The Secret of the Compounding Salary

I’m sure that many of you have experienced the torture of the dreaded yearly performance review at work in the past little while.

I happened to be fortunate enough to receive the full raise that I was eligible for this year. While I’m not quite as excited about this as I am about getting a raise without doing anything, a raise in income means increased contributions to my investments and the prospect of an early retirement.

Expect The Unexpected

Because I work in the financial industry, this year has been slightly tough on the company. This means that the annual bonuses that I have been used to in recent years will not be granted this year. Not only will the company not be issuing the familiar 10-12% bonuses,  we are actually expecting nothing – 0%!

Of course, the lack of bonus pay-outs is traumatic for employees. However, people underestimate the effects of the 3% raise in salary.

The Glass Is Still Half Full

Even though it appears that I will not have my bonus money to top-up my retirement savings account, I will receive significant benefits from the small 3% raise that I did get.

1.Life Insurance – My company provides me with life insurance to the tune of 3X my gross salary. This 3% raise equates to a 9% increase in the life insurance available to my family if something should happen to me in the next year.

2.Company Pension – My company provides me with a managed pension plan for which they match 7% of my salary. This raise provides 6% more money being contributed to my pension plan for 2008.

3.Investment Account – I contribute 25% of my net salary to an account dedicated to my dividend growth investments. Obviously, this means an increase to that contribution.

It is interesting how we forget those benefits that don’t necessarily show up in our checking account when our paychecks are deposited. The power of compounding takes effect not only with our dividend stocks or in our high-interest savings account, but with our workplace benefits as well.

Understand and Use Your Company Benefits!

Of course it is our hope that we can retire early if we choose great dividend growth stocks, but we have to take advantage of all of the programs and benefits that are offered along the way. I certainly believe that investing in my company matched pension plan will speed up my retirement process.

So, the next time you hear complaints around your workplace about the lack of bonuses or a cheap 3% raise…just remind yourself of this article and make sure that you are fully utilizing all of the benefits available to you.

6 comments

  1. Your article intrigued me. I have some employees that have maxed out in their pay grade. The company’s policy then is to pay them a lump sum amount. At first these employees thought it was good since they got the money up front, they soon realized that since their base did not increase next year the lump sum would be identical.

    You make some excellent points in your article!

    Best Wishes,
    D4L

  2. Good points, but it is also important to remember that most of that 3% gets eaten up with inflation, so really one better get a 3% raise or you are actually making less money than your did the year prior.

  3. Gardener,
    You are very correct. I guess I was trying to put emphasis on the compounding effect of the benefits. However, I did forget to mention inflation…which in my neck of the woods is higher than 3%!

  4. Good points. People should really understand what benefits are available to them. I have employees that have tuition reimbursement available to them, but unfortunately they don’t take advantage of it despite my pleas.

    I wonder about your retirement account. Do they match your contributions to the plan up to 7%?

  5. Jake,
    Yes, my company does match contributions up to 7%. I fully take advantage of this option, essentially doubling my money immediately.

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