“Our company isn’t even giving out cost-of-living raises anymore,” my friend Tina lamented over drinks a few weeks ago. “The cost of gas is up; my rent’s going up in June; I’m even spending more at the grocery store. I don’t know where I’m going to get the money.”
Tina had just had her annual review with her supervisors, and, as you’ve probably figured out, it didn’t go well. While Tina had heard some of her co-workers had received modest raises – most of them dubbed “longevity” or “loyalty” raises to thank employees who’d stuck it out with the company during a recession-induced salary freeze – Tiny was bummed she hadn’t received a salary increase as well.
“There’s always next year,” Tina pined, sounded like a Chicago Cubs fan at the end of September.
But really, there isn’t always next year. Here’s why:
What A 3% Raise Is Worth To You Right Now
Say you make an average American salary – that’s around $28,000 according to the U.S. Census Bureau. If you work in a high cost-of-living state, like California or New York, you probably make more than that. What does a standard three percent pay raise get you?
$28,000 x 0.03 = $840
An additional $840 a year – which comes out to just over $32 a paycheck (if you get paid every other week), and that’s before taxes – might not seem like much. Depending on where you live, it might not even cover a single month’s rent or pay your yearly car insurance bill. When you do the math, you might find yourself thinking like Tina: wondering why she should even bother to ask for a raise.
What A 3% Raise Is Worth To Your Future Earnings
In Tina’s estimation, it’s ok if she doesn’t get a salary increase this year; she assumes she’ll just have more fodder when she ultimately asks for a raise 12 months down the road. She’s overlooking a critical fact.
Say next year, she does get that three percent pay raise. The year after that, she get a promotion which nets her a ten percent salary increase. After that, she receives a standard cost-of-living raise for four straight years before getting a loyalty raise of five percent the fifth year. Let’s do the math:
Her original salary was $28,000
- Year one: she didn’t not ask for a raise, so her salary remained $28,000
- Year two: she gets a ten percent raise, bringing her annual earnings to $30,800
- Years three thru six: she gets a three percent raise every year, ultimately giving her an annual salary of $34,666 by year six
- Year seven: she gets that five percent loyalty raise, bringing her salary up to $36,399
Now, let’s pretend that she not only asked for but got that three percent raise this year. How does that change things down the road?
- Year one: instead of earning just $28,000 for a second straight year, she instead receives $28,840
- Year two: thanks to the ten percent promotion raise, she is now earning $31,724 – almost $1,000 more than she’d be earning if she hadn’t received the year one raise
- Years three thru six: with her annual three percent salary increase, she’s earning $35,706 by year six
- Year seven: factor in her five percent loyalty raise, and her income is now $37,491
The net difference between a raise this year and waiting until next? During our seven-year example period, Tina would bring home an additional $6,838 simply by fighting for that small raise this year. Under this scenario, her annual salary will be $1,092 higher seven years from now; the gap between what she is earning and what she could have been earning will only continue to grow over the course of her career.
What A 3% Raise Is Worth To Your Portfolio
Seven years from now, let’s pretend Tina took the additional $6,838 she’d earned – just because she didn’t wait until next year to ask for a raise – and put it into an IRA. Let’s give the market the benefit of the doubt and assume she’d see an eight percent return on her investment. At that point she’ll be 32, so let’s look ahead another 28 years – after she’s reached that golden age of 59 ½ and can withdraw from that IRA without penalty – to see how much the $6,838 is worth now:
It seems crazy to think that simply by fighting for a measly $840 right now, Tina can add more than $58,000 to her investment portfolio.
And, as astounding as that figure is, it doesn’t even take into effect a 401(k) match from her employer (which would grow right along with her salary) or any additional investments made based on her earnings past the initial seven years. Say she continued to invest an extra $1,000 – which she earned simply because of asking for a raise in year one – every year from age 32 to 60, along with the initial investment of $6,838. How much would her account be worth then?
Sure, Tina could wait until next year’s annual review to fight for a pay raise. But she shouldn’t. She can’t afford to.
And neither can you.