Inflation is eating your money, do you have the guts to stop it?

When did life get so damn expensive?

Reading time: 9 minutes

Whether you’re paying for groceries, ordering your morning coffee or looking at the painful bill after a night of drinks with friends, there’s no denying it: life seems to be getting more and more expensive.

The numbers don't lie: rents and house prices have gone up massively (a whopping 63,5% since 2013, here in The Netherlands).

European gas prices increasing by 145% since July 2021, while oil prices have increased by 46% over the same period.

Here's how energy and gas prices have behaved here in The Netherlands over the last year:

​You’ve probably heard about inflation, a term that’s thrown around a lot in the news.

Inflation is sky-high right now: in Europe and the U.S., we’re seeing inflation rates that haven’t been observed since the early 1980s.

​In today’s Monday Money, you’ll learn what inflation is, what causes it and most importantly: what you can do about it.

Taking a step back: what is inflation?

Inflation is a general rise in the prices of goods and services. It’s often measured by something called the Consumer Price Index (CPI).

What the CPI does is look at a ‘basket’ of goods and services that an average consumer uses in their daily life.

Think groceries, gas, housing costs, clothes, education, recreation, et cetera. If the price of these goods and services goes up on average, so does the CPI, and we can say inflation is increasing.

There are other ways of measuring inflation, but let’s not worry about those for now.

It all comes down to how much more expensive things have gotten since your last paycheck. If your spending behaviour is the same, you’ll end up spending more money, and you are consequently left with less - your cost of living increases.

As companies also face higher expenses (their raw materials or their labor gets more expensive), they will increase their prices, too, to keep the same margins. And this again increases the prices of goods and services for consumers like you and me.

So, what causes inflation?

When we were hit with inflation, many were quick to point out the war in Ukraine as the culprit. But inflation was rising long before that, and reality is often not as simple as picking one source of the problem.

Let’s have a look at what can cause inflation:

1. Higher production costs

2. Higher demand

3. Fiscal policy

We’ve already seen how higher product costs will increase inflation, as companies rise their prices to keep the amount of money they make on their products the same. This is called cost-push inflation.

For the second point, simple laws of supply and demand tell us that when many people want something that is in low supply, the price too goes up.

This happens when we have many people with jobs (low unemployment) and wages are rising. Consumer confidence is high, so we’re all happy to buy more things.

As all the supply is being bought up, we’re then willing to pay more for items that become more rare, therefore driving up prices. This is called demand-pull inflation.

Lastly, there’s the fiscal policy. We could write a full Monday Money about this, but let’s keep it brief for now:

Central banks can change the interest rate on savings. With lower interest rates, it’s easier for banks to lend more money to business and consumers. This, in general, is good for the economy, which benefits the more everybody spends.

We’ll leave that for now and instead look at what you can do about inflation.

What can you do about inflation?

In later newsletters, we’ll talk about protecting your savings and/or investments from inflation.

Of course, you could simply spend less money: cancel that subscription, cook at home more often and so on. And while that’s not a bad idea, we, of course, would like to keep enjoying life as much as before, and that means spending some money every now and then.

Let’s have a look at increasing your income. Today, we’ll talk about what to do if you are self-employed and what if you are an employee.

(In later newsletters we’ll discuss things like starting a side business and opening new revenue streams through passive income.)

If you’re a freelancer or self-employed, now is the right time to increase your prices. Don’t worry, everyone is doing it.

If you can increase your own prices, it’s important to raise them! But be sure to do so gradually.

This might sound counterintuitive, but raising prices is one way businesses can stay afloat amid rising costs–and sometimes even increase profit margins in the process!

Just be sure not to hike prices by too much at once; otherwise customers may take their business elsewhere.

To protect yourself from inflation, you need to keep up with the cost of doing business. If your expenses increase but your income stays the same (or decreases), then it will be harder for you to keep up with the cost of living without working longer hours—and that doesn't sound like a healthy option to me!

So don’t let inflation stop you from being successful–instead use it as an opportunity for growth.

By how much should you increase your prices?

Only you know the answer to this question! One way to do it is to check how much your production costs have gone up, so you keep the same margins.

But maybe the only real costs you have are the time and effort you put into your work? You can then opt to increase your prices by the same % that your cost of living has increased. For Europe, this would be anywhere between 6 to 10%.

Lastly, it never hurts to have a look at what your competitors are doing, so you don’t suddenly become very expensive (or cheap) compared to them.

You probably know who your most important competitors are already. If they publish their prices online, check out their site through Wayback Machine, and look at their historical prices. And then match yours accordingly.

At our agency, we’ve been increasing our prices gradually to match inflation, after not raising them for years. At 2% inflation or less, it might feel negligible (but it is not!). At today’s rates it is painfully clear how much your margins get hurt if you don’t increase your prices.

While nobody likes to pay more for your services, it is safe to assume that most if not all of your clients are either increasing their prices too or are at least aware of the high inflation. So no one should be surprised by your increase in price.

If you’re employed: negotiate a better salary!

Inflation probably ate your last raise. Here's how to tell if your salary is keeping up with inflation

You’re employed, and it’s not as easy to increase your income.

Some companies increased all employees' salary to help them with inflation, as I recently saw some viral LinkedIn posts say:

But that doesn’t mean you can’t negotiate for more money at work.

The key is knowing how much your salary should be and how much it should be increasing by each year, so you know when it’s time to ask for a raise.

It is probably pretty straightforward: unless you have recently received a raise of more than 10%, you’re probably losing out.

If you’ve received a raise or a promotion, and the increase was less than inflation, you’ve effectively not really gained anything. This is something you should address with your employer.

It shouldn’t come as a surprise for them, as they have probably already increased their prices too.

In our company, we give employees a yearly raise based on their performance, with a base increase that factors in inflation.

For how much should you ask? How to compare your salary?

On average, companies increase salaries by about 3%, which isn't much with current inflation levels in mind.

The best way to compare your salary is by looking at the average salary of professionals in your field, location and experience level.

You can do this by searching for “salary surveys” on Google and finding the most recent one that’s relevant to you.

You can have a look at websites like: Glassdoor, Salary.com, PayScale and Indeed.

The next step is to talk to colleagues in and outside of your firm.

This will give you a more accurate picture of what other people with similar positions earn.

Friends of mine actually started an initiative in the design field, where they’d ask colleagues and other friends to fill in their job title, description and salary details in a public Google Sheets file (anonymous). This is a great way to compare salaries.

A more sophisticated solution that I came across is Blind, “an anonymous community app for the workplace. Our vision in creating this space was to break down professional barriers and hierarchy.”.

If your employer doesn’t want you to talk salary with colleagues, it’s probably a good idea to start doing it.

If you dare, discuss your salary with friends and colleagues, and get over the taboo.

Remember, you’re not competing with your friends for who has the highest € number, you’re competing against companies so that all individuals are compensated fairly.

Why now is a great time to negotiate your salary

After doing your research, you should have an idea of how much you should realistically make.

Then, time to negotiate. Remember that it’s a great time to be an employee!

In the current job market, employers are finding it hard to hire qualified candidates and are willing to do a lot to keep you around. Many companies face high turnover, with employees staying for a shorter and shorter amount of times.

Us (young) professionals are in high demand, so if your employer doesn’t offer you what you want in terms of salary, benefits, being able to work remotely, etc., it might be time to negotiate and in the worst case: leave!

When it comes to negotiating with your boss, you have a lot of leverage. Know that if you leave the company, they’ll have to find someone else to fill your shoes and then train this person, which is probably more costly for them than just keeping you!

Your boss may also think that he or she can’t afford to give you a salary increase at this time.

However, I’d argue that they can’t afford NOT to give it to you–because if they don’t give it out now, they’ll have even more trouble down the road as people start looking around for new jobs and leaving.

The biggest salary jump always happens when you switch between employers, as your current employer doesn’t need to offer you a lot more for you to stay, whereas a new one wants to incentivise you to join their firm. More on this next week ;-)

Do negotiations scare you? Not sure how to best approach them?

Then stay tuned for next week’s Money Monday, where you’ll learn how to ace your next salary negotiation with ease! We’ll talk about the art of negotiation, take a look at best practices from experts and the science and psychology behind negotiating.

Conclusion: life is getting more expensive, and you should increase your income to match.

If you’re self-employed, you should be gradually increasing your prices. If you’re working for a boss, now is a great time to negotiate a better salary, better working conditions and secondary benefits. Start by finding out how much you should be earning, by doing online research and talking to your peers.

Next week, we’ll start your salary negotiations!