Free for 90 days: Sign up now and get 90 days managed free after your first deposit. See offer details

Limited time offer: Sign up today and get up to 1 year managed free. See details

Get your next rollover managed free in 2018. Learn how to enroll

Financial Goals

How to Get a Raise and Invest It

Stay on the same spending level when you get a raise, and invest the difference.

Sarah

By Sarah Chang
  |  Published: December 22, 2014

Stay on the same spending level when you get a raise, and invest the difference.

If you invest a $5,000 raise in a Roth IRA, you can grow that money tax free.

Getting a raise is mostly about timing for the company, industry standards and, of course, good performance. But it often comes down to one simple thing: asking for it. And in 2015, you may have to.

A recent National Association for Business Economics study found that just 24% of companies raised wages and salaries in the July-September quarter, down from 43% in the April-June period. It’s the first major decline after three consecutive increases.

And considering the outlook was projected to be the same for the rest of this year, it’s essential for more people to start asking for raises so that they can invest that money, improving their chances of hitting both short- and long-term financial goals.

get a raise

The Importance of Getting a Raise

The sooner you start moving up the salary ladder, the sooner you stand to benefit in ways that go beyond extra cash in hand. Each subsequent raise you earn will be bigger when it’s a percentage of your base salary—and you’ll be able to command a higher starting salary when looking for a new job.

Kali Hawlk, founder of financial content provider Common Sense Millennial, says it’s especially important to be proactive at the beginning of your career.

If you don’t negotiate your salary, she says, then you’re ensuring that your lower earnings number will carry over year to year. Subsequent raises, bonuses, and promotion amounts will be lower not just now, but throughout your working career.

Here’s an example:

John and Joe are both 30 years old and make $100,000 annually (after taxes). Joe does not ask for a raise, but John asks for a 10% raise. His boss counteroffers with 5% and he accepts.

John now makes $105,000. He invests the extra $5,000 throughout the year ($417 per month) and continues to live on the same salary as Joe. He invests this amount each month over the next five years. Because of the power of compound interest, he ends up with approximately $30,300, while he only put in $25,000 (assuming 7% returns).

In five years, John asks for another raise, this time 10%. His boss counteroffers with 7% raise, and he accepts. John is now earning $112,350. Joe also asks for a raise and gets the same 7%. However, he is now only making $107,000.

Like he did with the first raise, John decides to continue living on his original $100,000 salary and invest the extra income, which has now reached a total of an extra $1,029 per month. Over the next 35 years, with 7% returns, John’s money (including the initial $29,000) will grow to more than $2.2 million, while he only put in approximately $430,000.

Meanwhile, even if Joe invests his raise each month over the next 35 years (around $585 per month), he will end up with just more than $1 million—less than half of what John has.¹

How to Get It

When it’s time to ask for a raise, always go in with a plan, have an exact number in mind, and be ready and willing to negotiate. To make the ask, consider these points:

Timing

If your company has scheduled reviews each year, it’s best to ask for the raise during the review cycle, says Lucy Babbage, who handles human resources at Betterment. If your company doesn’t have those set times, be proactive by asking your manager to put them in place every quarter or every six months.

What You’re Worth

Try websites like Payscale, Glassdoor, and Indeed to research common pay for someone in your position, but your search shouldn’t end there. “The best way to find out what you’re worth is to talk to other people in your industry,” Babbage said. “Go to meetups, find other people you know who are working in the same space and, without directly asking their personal salary, ask what a good range is for your role so they can give you some knowledge, peer to peer.”

Your Accomplishments

The best way to show you deserve a raise is to clearly communicate to your manager what your accomplishments have been in regards to what your goals are, Babbage says. Look at your goals and outline how you’ve not only achieved them, but how you’ve gone above and beyond and, therefore, deserve more than just a cost-of-living adjustment.

Other Options

If your company can’t afford to give you a raise, consider other options. If you’re at a company that can give you equity, that’s a good alternative, Babbage said.

How to Invest It

Getting a raise is an opportunity to save without reducing your consumption, which is one of the core problems most people have with saving in general, says Dan Egan, Director of Behavioral Finance and Investing at Betterment.

Here’s an example: If you’re making and spending $4,000 a month (after taxes), and you decided to cut back on spending to $3,000, you’re going to feel that. “You’re going to go out to dinner less, you’re going to spend less. So, in that case, saving feels bad,” Egan said.

However, if you’re spending $4,000 a month and you get a raise to $5,000 a month, it’s an opportunity to save more without reducing your consumption. Instead of investing your entire raise, save half of it. So, if you get a $1,000-a-month raise, spend $500 and save $500.

¹This example was calculated using Investor.gov’s compound interest calculator: http://www.investor.gov/tools/calculators/compound-interest-calculator#.VIXZF2TF91o. This example assumes that John and Joe are receiving 7% returns; it also assumes that their raises listed here are after tax deductions.

More from Betterment:

Determination of largest automated investment service reflects Betterment LLC’s distinction of having the most accounts, based on Betterment’s review of account numbers self-reported in the SEC’s Form ADV, across Betterment’s survey of RIA automated investment services. Determination of fastest-growing automated investment service reflects Betterment LLC’s distinction of obtaining the largest number of new accounts since January 1, 2014, based on Betterment’s review of account numbers self-reported in the SEC’s Form ADV, across Betterment’s survey of automated investing services.

Recommended Content

View All Resources
What to Do When You’re Itching to Invest in Bitcoin

What to Do When You’re Itching to Invest in Bitcoin

Cryptocurrencies like Bitcoin and Ethereum are hot. We have some thoughts on how to responsibly scratch your "crypto-itch."

Diversification: Winning the War by Losing Battles

Diversification: Winning the War by Losing Battles

Diversification involves knowingly accepting some individual losses in order to gain long-term returns.

The Difference Between Vanguard and Betterment

The Difference Between Vanguard and Betterment

I’ve been asked a lot in the last few months in the transition from my old role at Vanguard to my new role as Chief Growth Officer at Betterment – what’s the difference between the two companies?

Start your investment plan

I am

years old and

  • Not Retired
  • Retired

.

My annual income is

.

Experience the new way of investing. Sign up today.

Start investing smarter

Get started

Refer a friend or family member and get up to 1 year managed free

Refer a friend

How would you like to get started?

Your first step toward a smarter investing future starts here.

Create a Betterment account

Go ahead and join the smart, modern way to invest.

See what we can do for you

Tell us a bit about yourself, and we’ll show you the benefits of investing with us.

Get a free investing checkup

Help us get a sense of your investing approach and see how you could improve.

Transfer a 401(k) or an IRA

Move an existing retirement account into a Betterment IRA.

Download the mobile app

Enjoy the Betterment experience anywhere on the go.

For more information and disclosures about the Betterment Resource Center, click here. | See our contributors.