Compound interest turbo-charges your salary, too

Back in the first post in this series on growing your salary or other work-related earnings, I mentioned I’ve really let my income stagnate.

While I currently work in a fun media industry that will never be among the highest-paying sectors, there’s no doubt I could be doing better.

In fact, I’ve earned around the same during the last tax year (2008-2009) as I earned back in 2001-2002!

There are some personal reasons (principally, I did very well in the early years, and also it took me a while to get re-motivated after exiting a start-up in 2007) but let it be a warning to anyone on a good salary. Don’t rest on your laurels!

Just as compound interest multiplies your savings pot, so climbing the greasy corporate pole becoming a happier, more productive employee and advancing your career will really boost your income after a few years.

If you live within your means, then the result can be more money saved, invested and returned to you in spades in years to come.

Focusing merely on cutting costs will never make you even modestly rich, at least not while you’re still young enough to enjoy it. (Compound interest will turn anyone rich if they save a little and live to 100, revolutions and wars notwithstanding).

Let’s consider three salary advancement scenarios for someone earning £35,000 a year (a little over the average male full-time income in the UK):

• Mediocre advancement, gets an average annual raise of 2.5%
• Fair advancement, gets an average annual raise of 5%
• Swift advancement, gets an annual raise of 10%

After 10 years of such growth, each executive currently earning £35,000 a year would then be taking home a salary, respectively, of:

• £44,802
• £57,000
• £90,781

That’s a huge difference!

Assuming our three executives live fairly similar lives in similar neighborhoods, within a decade the higher earner could save and invest as much money as the lower earner makes in an entire year.

A high salary coupled with a relatively frugal mindset can make you rich.

Given that a cheap hands-off index fund is the best way for most people to invest, the higher earner doesn’t even need to devote his weekends to investing in order to get well ahead. Who said life was fair?

Incidentally, I believe it’s not appropriate to use compound interest over longer time periods such as 30 years when working out the affect of annual raises on your salary.

You can reasonably predict a locked-away pension will compound for several decades. But a salary is another matter altogether.

Most people enjoy a decade-long growth spurt in their salary and then stagnate, unless they really shake things up by changing career or moving industries.

If you really want to enjoy high salary increases forever, choose an appropriate career early such as law or accountancy. I’ve friends from university who are now, frankly, raking it in, and in some cases even working a little less hard than in their tougher 20s.

Be an accountant. You’ll lie at parties about what you do, but you’ll sleep in a better house at night!

Try this compound interest calculator to see how your salary could grow.