Wages aren’t rising in line with inflation: how can you weather the storm?

If salaries increased with inflation, Brits would be £25,397 a year better off. Without an inflation-beating pay rise, how can you weather the storm?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Inflation in newspapers

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Vulnerable families continue to face increasing financial pressure due to the rising cost of living, and disposable income seems to be an increasingly rare luxury. Money-saving website Savoo has delved into historical data to find out how disposable income has evolved over the last 35 years. Their research reveals that if salaries had actually increased in line with inflation since 1987, Brits would be £25,397 a year better off.

In the absence of an inflation-beating pay rise, what can you do to weather the current storm?

[top_pitch]

How have average wages evolved since 1987?

Year

Cumulative inflation from 1987

Actual disposable income (per year)

Inflated disposable income (per year)

1987

4.15%

£19,221

£19,221

1997

2.20%

£23,373

£30,031

2007

2.39%

£30,506

£38,961

2017

2.56%

£30,384

£51,785

2020

1.74%

£31,464

£56,861

The table shows that the average disposable income was £19,221 per year in 1987 and that by 2020, it had increased to £31,464 per year.

However, if wages had risen in line with inflation, the average disposable income would have been £56,861 per year by 2020. This means that we’re £25,397 less well off annually. 

[middle_pitch]

What can you do to remain financially resilient?

Here are five steps you can take to limit the impact of the rising cost of living.

1. Cut back on life’s pleasures

However you may feel about cutting back on luxuries, it’s important to understand that these are challenging times, and the chances are high that they will yet get tougher. Take heart knowing you’re not cutting back on life’s pleasures indefinitely. Cutting back in the short term could help you build lasting financial resilience and attain financial security.

Savoo’s research reveals that the price of some life pleasures has, in fact, risen by more than inflation. Let’s take a look at the price of a cinema ticket as an example.

Year

Average cost of a cinema ticket

Cost based on inflation

1987

£2.15

£2.15

1997

£4.07

£3.36

2007

£5.05

£4.36

2017

£7.49

£5.79

2020

£6.75

£6.36

Overall % Increase

214%

196%

What does this mean? The price of many luxuries rises faster than the rate of inflation, making them unrealistically expensive. Cutting back on luxuries temporarily might free up a good amount of money that can be diverted to essentials.

2. Generate more income

The simplest way to generate income in the short term is to start a side hustle. Consider possible side hustles you’re passionate about, especially those that require zero or minimal initial capital and offer high growth potential. You can start by considering your hobbies or checking out a range of side hustle ideas.

As your finances improve, you can consider longer-term investments like shares. However, keep in mind that investing in shares can be risky, and you could get back less than you invest. It’s always wise to carry out your due diligence and seek professional advice when necessary.

3. Protect your emergency fund

Sometimes, financial pressures can be so overwhelming that you’re left with no choice but to dip into your emergency fund. Though this might make your situation better in the short term, you need to implement measures to protect your savings.

A good example is to increase your sources of income, as indicated above. Additionally, each time inflation rises, you may need to increase your savings by the same percentage to ensure your savings match the current cost of living.

4. Check whether you qualify for any government benefits

If you’re eligible, it’s always a good idea to claim the government benefits available to you. They can help ease financial pressures, making it easier to build financial resilience.

5. Review and compare your insurance providers annually

It’s recommended that you review your insurance deals annually, including home and car insurance providers. The same applies to utility providers, such as phone, broadband and energy companies. The chances are high that you’re not on the cheapest possible deal, meaning you’re missing out on an opportunity to save money.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »