Why Your Company is no Place for Financial Growth! That was the title of a post that was sent to me from the other side of the (little) pond. He was happy to support me after my call for help.
Why Your Company is no Place for Financial Growth
Today a guest post by Paul McGuire from Leave the Bubble. I enjoyed it and I hope you do too!
I’ve been with the same employer for 16 years. They’ve treated me well and provided me with a nice, stable income that’s been the fuel for my retirement journey. In that time I’ve had several different jobs and even a promotion or two. Nevertheless, I’ve been here a little while and decided to take a look back at my time with them. I wanted to see how all this time spent has benefitted me in the wallet.
Over that time, my annual salary has increased 96.67%, which sounds great, right? Averaged over the same timeframe, and ignoring the compounding effect, that means my pay has increased 6.04%. I mean, that’s almost double what it was when I started. But how has that played out annually? What has been my annual growth rate, and knowing that information what should I do with it?
That Ain’t Nothing!
But wait, there’s more to this story! When I started with the company many years ago, family health insurance was free. I simply paid a small monthly amount for dental coverage for my wife and me and our little brood of three. That amounted to well less than 1% of my total paycheck.
Oh to have the benefits of the European economy where healthcare is part of the government services. Yes, I know that comes at a cost of higher taxes, but it sure would be nice if we had that as a benefit. Because, as you’ll see illustrated below, the times are definitely changing with no end in sight.
Today, we now are in a cost-sharing model where we pay 27% of the health premium and 38% of the dental insurance premium. While it doesn’t sound like a lot, especially in today’s ACA landscape, my total share of this insurance has increased 1,652.6% over 15 years – a stunning number by all accounts. To add insult to injury – I work for that very same health insurance provider! You would think the benefit of working for them would be a little better than that! And my oldest two children have grown up and aren’t even part of our healthcare plan any longer, yet there were no discounts when they left the plan.
Today, my share of health and dental insurance amounts to a little more than 4% of my paycheck. To keep the math simple yet still factor in the cost, let’s subtract that from my overall increase, leaving us at 92.67%. Still pretty awesome in terms of salary growth over 16 years, right?
The Devil Within – Inflation
During the same timeframe, inflation in the United States has increased 39.47%, according to the Bureau of Labor and Statistics, or an average of 2.46% per year. How did I derive that number? At the CPI Inflation Calculator site, you can input any dollar value and set of dates to come up with past or present values. Here’s what happened when I put in the value of $100.00 from back in September 2002, the same month I started with my company.
So, factoring out inflation by simply subtracting that percentage from my salary increase yields an increase over 16 years of 53.2% – still not bad. If we just do a simple division (again, without the effect of compounding), we can come to the conclusion that my salary has gone up an average of 3.33% per year.
Let’s Apply the Rule of 72
While we normally see the Rule of 72 applied in the investment world, I think it has merit in this discussion. The Rule of 72 states that you can divide 72 by a given annual interest rate and know how long it will take your money to double at that rate. If my average pay raise remains static, 72 divided by 3.33 equals 21.62 years. At this rate, my effective pay rate won’t double until I have almost 22 years with the company! That’s also not figuring in any changes to my marginal tax rate due to salary increases and now having only one child at home.
In the End…
I’m on salary, and I don’t have the opportunity to earn commissions at work, so there’s very little I can do in the company to grow my income significantly. Although I’ve earned my master’s degree while working here, held positions across multiple divisions in the company, promoted to management and been involved in several high-profile projects, still my real average raise has been 3.33% per year.
Meanwhile, over the same timeframe, my investments in mainly low-cost index mutual funds have grown in the neighborhood of 10% and now that growth regularly exceeds my annual household income from my work. If I just subtract the rate of inflation over that same 16 years at an average of 2.46% per year, my real return becomes 7.54%.
I don’t mean to sound ungrateful (I’m sure several folks will take it that way) but at this point, my money makes more money than I do and grows at more than double the rate of my salary! And I’m also aware that the investments that I have today were funded by working so I’m certainly grateful for the income that enabled me to reach this point. While none of us know what tomorrow brings to the stock market, over the long haul it has reliably provided returns at more than twice my average annual raise. And that’s even going through the stock market doldrums of the 2000s that many call the “lost decade.”
So do yourself a favor – put away as much you can as soon as you can. If you’re going to work for someone else, begin with the highest possible starting salary. Remember that it’s not about what you make, but what you keep. Corporations are not in the business of making its employees rich. Their plan is to tease you along with just enough of a raise to keep you coming back. If you aren’t saving aggressively, you aren’t preparing for tomorrow. Before you know it, you’ll find yourself in the “golden handcuffs”! Something that everyone bemoans as the reason they can’t leave their job.