What is compound interest?
The old adage is that compound interest is the 8th wonder of the world. Not sure I could name the other 7, at best a few, but this one I am intimately familiar with. For those that don’t know, compound interest is simply the benefit of earning a constant percentage on your money when it comes to investing. So, if I earn 9% on my money it doubles every 8 years. It is a beautiful thing and one of the guiding principles of financial and investment planning.
Compound interest for your salary
However, for today I’m going to focus on a different area of compound interest. One I have coached and observed many clients throughout my career benefiting from. That is the beauty of compound interest impacting your career.
You see the way most careers work is you don’t go backward. Thus, if you make $100,000 a year (or per annum if I am from over the pond) then if I am going to take a new position with my employer, or seek out new employment, I am not doing so for less than $100,000. In fact, to get me motivated to move you’ll have to make a sizeable offer above and beyond $100,000 to make a change. Because let’s face it, everyone hates change.
The Art of Negotiation
There is another dirty little secret here, which is the art of negotiating. Not only when looking to increase your salary should you push as hard as possible for a pay increase (or search elsewhere), but in addition, get to that next career level. By doing so you’ve created a floor for your worth on the marketplace. The benefit here is much like with your salary, your next move will only go up from here.
Thus, the moral of the story is – if your goal is to continually increase your income and career, negotiate and push to increase your salary and title. The benefit here is you’ll find both will start to increase exponentially.
Now, let’s focus on the salary department and how the compounding effect can make a huge difference over the course of your career. Let’s focus on a few different examples, so you can truly see the impact of percent increases.
How Compounding Interest Impacts Your Career
Person A makes $100,000 starting at age 22 grows with the cost of living of 3% every year until they retire at 62. This person will retire making around $362,000 in their last year of working. Not too shabby, but remember by then gas will be $100 a gallon!
Person B makes $50,000 starting at age 22 with negotiating a 6% raise every year until retiring at 62. What do you think this person will end up making their last year of work? Same as the person starting out with $100,000? If you guessed that you’d be 100% wrong. As a matter of fact, you’d end up making approx. $514,000 your last year of work. Holy moly right!? Makes that $100 gas a little more palatable.
Person C makes $100,000 starting at age 22 growing with inflation of 3% until age 62. Except, in this example every 10 years they negotiate a 10% raise or a new job. I’m as curious as you are where this person lands. Please hold while I try to figure this bad boy out…. If my math serves me correctly this person will end up making $424,233 in their last year. Compare that to the straight 3% increase in example one and you are talking about over $60,000/year in your last year. The beauty here is you don’t have to be a master negotiator, you simply once a decade have to be an advocate for yourself to push the envelope.
How it could work for you:
Imagine what would happen if every 8 or 5 years you negotiate a decent bump? As you can see, the magic to compound interest applies just as well when it pertains to your income as it does to your career. Additionally, it is what happens in the non-bump years where beauty starts to happen.
You see, if every X years get a decent bump, even your off years where you get a cost of living type of an increase starts to compound quicker. Simply put if you negotiate a $100,000 salary a 3% cost of living raise means $3,000 more in your pocket in normal years. If however, you started at $50,000 that is only a $1,500 cost of living raise. And remember it continually compounds from there!
I think this is as important of a principle at age 22 as it is at age 52. The point being even a little bit of negotiating can have a massive impact on your finances and career trajectory. Remember, employers must entice you to take that new job or position. If you can squeeze a few extra dollars out, your income will forever grow faster.
I love this strategy and dip into this well any time I’m talking to a client looking at a new job. It helps them really understand the long-term impact of their decisions while helping them negotiate their best future.
Hope you enjoyed this blog and stay wealthy, healthy, and happy.
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