Getting a raise is great—with more money in your hand, you’ll be able to buy more things, pay down existing debts, and further pursue your long-term financial goals. However, in addition to thinking about the nominal amount of money you’ll be making, it is important to think about changes to your real spending power.
While your nominal salary is the dollar amount you see on your paycheck, your real salary represents how much you can actually buy with these dollars. In other words, real dollars are used to describe your spending power after adjusting for external factors, such as inflation.
And if you haven’t noticed, inflation has been very high lately. According to the February 2022 Consumer Price Index, prices for goods and services have risen 7.9 percent over the last 12 months, the highest we’ve seen since 1982. That means a “bundle of goods” that cost $100 in February 2021 would, on average, cost about $107.9 in February 2022.
While that $8 might not sound like much at first, these changes can begin to add up when they are applied to your entire salary. Keeping the 7.9 percent figure in mind, to buy $50,000 worth of goods, you now need $54,000—and not many people have $4,000 just lying around.
If you are finding your pay increases are not keeping up with inflation, you are certainly not alone—according to a recent CNBC report, the majority of Americans saw pay increases that were less than annualized inflation figures. But if you are hoping to find ways to save this year, keep these seven helpful tips in mind.
1. Record All of Your Expenses—Preferably by Hand
One of the most common reasons people end up overspending is that they have no idea how much they spend. As long as their card keeps getting approved, they assume that they stay financially afloat. Keeping track of your ongoing expenses is one of the best ways to gain control of your finances and find possible opportunities to save. Additionally, if you record your expenses by hand, you’ll be even more likely to remember them and you’ll become more frugal as a result.
2. Identify the Costs of Borrowing
The average American has about seven different sources of debt. It can be easy to accumulate debt quite quickly between student loans, a mortgage, tax obligations, credit cards, and car payments. However, it is important to realize that not all debt is created equally. Debt that has higher interest rates should be your top priority. Once you have paid the monthly minimums on all existing accounts, try to pay off your more expensive debts as fast as you possibly can. Eventually, this can help you save thousands of dollars per year.
3. Buy Necessities in Bulk
The phrase “pennywise, pound foolish” is used to describe the practice of always buying the cheapest item available rather than buying the best deal possible. If a gallon of laundry detergent is $15 and a half gallon is $10, you might be tempted to “save” and choose the cheaper option. But in the long run, you will end up paying more for every load of laundry. Making a bulk purchase, when possible, is often the best strategy for reducing marginal expenses.
4. Improve Energy and Water Consumption
On average, Americans spend about $80 on water and $120 on electricity per month. With the proper practices in place, you can potentially cut these expenses in half. Purchasing energy-efficient appliances, using energy-efficient lightbulbs, and adopting strategies to reduce water consumption (such as a low-flow showerhead) can all be very beneficial. Plus, as a bonus, you’ll reduce your personal impact on the environment.
5. Purchase Generic Items
Almost all brand name goods have a “generic” equivalent—and using generic equivalent will almost always enable you to reduce your expenses by 50, or even 90 percent. Take a close look at your bills from the last few months. Were you usually buying brand-name products, or were you buying generic items? Replacing just a few of your regular expenses with an affordable alternative can really add up over time.
6. Refinance Existing Debt
One of the most overlooked expenses in the United States is the ongoing cost of debt. Once you’ve begun making payments, it can be tempting to keep the status quo and not make any changes. However, there will be plenty of situations where you are paying much more than is necessary to keep these accounts active. If your credit score, personal income, or other personal finances have improved, you may be able to qualify for loans that are significantly better than what you had to choose from a few years back. And with interest rates still relatively low, the potential benefits of refinancing are even higher. If you are a homeowner with an adjustable-rate mortgage (ARM), it might be time to think about refinancing to a fixed-rate mortgage since interest rates are on the rise.
7. Generate a Secondary Income
Thus far, we’ve mainly discussed ways to help decrease your personal expenses. These strategies can all help combat the effects of inflation. But decreasing expenses might not be enough. If that’s the case, you should consider the possibility of generating a second income. Working a second job (such as a gig job) can be great, but you’ll also find other profitable options. Selling things, renting out your property, and even day trading can all help increase your monthly earnings.
Conclusion
The recent wave of inflation has affected the spending power of every dollar in circulation. And if your income has not kept pace with these changes, you might be scrambling for answers. Though these small steps will not guarantee financial security overnight, they can undoubtedly help you save money and point you in the right direction.
