This article, written by Sarah Chang, originally appeared on Betterment.
Getting a raise is mostly about timing for the company, industry standards and, of course, good performance. But it often comes down to one simple thing: asking for it. And next year, you may have to.
A recent National Association for Business Economics study found that just 24% of companies raised wages and salaries in the July-September quarter, down from 43% in the April-June period. It's the first major decline after three consecutive increases.
And considering the outlook was projected to be the same for the rest of this year, it's essential for more people to start asking for raises so that they can invest that money, improving their chances of hitting both short- and long-term financial goals.
The Importance of Getting a Raise
The sooner you start moving up the salary ladder, the sooner you stand to benefit in ways that go beyond extra cash in hand. Each subsequent raise you earn will be bigger when it's a percentage of your base salary -- and you'll be able to command a higher starting salary when looking for a new job.
Kali Hawlk, founder of financial content provider Common Sense Millennial, says it's especially important to be proactive at the beginning of your career.
If you don't negotiate your salary, she says, then you're ensuring that your lower earnings number will carry over year to year. Subsequent raises, bonuses, and promotion amounts will be lower not just now, but throughout your working career.
Here's an example:
John and Joe are both 30 years old and make $100,000 annually (after taxes). Joe does not ask for a raise, but John asks for a 10% raise. His boss counteroffers with 5% and he accepts.
John now makes $105,000. He invests the extra $5,000 throughout the year ($417 per month) and continues to live on the same salary as Joe. He invests this amount each month over the next five years. Because of the power of compound interest, he ends up with approximately $30,300, while he only put in $25,000 (assuming 7% returns).
In five years, John asks for another raise, this time 10%. His boss counteroffers with 7% raise, and he accepts. John is now earning $112,350. Joe also asks for a raise and gets the same 7%. However, he is now only making $107,000.
Like he did with the first raise, John decides to continue living on his original $100,000 salary and invest the extra income, which has now reached a total of an extra $1,029 per month. Over the next 35 years, with 7% returns, John's money (including the initial $29,000) will grow to more than $2.2 million, while he only put in approximately $430,000.
Meanwhile, even if Joe invests his raise each month over the next 35 years (around $585 per month), he will end up with just more than $1 million -- less than half of what John has.¹
How to Get It
When it's time to ask for a raise, always go in with a plan, have an exact number in mind, and be ready and willing to negotiate. To make the ask, consider these points:
If your company has scheduled reviews each year, it's best to ask for the raise during the review cycle, says Lucy Babbage, who handles human resources at Betterment. If your company doesn't have those set times, be proactive by asking your manager to put them in place every quarter or every six months.
What You're Worth
Try websites like Payscale, Glassdoor, and Indeed to research common pay for someone in your position, but your search shouldn't end there. "The best way to find out what you're worth is to talk to other people in your industry," Babbage said. "Go to meetups, find other people you know who are working in the same space and, without directly asking their personal salary, ask what a good range is for your role so they can give you some knowledge, peer to peer."
The best way to show you deserve a raise is to clearly communicate to your manager what your accomplishments have been in regards to what your goals are, Babbage says. Look at your goals and outline how you've not only achieved them, but how you've gone above and beyond and, therefore, deserve more than just a cost-of-living adjustment.
If your company can't afford to give you a raise, consider other options. If you're at a company that can give you equity, that's a good alternative, Babbage said.
How to Invest It
Getting a raise is an opportunity to save without reducing your consumption, which is one of the core problems most people have with saving in general, says Dan Egan, Director of Behavioral Finance and Investing at Betterment.
Here's an example: If you're making and spending $4,000 a month (after taxes), and you decided to cut back on spending to $3,000, you're going to feel that. "You're going to go out to dinner less, you're going to spend less. So, in that case, saving feels bad," Egan said.
However, if you're spending $4,000 a month and you get a raise to $5,000 a month, it's an opportunity to save more without reducing your consumption. Instead of investing your entire raise, save half of it. So, if you get a $1,000-a-month raise, spend $500 and save $500.
¹This example was calculated using Investor.gov's compound interest calculator: http://www.investor.gov/tools/calculators/compound-interest-calculator#.VIXZF2TF91o. This example assumes that John and Joe are receiving 7% returns; it also assumes that their raises listed here are after tax deductions.More from Betterment:
- This Year Don't Make Resolutions -- Create Habits
- 14 Productivity Hacks to Improve Work Happiness
- Your 2015 Tax Season Calendar
Sarah Chang is a contributor for Betterment, the largest, fastest-growing automated investing service, helping people to better manage, protect, and grow their wealth through smarter technology (learn more here.). She is also the Editor-in-Chief of GoGirl Finance, a personal finance website that helps women gain confidence when dealing with money. Prior to joining GoGirl Finance, Sarah taught history and government at the high school level. Her writing has been seen on The Huffington Post and The Stir. She also owns and authors The Stroller Ballet, a lifestyle and parenting blog.