Your first Professional Years determine your Income and Wealth
It’s the first years of your career that have the biggest impact on your later income and wealth. Make sure to use this valuable time correctly and follow some simple pieces of advice. And how do you make sure your salary and wealth consistently keeps growing throughout your career? Find out here.
When to expect the highest salary increases
I see lots of young professionals getting excited when they receive their first pay raise. Getting excited about your early career pay raises is absolutely OK, but the reason behind the excitement is generally flawed. Young professionals often think their salary will continue to grow throughout their career as it is growing during their 20s. And this is where they are wrong. According to a PayScale study men and women see their salary grow by about 60% between their first job and age 30.
After age 30 the same study conducted by PayScale reveals that the salary increases start to slow down. While men can expect their salary to grow by another 45% up to age 48, women only see a salary increase of about 20% up to age 39. Before anyone now starts to get upset about the inequality between men and women: The data shows that the difference in salary increase is explained for a big part due to men and women generally choosing different industries. However, what is really interesting (or somewhat disturbing) is that by age 39 (or 48) most reach their salary peak. Read further below how you can prevent that. Although the study shows a slight salary increase after age 39 (or 48) this increase often just levels the inflation. This means you will not be able to buy more by getting this additional pay raise.
The difference between negotiating and not negotiating your salary
The study by PayScale illustrates how important it is to negotiate your salary during the first years of your career.
In order to illustrate that, let’s assume that in your first job you manage to negotiate a salary that is USD 150 per month higher than your friend’s salary. This might not seam like a big deal. But after the first year you will already have made USD 1,800 extra compared to your friend. However, it only starts to become interesting if we consider how your salaries will start to diverge throughout your career. The data above suggests that by age 30, both your salary and the salary of your friend will grow by 60%. This means you are now already making USD 240 per month and USD 2,880 per year more than your friend. Let’s assume you have worked for five years by then (you had four pay raises) and your salary has been growing equally over these five years. You made an extra of USD 11,700 by the time you are 30. Going further, let’s assume your salary keeps growing steadily by another 45% to the age of 48. By age 48 you will have made an additional accumulated income of USD 75,852 compared to your friend. Assuming neither your nor your friends’ salary increases after age 48, you will have made USD 125,964 more by age 60 than your friend.
Now let’s say you are a good negotiator and instead of making a 150 more than your friend you make 250 more than your friend per month in your first year. Under the same assumptions as above, this will earn you an additional accumulated income of USD 126,420 by age 48. This means you will have accumulated more additional income by age 48 than your friend by age 60. When you turn 60 you will have accumulated staggering additional USD 209,940.
The example above assumes that your income will simply remain on your bank account. If you’re smart (which I am sure you are – otherwise you wouldn’t be reading this blog;-) ) you will invest your money. While the differences of accumulated income based on your salary alone have been stunning, they become shocking if we include compound interest.
What is compound interest? Compound interest means that you are adding your earned interest on top of your investment. In other words: Rather than paying your interest out, you reinvest it. This increases your investment and allows you to earn a greater return of money while the % remains the same.
So, how will compound interest effect your wealth? Let’s return to the example above where you make USD 150 per month more than your friend. Let’s assume you always invest the additional income and you manage to make 6% p.a. with your investments. Some times you will be below this figure, but as a smart investor 6% is something that you can achieve on a long term average. If you don’t know how to achieve these interest rates get the book Unshakable by Tony Robbins or work together with one of my favorite Financial Planners Jeff Rose. Under the above scenario you will accumulate an additional income of more than USD 148,280 by age 48 and over USD 370,000 by the time you are 60.
Now let’s again assume you focused hard on negotiating your salary early on and managed to get USD 250 per month extra. This will eventually earn you a staggering USD 247,000 by age 48 and over USD 618,000 by age 60.
This means the difference between a good negotiator that is consistently investing his money and one that is not is a mind blowing USD 408,060.
In order to put this in context: The USD 250 difference in the first month of your career will mean a USD 618,000 difference by the end of your career. Isn’t this crazy? Yes, and this is exactly why I emphasize again and again on how important it is that you guys negotiate your salary and keep investing. And don’t postpone that to later!
Why the first years count most
So, why is it so important not to postpone negotiating your salary to later? I mean, when interviewing for your second or third job after already having gained some work experience, you will be in a much stronger position, right? Nope, big mistake – and here are three powerful reasons why.
- The vast majority of employers expects you to do so. A study conducted by Salary.com found that 84% of employers expect potential hires to negotiate for higher pay. Doing so shows confidence, ability to negotiate and preparation (know what salary you can ask for).
- You have the best chance to negotiate a higher salary in your first job. It’s never going to get easier. Employers continue to grow more reluctant towards giving you a pay raise as you get older.
- The money you invest early in your live pays compound interest for the longest. This is why getting into the market as early as possible is one of the best investment advice I can give you.
Do these findings mean it is too late for you if you’re in your 40s, 50s or 60s? No, it is never too late to profit from compound interest or to negotiate a higher salary. Additionally, we have gathered some advice you can follow to make sure your salary keeps increasing. Also if you are not in your fastest growing salary years anymore.
What you can do to make sure your salary keeps growing
- Choose the right industry: The differences in men’s and women’s numbers in PayScale’s analyses was largely driven by job choice. Bardaro from PayScale explains: “Men tend to go into engineering, computer science, management roles and director roles more so than women, and those jobs see fairly consistent pay increases year in and year out.”
- Specialize: What skill set or profile is your firm/industry struggling to find? What skills are important to your company but non of your colleagues posses them? Do your research and get trained. You can be sure that your employer (or other employers) will reward your unique know how. Qualifications that are scarce are just more valuable.
- Switch Job: Absolutely nothing you can do in order to increase your salary in your current position? Start looking around what other employers would pay you. However, make sure not to switch jobs too often. Employers generally do not appreciate candidates that tend to switch jobs too often. Some employers might discard your application because of that alone. And even more important: While this article is mainly about money, it is not the only thing that counts. If you are with your current position and it pays the bills, don’t switch it just because of the money.
- Go to Job Interviews: Adding to the previous point. No matter how much you love your current job, you should be interviewing. Find out what other firms have to offer. Eventually, you might want to tell your employer about your other job offer and see if he is willing to match it.
- Are you ready to get promoted? Which job one level above you might become available soon? Is there a supervisor that seems unhappy and might leave soon? Make sure you are ready to move into that position. You might want to speak to other supervisors and tell them that you would be ready for a new challenge. This way they will have you on the radar once the position becomes available.
- Hang out with the right people: One of the best advice I once got: You become the average of the five people you surround yourself with the most. Therefore, choose your friends wisely. Make sure to hang out with people you admire and already have what you want as much as you can. Learn from them, copy their routines and get inspired!
- Ask for a raise: Again, because it cannot be mentioned enough. A good starting point can be to write down all your tasks and achievements. Compare it to your job description. Anything you are doing that is not on your job description? There you already have the first argument in your favor.
If your employer keeps turning down your request for a higher salary: Ask what you have to do in order to get the raise. Let them give you concrete things you can work on.
Some final advice
Finally: Some patience is required guys! I meet way too many people that want to jump the gun. They want to get their first raise before getting their first salary and they dream of their first promotion before their first day at work. What you put in today will only pay off a year or two later. But if you consistently perform well it will pay off eventually. Therefore, do your future self a favor and work hard now. And prioritize your goals: My advice is to become absolutely relaxed about your long term goals, while being absolutely impatient about your short term goals. What I mean by that: Focus on the next exam, on your next meeting or the next email. Try to over perform on each of these short term tasks and goals. And you will see that you automatically will overachieve your long term goals. More about that in a later blog.
Keep climbing the ladder!