Welcome to Financially Well, the finance podcast for Millennials. The biggest reasons to ask for a raise right now only relate to inflation, right?
For example, try to recall the most recent inflation headlines you’ve seen. In doing so, you may notice a theme: a significant focus on spending. In Time, one headline reads, “Inflation is Hitting Everyone’s Budget.” In Forbes, “How to Budget for Inflation and Higher Prices.” From CNBC, “What’s More Expensive as Inflation Costs Families.” And, perhaps most tellingly, from NerdWallet: “To Fight Inflation, Take Down Food Expenses.”
To be clear, these headlines aren’t inaccurate. And they offer some insight on the stressful financial reality that faces many people around the country right now. But they’re also woefully incomplete.
A simple cash flow analysis is one of the most fundamental – and important – calculations in personal finance. And your cash flow ultimately depends on not one, but two variables. The first one, expenses, clearly seems to offer the key to resolving our individual inflation dilemmas.
Spending-obsessed messaging may not strike you as particularly valuable or novel. It has long served as the star in popular personal finance narratives. After all, haven’t Millennials heard about our spending habits for most of our adult lives? The “latte factor,” if you recall, argued that we all could become rich if we just eliminated our coffee purchases. Then later, an Australian millionaire suggested in a Time magazine interview that we all could become homeowners if we simply stopped buying avocado toast.
Our spending habits, particularly our discretionary expenses, mostly gain attention because they’re the easiest scapegoat. Discretionary spending is highly personal, which makes for an easy target for people who see the world differently. And spending as a solution provides a relatively tidy, quick fix, which lends itself to soundbites and clickbait.
For most people, though, a modest spending reduction isn’t nearly as powerful over the long term as the much more neglected variable in the cash flow equation: increasing your income. And this, aside from obvious benefits, begins to explain the true reasons to ask for a raise.
If you only remember one detail about the relationship between income and spending, I encourage you to commit to memory a line from author Nick Maggulli’s recent book, “Just Keep Buying”:
“Increases in income aren’t followed by similar increases in spending.”
How can you utilize this knowledge (pulled from the U.S. Consumer Expenditure Survey) to significantly improve your finances in the years ahead? Let me repeat Maggulli’s insight, but using my own words: the most underappreciated reasons to ask for a raise or otherwise increase your income relate to the greater number of opportunities you’ll have to save and invest. Because your spending likely will not rise to the level of your new salary.
For many Millennials, their income potential – depending on different short and long-term employment choices – can be significant. But their new savings potential solely from different spending choices often is minimal. In his book, Maggulli explains why your spending likely won’t follow in step with increases in your income:
“Why doesn’t spending go up proportionally with income? Because of something that economists call diminishing marginal utility…. It means that each additional unit of consumption brings about less benefit than the unit before it. Personally, I call it the ‘law of the stomach.’
[When you eat pizza], each additional slice will bring you less joy than the slice before. And, at some point, you will get so full that eating another slice of pizza will actually make you feel worse.
The same thing happens when it comes to spending money. You can see your income increase by a factor of 10, but it is unlikely that you will spend 10 times more on food, housing, or any other necessity as a result. While you might increase the quality of food and housing you consume, these higher quality items are unlikely to cost 10 times more.”
“Increases in income aren’t followed by similar increases in spending.”Nick Maggulli
To be clear, you still need to keep tabs on your spending habits. As Maggulli notes, “Everyone should do a periodic review of their spending to ensure that it isn’t wasteful (e.g., forgotten subscriptions, unnecessary luxuries, etc.). But there is no need to cut your lattes.” You’ll just reach a point at which you no longer can reduce your expenses in a meaningful way. And this is why, as Maggulli says, “If you want to save more, the main point is to tighten up where you can, then focus on increasing your income.”
If you can regularly remind yourself of this cash flow dynamic, you may feel more empowered to devote your energy to income growth, rather than spending cuts alone. And once you start to see progress on the income side of the equation, you can turn your attention to the action that most directly helps to generate wealth: investing in income-producing assets, such as stock market index funds. But what are your most viable options for actually increasing your income?
I would place the most common strategies for increasing your income into three main categories:
And for the purposes of our discussion here, let’s immediately discard suggestions you may hear that can border on patronizing. I’m not going to suggest you pick up a side hustle that doesn’t sufficiently value your time or skills. I’m also not going to propose that you re-sell any personal possessions just to generate a little cash on a one-time basis. When you think about increasing your income, I encourage you to fully leverage the knowledge, skills, and experience that you have worked hard to earn up to this point.
Starting a business may strike you as the most daunting option on this list, especially if you have never thought about yourself as an entrepreneur. But many experienced, highly-skilled professionals have the potential to generate additional income without hiring employees, leasing office space, or buying advertisements.
Instead, think about your expertise, the services you already provide for an employer, and any related “products” that you eventually could create. As an example, you might start out selling your expertise on an hourly basis, perhaps in the form of consulting work. At this stage, you likely can keep your costs very low. Then, over time, you could choose to build a brand around your service that drives additional demand and higher prices. And in the future, you might even create a standardized digital product to sell (such as a course) whose revenue isn’t directly tied to your time.
For many Millennial parents, changing jobs in the near future may feel much more realistic than adding self-employment to our weekly schedules. Even so, our current employment roles – however flawed – come with a form of familiarity and comfort. A new job entails many unknowns that can feel scary and, well, hard.
But as of June 2022, according to the Federal Reserve Bank of Atlanta, the wage gains of “job switchers” reached 6.4%, while gains for “job stayers” increased only to 4.7%.” Employment data consistently shows that one of the most reliable ways to increase your income is moving to an employer who has a particularly acute need for your skills right now.
But you may love your current job. Or certain factors in your personal life may favor staying with your current employer. In this case, one of the best reasons to ask for a raise becomes highly personal. If you’re in this position, you may want to focus most on better advocating for yourself during your next performance review.
As personal finance reporter Julia Carpenter recently wrote in the Wall Street Journal, “Asking for a raise is a good idea every year, but there is extra urgency to do it now as inflation eats into Americans’ budgets. …The combination of high inflation and continued strong job growth makes now an ideal moment to ask for a raise. Raises are the best defense against higher prices and companies might be more receptive than usual to requests for a raise given the tight hiring market.”
In a follow-up article about how much of a raise to ask for, Carpenter wrote, “Individuals are better off trying to calculate their own personal rate of inflation to understand how large a raise it would take to break even, much less gain purchasing power. …And “if larger merit raises aren’t on the table—and may not be as companies are looking to conserve cash in the current market—companies may be willing to offer spot bonuses, one-time payments to recognize performance or boost retention.”
Each of our personal cash flow dynamics is loaded with emotions and complex psychology. Many Millennials are taught to feel guilty about spending money. Meanwhile, few of us are taught how to negotiate a raise. Articles about saving and investing money usually point to our expenses as the key to more progress. And in a relationship, each partner may perceive their compensation differently. But ultimately, despite these obstacles, we must try to stay focused on the fact that the most underappreciated reasons to ask for a raise are about growing your wealth – and improving your life – over time.
Thanks for listening to the Financially Well podcast.
[Editor’s note: this article reflects the transcript (which I’ve edited for clarity) of a recent Financially Well podcast episode.]
Kevin Mahoney, CFP® is the founder & CEO of Illumint, an independent firm in Washington, DC that offers financial planning for Millennial parents. He specializes in navigating the new financial decisions that arise during our 30s and early 40s, such as repaying student loans, buying a house, saving for college, & investing for the future. In addition, Kevin also leads a financial wellness benefits program for Millennial employees around the country, including group speaking engagements.
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