Is Inflation Eating Your Pay Raise?
2024-07-05
As Canadians, many of us have noticed our paychecks don’t stretch as far as they used to. This isn’t just a feeling; it’s a reality shaped by the interplay between inflation and wages. Let’s explore this dynamic and see how it aligns with the financial flywheel framework.
Understanding Inflation and Wages
Inflation refers to the general increase in prices of goods and services over time. Imagine you bought a loaf of bread for $2 in 2020, and now it costs $2.38. That’s a clear sign of inflation.
Wages, on the other hand, are the money we earn from our jobs. Ideally, wages should increase at a pace that keeps up with or exceeds inflation, allowing us to maintain or improve our standard of living. However, taxes reduce our net income, affecting our purchasing power.
The Data: 2020 to 2024
Examining the data over the past five years:
- Cumulative Inflation: Prices have risen by 18.9%.
- Cumulative Wage Increase (after taxes): Wages, adjusted for a 30% tax rate, have increased by 12%.
The 36.67% difference between these figures indicates that wage growth has not kept pace with inflation. This gap can erode purchasing power, making it harder for Canadians to maintain their standard of living.
The Financial Impact
This disparity has several implications:
- Reduced Purchasing Power: As prices increase faster than wages, our ability to purchase goods and services diminishes. This can make it challenging to afford essentials like housing, food, and healthcare.
- Increased Financial Stress: When costs rise faster than income, it can lead to financial stress. Canadians may find themselves juggling bills, cutting discretionary spending, or even dipping into savings.
- Debt Levels: To manage rising costs, some may rely more on credit, leading to higher debt and financial vulnerability.
Integrating with the Financial Flywheel Framework
In my upcoming book, the financial flywheel framework emphasizes creating sustainable financial momentum. Here’s how we can apply these principles in the context of rising inflation and stagnant wage growth:
- Income Growth: Invest in education and skills development to enhance earning potential. This can help counteract the effects of inflation by positioning you for higher-paying opportunities.
- Expense Management: Develop a robust budgeting strategy to track and manage expenses. Identifying areas to cut costs can help maintain financial stability despite rising prices.
- Smart Savings: Prioritize saving and investing. Use high-yield savings accounts and consider investment opportunities that can outpace inflation, thereby preserving and growing your wealth.
- Debt Reduction: Focus on reducing high-interest debt. This can free up more of your income for savings and investments, strengthening your financial flywheel.
Visualizing the Data
Disclosure: The graph above shows the cumulative year-over-year change in Canadian headline inflation versus adjusted wages from 2020 to 2024. Wage data was adjusted to reflect a 30% marginal tax rate, illustrating the net impact on take-home pay. Inflation data was sourced from Trading Economics and Statistics Canada, while wage data was adjusted based on standard tax rates for middle-income earners.
Conclusion:
Let’s get it moving…
By staying informed and strategic, we can ensure our financial momentum continues to build, helping us achieve long-term financial success and stability.
Until next time,
Trevor
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Trevor Dale, CFA
CEO, TK Dale Wealth Inc.
Portfolio Manager, TK Dale Wealth Management Inc.
Life Insurance Agent, TK Dale Wealth Insurance Inc.
Mortgage Broker, TK Dale Wealth Mortgages Inc. Lic. #13359
#7-17075 Leslie St., Newmarket, ON L3Y 8E1
*Disclaimer: Please note that this communication contains forward looking information. We do not guarantee or warrant these statements and cannot guarantee that the outcomes will occur. This is not individual advice and you should seek the help of a licensed professional. This is not intended to solicit residents outside of Ontario, Canada. We do not provide tax or legal advice. Securities mentioned in this communication are not recommendations. We do not endorse nor recommend any securities mentioned. This is not financial advice. We recommend seeking the help of a licensed professional prior to making investment and financial decisions.