The Adams, the Browns, and the Carters are three similar families. Two parents, two teenage kids. All three families live in the same town, attend the same school, and enjoy the same food.
But they differ in their income and their spending. So inflation affects them differently. Here where they stood one year ago.
- The Adams take home $2500 per month after tax. That puts them at about the 25th percentile in the USA for take-home pay.
- The Browns take home $4500 per month after tax, placing them in the 50th percentile.
- And the Carters take home $8000 per month after tax, placing them in the 75th percentile.
And they spent differently, too.
- The Adams spend $2250 per month, all of it on necessities. They save/invest $250 per month.
- The Browns spend $3500 per month, $500 of which is discretionary. They save/invest $1000 per month.
- The Carters spend $6000 per month, $2000 of which is discretionary. They save/invest $2000 per month.
| Take-Home Pay | Necessity Spend | Discretionary Spend | Savings | |
| Adams | $2500 | $2250 | $0 | $250 |
| Browns | $4500 | $3000 | $500 | $1000 |
| Carters | $8000 | $4000 | $2000 | $2000 |
Now, let’s assume the three families have been equally hit by the past year’s 8% inflation. We’ll also assume each of the three families received “standard” 2% raises to their income.
Here’s where they stand today.
| Take-Home Pay | Necessity Spend | Discretionary Spend | Savings | |
| Adams | $2550 | $2408 | $0 | $142 |
| Browns | $4590 | $3240 | $540 | $810 |
| Carters | $8160 | $4320 | $2160 | $1680 |
Let’s focus on two important questions:
- How did the families’ savings rates change?
- And, since discretionary funds are flexible, how did the sum of [discretionary spending + savings] change?
| Monthly Savings % Change | Savings + Discretionary % Change | |
| Adams | (-43%) | (-43%) |
| Browns | (-19%) | (-10%) |
| Carters | (-16%) | (-4%) |
The Adams’ extra money decreased by 43%.
The Carters’ extra money decreased by 4%.
And for what it’s worth, the Carter’s are not exorbitantly rich. They are comfortably middle class in most US cities, with a combined pre-tax salary of around $125,000. 25% of the U.S. populace earns more than the Carters.
A family earning $300,000 per year (96th percentile in the US) might only see inflation decrease their monthly “extra money” by 1%.
In other words, the Adams family, who are already struggling, are squeezed by inflation 10x more than the Carters.
The Adams’ long-term savings goals (retirement, a bigger house, etc.) are delayed by years by this 43% reduction in the monthly savings. The Carters’ goals are delayed by weeks or months.
Inflation hurts. But it disproportionally hurts the poor.
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-Jesse
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Totally Agree that inflation affecting the poor more. It pains me to see the ways the system is tilted to the rich. Another good example is interest rates where someone who can’t afford things get hit with the highest interest rates while people with large portfolios can get margin loans at rates just over prime. It is harder for the poor to get ahead and easy to get knocked down. However, I hope that doesn’t discourage them from being financially savvy. Not having as much margin for error is all the more reason to have good handle on money and putting into action many of the things you talk about on this blog.