Compound interest is often considered a wonder of the world, and this wonder can work wonders for your long-term investment accounts. When your interest is compounded, it means you earn a consistent percentage on your money year after year. For example, if you earn 9% on your money, you have doubled your investment every 8 years. Compound interest is based on both the initial investment and the accrued interest from the previous period. Funding frequency varies depending on your financial institution, but can range from daily to annually.
When your investments are subject to compounding, it can work to your advantage and you may find it easier to build wealth exponentially. You can also use compound interest to your advantage when paying off a loan. For example, if you pay your mortgage or other loan twice a month instead of monthly, you can reduce the amortization period and save interest along the way.
Compound interest and your career
What does compound interest have to do with your career? More than you think. Although your salary is not directly compounded, the career trajectory often follows a pattern similar to the exponential growth of compound interest. In your career path, you often move forward instead of backward. For example, if you make $100,000 a year and accept a new position with a new salary, you are likely to accept a higher salary than what you currently have. Each career step you take should allow you to advance further, reinforcing the cumulative impact of your salary with each career change you make.
Improve your path to retirement with negotiation
There is another aggravating factor that many people overlook during their careers leading up to retirement, and that is the art of negotiation. When you’re looking for the next step in your career, you’re not just looking for increased money and benefits, but also the next title or level that makes sense for your job and your field. Trading a new title, you are creating a new baseline for yourself. For example, if you move from an Associate to a VP level or from a Director to a C-Suite, you have created a new stage for yourself in the market and you will only continue to rise in title from now on.
Your goal should not only be to increase your salary exponentially throughout your career path, but also to improve your title. Both will exponentially increase your value and help enrich your career.
How Your Career Can Get Worse
You don’t have to negotiate a new title and a raise every year. Even in years when you only receive a cost-of-living increase, the magic of compound interest works.
For example, if every 5 years you get a promotion, even in the intervening years, you will continue to increase the raise from the year you received the promotion. If you’ve negotiated up to $100,000 in salary, the “normal” 3% cost-of-living increase is worth more on your $100,000 salary than it would have been before your promotion; if you were stuck at a salary of $50,000, the same 3% increase is only $1,500.
Mixed careers young and old
The idea of increasing your salary and your career is just as important at a young age as when you are older. The sooner you can start raising your salary and title, the more you should let the raises work in your favor. That said, there’s no bad time to champion your cause and your career. As you approach retirement, those last few years with a very large salary at a compound rate can make all the difference in your finances.
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