raises – are they for suckers?

If you work for an employer, chances are that you get paid a fixed amount and it is increased every year. Chances are also good that you are being paid in money, which is subject to inflation. The result is probably that your real wages are probably stagnant. As the New York Times pointed out recently:

Americans earned a smaller average income in 2005 than in 2000, the fifth consecutive year that they had to make ends meet with less money than at the peak of the last economic expansion, new government data shows.

Total income listed on tax returns grew every year after World War II, with a single one-year exception, until 2001, making the five-year period of lower average incomes and four years of lower total incomes a new experience for the majority of Americans born since 1945.

Go read the article before it goes in the (pay to view) Times archive.

I calculated my own raises, year over year. My best year was a 62% raise, and my worst was a three-year tie at 4%. The 62% raise was an exception to the rule. I left a stable job in a small Southern city, Memphis, and moved to the gargantuan metropolis of Moscow and received, in effect, hazard pay. The actual raise in real terms was even more, because I didn’t have to pay US taxes on it.

Over the last 5 years, my average annual raise was 5% – so my salary this year is 27% higher than my salary in 2002. For the last 5 years, the inflation rate was 14.29% (inflationdata.com). Therefore, my real purchasing power increased approximately 13% over 5 years.

This is not tremendous growth. If you had an investment that had returned no more than 13% over five years (more or less 3% annually) you would probably dump it. Isn’t your career an investment of sorts?

I am a consultant, so there is no real possibility of huge upward leaps in my salary unless I go back to a salaried job. I was a senior manager when I snuck out of the workforce and into consulting, so I would probably go back in as a senior-level manager or a very junior executive. I know from talking to various investment bank clients that I already make more in base salary than an experienced vice president, let alone a junior one. The bonuses are much larger, but are certainly not guaranteed. So while I might eventually hit the big time executive salaries, chances are good that the 4-7% kind of range would continue. Another consideration is my time, since as a junior executive I’d probably be pulling long hours trying to prove myself. I have grown accustomed to my consulting “8-‘n’-done.”

So if you work in a salaried job and love it or feel that you are gaining valuable experience, feel lucky. But if you are expecting to become rich as a salaried employee, sit down and calculate your raises over the last five years, and honestly assess your chances of becoming an executive at what you do. I think you’ll find that while being employed can maintain your standard of living, it’s unlikely to make you wildly rich.

How can you become rich – and should you want to? Coming soon…

16 Replies to “raises – are they for suckers?”

  1. I’ve averaged a 7.2% annual rise since I graduated, but then I’m only in my late twenties. I expect it’ll slow down significantly from this point. Which is ok, I’m not really into being rich through my income.

  2. Since last year, I have increased my pay by 21%, which is a combination of a few raises. Before that…I can’t think of it off the top of my head…

  3. I think if you want out the rat race, a salary is what allows you to stash enough away for the exit. The exit might be a high risk high reward job at startup, starting your own business, aggresive investing, or even moving to low cost country. Either love your job, or have a plan while you earn the salary.

  4. Pingback: Advanced Personal Finance » Blog Archive » Carnival of Personal Finance #116 - NSA Edition
  5. A steady job may not be the fast train to wealth, but you can do it. Although, I do agree that people should really not settle, and continually look for ways to improve their career/income.

  6. Great comments! I guess to clarify what I’m getting at: waiting on raises to get you rich won’t work. You can work on saving, or investing, or alternative income to supplement your main income. For most people, though, if you’re waiting for your salary to grow fast enough for you to become ‘rich’ you’ll wait forever. That extra 3% per year will get eaten up by new expenses. The only way to financial independence is through frugality, investing and alternative/”passive” income (the link by moneygardener, above, illustrates how investing beats raises).

  7. You are forgetting that investing comes with RISK of losing your investment – that’s why you make a good percentage return on your money. Going to work everyday does not carry risk of loss. You cannot compare investing returns with your salary increase.

  8. @Joe: I understand that there’s a difference, but let me ask you – how much risk is there in an FDIC-insured high-yield savings account? Going to work does carry a risk of loss – your income stream can be cut off if you get laid off.

    But I do understand it’s a comparison of apples and oranges – I’m merely doing it to highlight how we settle for less of a return on our careers than we would be willing to accept in an investment.

  9. Yet…salary is only part of the equation. If the total comp is going up every year (incl. bonus and stock) then that’s a fair trade.

    RE: “you won’t get rich off a salary” who says?

    Totally depends on 2 factors: 1) what rich is to you (your #) and 2) what you do with the income you receive.

    We started with very little 8 years ago and are now flirting with 7 digits for the first time (on balance sheet).

  10. @Finance Girl – I’ll be picky and say I was only talking about salary 🙂 since obviously if you throw in more exotic compensation like options or significant bonuses (like investment bankers getting 110% of their base) you’ll have a chance to do much better. I’ll actually cover your 2 factors in future posts: what does getting rich MEAN for the first, and just a general mess of investing-related posts for the second.

    If your 7 digits are all from salary and don’t include the net worth of your home then congratulations! Yet I’ll still stick by my point: if you expect to sit back and let raises get you rich, you will be waiting a long time. You may invest your money wisely or be terribly frugal or start a great business, but none of that comes to people who just spend their whole salary and wait for the next tiny bump!

  11. Pingback: Brip Blap

Comments are closed.