There are seven steps you can take to earn higher increases and when you do, you can literally earn millions of dollars more over the course of your working lifetime.
But there’s another important piece to maximizing your career earnings. This too can add up to a significant amount of money.
The opportunity: making your first job’s starting salary as high as possible.
What’s a High Starting Salary Worth?
The impact of a high starting salary can best be illustrated through an example.
Let’s look at the following individuals:
- Chuck begins working at 22, has a starting salary of $35k, and earns annual increases of 3%.
- Jill begins working at 22, has a starting salary of $40k, and earns annual increases of 3%.
Obviously, Jill will make more over a 45-year career. But how much more?
- Over 45 years, Chuck earns $3.2 million.
- Over 45 years, Jill earns $3.7 million.
Yep, Jill earns half a million dollars more simply by starting a bit higher than Chuck.
This is because that $5k advantage compounds upon itself over 45 years, making Jill much better off.
BTW, even earning just 3% increases, they both make over $3 million during their lifetimes, a point that shouldn’t be passed by quickly.
High Starting Salary is Worth Even More
USA Today covered this same issue and had the following conclusions:
A study from George Mason and Temple University found that an employee who neglects to negotiate their first-ever salary could lose out on $600,000 over the course of their career. Yes, there are other variables to consider with this figure, but it shows just how much not asking for more money can add up over time. You lose out on hundreds of thousands of dollars.
This study determined that those who negotiate on starting salaries usually end up with $5,000 more than their non-negotiating counterparts. That amount might seem like chump change at first, until you factor that into the entirety of your career, which is where that freakish extra $600,000 over the span of a 40-year career comes from.
They are assuming that average annual increase are more than 3% and thus get higher numbers. But the conclusion is the same: having a higher starting salary can earn you a boatload of extra money over the course of your career.
Getting a Higher Starting Salary
This then begs the question of how to start with the highest salary possible. A few thoughts:
- Make sure there’s some competition. Nothing encourages an employer to up a salary offer more than having multiple job offers. This doesn’t mean you need to take the job that offers the highest salary, but if there’s a position you want offering $30k a year and one you’re “ok” with offering $40k per year, you can use the higher salary offer at place #2 to get place #1 to increase their offer a bit.
- Be willing to walk away. This goes great with the tip above. If you have other job options and don’t need to take any specific offer, you have the ultimate power — the power to walk away. You want to be courteous at all times, of course, but you can also communicate to the potential employer that there’s a minimum standard which has to be met or you’re not interested. I’ve had this happen a few times in my career (not with my first job, but later ones) and have been able to increase initial offers because I drew a line in the sand and said I’d walk away if I couldn’t get what I needed (FYI, this is much easier to communicate to an intermediary like an executive recruiter of HR person than to the hiring manager herself.)
- Know how to negotiate. There’s a reason being able to negotiate is a skill that grows your career earnings. In this example alone we can see how it’s worth up to $500k! The keys are to 1) know what your potential employer wants, 2) communicate how you can provide it better than anyone else, and 3) demonstrate why it’s worth extra pay. If you can do this, you have a very strong position and should be able to negotiate a higher salary. For more tips, here’s a great article on how to negotiate your first salary. You can also Google “how to negotiate a better starting salary” and get lots of good advice.
- Ask for a review sooner. If the employer isn’t able to give you what you want immediately, ask for your salary to be reviewed after a short period of time. Most companies will review salaries after a year. Instead, ask for your review in six months. This will give you time to prove your worth and demonstrate that you deserve a salary increase — which is the key to getting approval when you ask for a raise.
- Trade other perks for a higher salary. Perhaps the company offers you something that you don’t value (like a club membership, paid parking near the office, etc.). Ask them to forego that expense and instead give you the money in your salary.
In the end, the company might not budge on salary at all. If you still want to take the job, I’d suggest you ask for at least something — flexible work hours, working from home on certain days, more vacation, and so forth. If you can’t get extra salary out of them at least try to get more value.
Starting Salary Versus Higher Increases
Now let’s compare the value of starting with a higher salary to getting higher annual increases to see which is worth more.
As you’ll see, there are some interesting interactions here.
Consider this scenario:
- Chuck starts working at 22, has a starting salary of $35k, and earns annual increases of 4%.
- Jill starts working at 22, has a starting salary of $40k, and earns annual increases of 3%.
So Jill begins with a $5k (14.3%) head-start on Chuck, but Chuck earns 1% more in increases each year.
Here’s how they end up:
- Over 45 years, Chuck earns $4.2 million.
- Over 45 years, Jill earns $3.7 million.
A few thoughts:
- Chuck earns half a million more than Jill even though he started behind her. That extra 1% can make a HUGE difference.
- Chuck earns an extra $1 million at 4% than he did at 3%. Let me say it again: That extra 1% can make a HUGE difference. So it’s worth a bit of extra effort to get higher increases, right?
- To earn as much as Chuck with 3% raises, Jill would need a starting salary of over $45k — over $10k (28.5%) higher than Chuck’s starting salary.
These numbers tell you that if you had to choose between a higher starting salary but lower increases versus a lower starting salary but higher increases, as long as the starting salaries were relatively close to each other, the higher increasing job would be much better.
Higher Starting Salary AND Larger Increases
But why do only one of them? What happens if you start high and get good increases?
Consider these options:
A. Chuck starts working at 22, has a beginning salary of $35k, and earns annual increases of 3%.
B. Chuck starts working at 22, has a beginning salary of $40k, and earns annual increases of 3%.
C. Chuck starts working at 22, has a beginning salary of $35k, and earns annual increases of 4%.
D. Chuck starts working at 22, has a beginning salary of $40k, and earns annual increases of 4%.
E. Chuck starts working at 22, has a beginning salary of $45k, and earns annual increases of 4%.
F. Chuck starts working at 22, has a beginning salary of $40k, and earns annual increases of 5%.
G. Chuck starts working at 22, has a beginning salary of $45k, and earns annual increases of 5%.
Here are the total earnings for each over 45 years:
A. $3.2 million
B. $3.7 million
C. $4.2 million
D. $4.8 million
E. $5.4 million
F. $6.4 million
G. $7.2 million
We could go on and on, but you get the point.
The conclusion, of course, is to do both.
Do all you can to begin with a high starting salary as well as get high annual increases.
Here were the numbers I was looking at when I graduated:
- Earn $20k at 22 out of undergrad school. ($20k was probably generous, but it makes for a round number.)
- Earn $40k at 24 out of MBA school.
My results for each would have been:
- $1.9 million over 45 years at 3%.
- $3.4 million over 43 years at 3%.
The extra two years for the MBA was kinda worth it, huh? In the end that MBA would have been worth an extra $1.5 million. Not bad for a two-year investment.
Of course, I didn’t get 3% increases, I got 8.16%. (BTW, I also didn’t work 43 years, but that’s for a different post.)
In other words, I did both: made an investment of time and money to start higher as well as worked hard to get larger-than-average annual increases.
And it paid off for me.
One mistake I did make is that I didn’t negotiate on the $40k. I simply took it. I could have made much more if I could have gotten it to $45k or even $42k.
But I was young, knew next to nothing, and was simply happy to have a job after six years of school.
Oh, and the job was with a “name brand” company, so I did get value there. Working there put me on the road to earning six figures within seven years.
Just to be clear, negotiating a higher salary is not just a good idea for your very first job, but for any new job you’re taking — either within your current company or for a new one.
At the beginning of your career, a higher salary gets you started at a higher level.
During your career, higher salaries when you change jobs contribute to those all-important annual increases that can earn you millions more.
So be sure to negotiate higher salaries whenever you switch jobs. Your income and net worth will thank you for doing so.