We’ve talked several times about the value of growing your career, which then allows you to earn better than average annual increases.
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
Glassdoor 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.
Yep. Wow.
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.
My Results
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.
Always Negotiate
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.
P.S. For those who prefer a video version of this post, see the ESI Money YouTube channel.
Hi ESI,
In case I have not mentioned it before, you got a great blog over here. We probably reference it in almost all our posts we publish. We like that it also touches on the Earning side of the equation, just like our blog. Keep up the good work!
About this article, I agree with you that the starting salary makes a huge difference. Just like you I started at $40K/yr and just like you I made a mistake of not negotiating, I was just glad I had gotten a job :-).
However, that was a big mistake as it took me years to recover from that after switching companies.
Great write up, ESI. It’s important to understand how much of a difference annual raises make and why you should negotiate for one each year. When it comes to starting salaries, I would also add the importance of knowing what to pursue before you start college.
Degrees like accounting, engineering, and nursing have starting salaries well beyond $60k. Starting at $60k versus $40k is going to make a huge difference over the course of your earning years.
Wow, it always gets me to see how the numbers play out in the long run. I think one of the hardest things for a new-grad is the willingness to walk away. It can be scary to say “no, I’m worth more” and then back it up by a willingness to “leave the room”, but it can be vital in a negotiation!
Which is much easiers when you aren’t $100K in student loan debt. I tell young kids to not have any debt so they walk away from a bad job.
Great post! It baffles me that people don’t negotiate their salary. More often than not, if you ask for something and can make a good business case, you’ll get it.
So there’s really something to the “E” in ESI?! I love how you support your arguments with numbers, ESI. My career was similar to yours, except I chose to pass on the MBA. I started at $22k in 1985, and earned big increases in my first 10 years (See my “How to be a 401k Millionaire” post on BudgetsAreSexy).
There’s little doubt in my mind that you should pursue both. Since most folks reading this have already earned their first salary, it’s best to focus on doing whatever you can to get promoted and earn the highest possible salary increases throughout your career. You’ve got some great content on how to maximize your raises, hope folks snoop around on your site and take action as a result.
Wow! those numbers are amazing. You’re right, negotiate, negotiate, negotiate. Not just on your salary but also on your vacation leaves. I remember the time when during a job interview when my wife asked for a four-week vacation instead of the regular two-week vacation and ended up getting it.
In the current job I have, there was zero ability to negotiate vacation time. We can accumulate comp time, but not the same. One of reasons I left a 4 week vacation job for 2 weeks was the promise of promtion working under the person that was going to retire. Well, the promotion didn’t happen and so when I vest in my pension in 33 months, I am going to retire. There is no room for any other promotion and raises are few and far between in the gov’t world
I unfortunately did not negotiate my first job but I have every job since. It was a combination of not knowing and just being glad to have a job. Then again timing is also important. Mid dot com crash a computer science grade didn’t have much room to negotiate, but now with markets high competition is such that you definitely should negotiate.
Great advice for new grads. I did not have the confidence at age 22 to negotiate a higher salary. I was just happy to have a job offer. It is interesting to see how compounding works with wage increases over the course of ones career.
One thing as a 22 yo, you may or may not have a choice to negotiate depending on your skill level. If you are coming out of college, what can you offer right off the bat? If the company has two 22 yo that they are considering and one says “pay me 45K or I don’t come” and the other says “I’ll take 40K and when do I start”, who is the company going to hire? Is it better to start getting experience while a decent paycheck or waiting on the sideline until someone pays you what you want to get?
At least you are getting experience and getting a decent paycheck. Six months later, you could use that as a stepping stone for a raise or go to another company for higher pay. Meanwhile, the other person could still be on the sideline waiting for a company to pay the “$45K” that they want. You just lost six months of decent pay and experience.
Just a thought.
Another great post ESI, and like others have said, I do love how you support it with numbers. A couple of comments I’d be interested in hearing you and your readers thoughts on.
I have found when negotiating salary that it’s best to do your research and make the conversation about more than just “the number”. For instance, maybe you don’t need health insurance and could ask the company to bump your initial salary for foregoing the health insurance cost to the company. Or if you know they have certain committees or activities, you could ask for a higher starting salary but also offer to be a part of or run those meetings/activities. If you just say “I want a higher starting salary” without bringing additional value, it would be harder for the company to agree to it. But from an employer perspective, a company would rather hire someone who knows how to respectfully negotiate and shows initiative to take on more responsibility (even before hire) than only going with the cheapest employee. A lot of times companies end up losing in the long run by going with the cheapest option in the short run – it’s your goal as a prospective employee to make the company see you as good long-term investment.
I’m curious on people who have recently gotten their MBA what their take is on the value of it. I received my MBA just a few years ago and other than being able to say I have it, I haven’t seen any real value from it. My employer at the time didn’t even say congrats on completing the program while working full time – nada. And while I didn’t go to a top tier school (Harvard, Yale, etc.) it was from a large accredited and respectable university in the South East. I didn’t find the classes at all challenging and while the connections with the professors and fellow students have been good, I don’t know that it’s impacted my income at all. Just curious if others have had similar experience…
One final question: do you see getting a particular skill in school – accounting/CPA, engineering, etc. – better or worse from a job and salary perspective than a more general liberal arts education. I’m trying to help a friend who has a more general background and he keep saying he wish he had gone to school to just learn a single skill – like pharmacist or accountant – instead of a general “fluffy” major like Business or English.
Couple questions:
1. What have you done to try and capitalize on the MBA? (i.e. look for other jobs)
2. Is it from a school most people would recognize (i.e University of Georgia) or from more of a regional school?
Michael –
I double majored in English and History from Tufts University (Jackson College, to be exact). I am a Gen Xer, and I am the only one amongst my siblings without a graduate degree. Everyone (except me) thought I would either get an MBA, or become a teacher once I graduated. I never did go back to school & I never wanted to become a teacher, but I did enter the 2 comma club just a few months ago.
I used my education as well as my brains to figure out how to FIRE. I’ve worked in several industries from law, to sports, to technology. I have been fired, and I have been laid off. I have also worked in 6 states. I believe all of these have worked to my advantage, because I chose to make lemonade from the lemons, and to recognize my own strengths but more importantly, my own weaknesses when it comes to my daily work. I’ve been with a Fortune 10 company for almost 10 years now, earning what I consider to be a very generous salary, because I have been willing to do what needs to be done. My area had layoffs just 4 months ago, yet I am getting a promotion tomorrow.
My feedback to you is that your advanced degree will help you in your career as much as you make use of it. Any number of my college classmates have struggled to make ends meet, even though they have the same bachelor’s degrees I do, because they did not pro-actively own their own careers. Your diplomas are just paper in a frame on the wall if you do not pro-actively engage in using the education you earned while taking those graduate classes.
Yes, I think you are spot on there. And I’m the first to admit that I got it more because I always said I would get an MBA and because of the knowledge I would gain from it. Thanks again for a wonderful response Lisa and continue being proactive and making the most of it!
Respectfully Disagree! Those days are over where you were held back by the starting salary.
Today millennials are jumping from their jobs after 3-4 years of experience and you can make that a big bump every time you jump, I personally had a 100% jump when I switched jobs.
The days of a stable paycheck are over, the higher base you have the hire chances of you getting laid off! The best jobs are those that offer a average base and high commission/performance bonus structure.
Wouldn’t you rather have a 100% jump from a $40k salary than a $30k one?
Even if the second job amount was the same (meaning the jump from $40k was smaller in percentage terms), you still ended up making more while you held job 1.
I pursued a grad degree which in retrospect I have not leveraged properly. For that matter, I didn’t realize I was just floating through until I started reading your blog and some other finance/career blogs. Career management, negotiating, understanding all the (power and other) dynamics at work is all so important. Just last Friday I got a promotion and reached out to Mr and Ms 99to1percent (one of the newer but awesome blogs) on advice on how to negotiate (and they were gracious enough to reach out to you too for your input as well 🙂 . I was going to post a message but it was awesome they reached out). I’ve spoken to my manager today but I expect to get an answer in a few days/weeks – one way or the other. I will always negotiate going forward!
Good for you! Let me know what response you get.
Pay raises aren’t always gauaranteed and neither is job promotion. Making more doesn’t mean one person won’t spend more. Chuck might be into cars and boats and Jill wants a large house. Finance comes down to many things and reading some behavioral finance articles shows that making money doesn’t equate to saving money. I have rarely gotten decent raises without leaving a company but my wife has moved up in her company and has always gotten good raises and bonuses.
You want to increase your salary early as fast as you can, realizing that eventually you will hit a ceiling on how much you can command – likely between $250- $400K for a very senior management level and even for a CEO of a small to medium company. I started at a salary at $42K per year and was able to double this by nearly 3 times over my 21 year career- this equates to a compound growth rate of 10%. The longer I work with a similar terminal salary, the lower the growth rate will be over my career period. I actually hit this salary level about 10 years ago so at that time my compound annual rate was more like 23%. That’s why when looking at these scenarios it’s important to check the last few years so they aren’t exceeding the likely market ceiling.
The faster you get to a higher salary, the faster you will be able to get to FIRE. It’s far easier to save a large portion of your income when you are making more.
-Mike