Making More Money: The Importance of Even Small Salary Increases

It goes without much argument that all things being equal it’s a good idea to be making more money than less.  The extra money can be used to pay down debt, save faster, invest more, or simply buy more stuff.  And who doesn’t like those things?

Getting a new job that pays more or a raise from a current gig is a great feeling.  But just how valuable is really?  And is it worth chasing even a few thousand dollars more?   For many of us the answer is absolutely, and more so than you may know.

Let’s imagine a typical worker we’ll call Sally. She has been working at the same job for two years now and makes $50,000 a year.  She’s considering another job offered to her that pays $55,000 a year, but she’s unsure it’s worth the change as it doesn’t seem to be much more money.

After all, $55,000 is only $5,000 more a year than she’s currently making, and that works out to a 10% increase in salary.   This is not a trivial amount, but certainly not enough to change Sally’s life, right? Well, maybe it is.

Sally currently saves $3,500 a year
Sally currently saves $3,500 a year

If Sally’s at all normal she’s likely spending a good portion of her $50,000 salary each year.  After taxes, rent, food, transportation, clothing and everything else that life throws her way, Sally may only be able to save $3,500 a year.

But, if Sally were to now make just $5,000 more a year (which we’ll call $3,500 after taxes for easy math), and she kept her spending to the same amount next year, her savings would now be $7,000 a year – twice the amount as before!

Sally can save for retirement at double the pace or pay off her student loans twice as fast – that’s pretty good!

What if Sally instead convinces her current employer to not only match the other offer but give her a raise to $60,000 a year?   Well, now she would be able to save three times as much as she could before!

Sally makes 20% more and saves 200% more
Sally makes 20% more and saves 200% more

Here’s yet another way to think about Sally’s situation: Every extra $5,000 dollars Sally earns per year saves her a whole year of working at her current salary to save the same amount.  If Sally makes $10,000 more a year she’s basically saving three years worth every year at her current pace.

Now let’s introduce Sally’s best friend Barbara.  She works at a different company making $100,000 a year.  But, because Barbara and Sally hang out all the time and shop together at the same stores and eat at the same restaurants together, Barbara spends the same amount per year as Sally.  But because Barbara makes an extra $50,000 a year (which we’ll call $35,000 after taxes, staying with the same ratio), she’s able to save 11 times as much as Sally!

Did you catch that last bit?  Barbara makes twice as much as Sally but is able to save 11 times as much.

Barbara is able to save 11 times as much as Sally
Barbara is able to save 11 times as much as Sally

Key takeaways:

  1. It’s great to make more money  (you already knew this one)
  2. If you can keep your spending the same even a small raise could have big implications
  3. If you can somehow make a lot more money and keep your spending in check you can really separate yourself from the crowd

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