find a side hustle that at least gives you the earning potential to beat inflation. If you are current earning £1,000 a month and inflation is running at 5%, you need to earn an additional £50 per month, after tax, just to maintain your current standard of living.
Ideally, you would look for a side hustle that has the potential for you to earn £70+ a month, meaning you are keeping pace with inflation and adding a little extra money into your back pocket to boot!
Now that we have considered increasing your income, another great way to combat inflation is to try to reduce expenses.
The key thing to consider here is that we are trying to get the same or better lifestyle for less money. If we simply reduce our lifestyle to combat inflation, then we are getting worse off in real terms over time. The idea here is to get the same or better for less money.
It is amazing how much money we waste when we don’t need to. Think about your mobile phone contract, your cable TV subscription and see if you can negotiate any discounts or reductions or switch to a new supplier to get a better deal.
So, there we have it – 3 ways to beat increases to the cost of living.
The good news is that periods of very high inflation tend to be fairly short lived and things usually stabilise over time.
Keep your head up, implement the tips above and you stand to come out of 2022 financially better off than you went in!