Income Alpha

There’s so much going on in the markets that it’s hard to think in terms of a goals-based framework when investing.

Paying attention to the best-performing stocks, digging through the 52-week low list for bargains or trying to figure out when the next recession will hit are all much more exciting activities than figuring out how much you need to save and invest prudently to reach goals that could be years or decades out into the future.

Investors spend an inordinate amount of time and effort trying to outperform the markets or their peers. For most people, that time would be better spent investing in themselves to increase their income. Saving more is often your best investment decision and the best way to supercharge your savings is to earn more money.

Most personal finance experts will tell you the best way to get ahead is to cut back and live frugally. Living below your means is the only real way to save money but frugality has its limits (and it’s not much fun). Earning more money may be harder to do for most people but it can pay big dividends.

A $10,000 raise early in your career could be worth well over $1,000,000 over the course of a lifetime.

Let’s take a look at a simple example to see how. Let’s say you’re able to negotiate a raise or start a side business that brings in an extra $10,000/year to your net income. Here are three different scenarios that show what this single raise could turn into if you prioritize it in terms of saving:

Assuming you’re able to grow your income at the rate of inflation every year, call it 3%, and earn 6% on your investments, simply saving part or all of this raise each year can give you a huge boost in portfolio growth.

Now think about how much of an impact a few raises over the course of your career could have on your wealth if you approach them in this manner.

Obviously, this means you have to make a concerted effort to save any additional income a priority but the hard part for most people is actually earning more money or figuring out how to get a raise.

You could always hope and pray that your employer takes care of you and sees all of your hard work but most people need to be more proactive to make something happen. Here are a few considerations when asking for a raise:

  • You have to actually add value to your organization.
  • You have to be able to demonstrate that value.
  • You have to be able to convince your boss they can’t function without you.
  • You have to research your salary range and prove why you deserve to be closer to the top than the bottom.
  • You have to actually ask for it.

I’m not a born negotiator but have learned it’s an important skill for a number of different avenues in life. If you can’t sell yourself you’ll have little chance of making more money.

And even if you can’t negotiate a large raise, simply saving more of a cost of living increase each year can have an impact. Let’s say someone makes $60k a year, saves 10% of their salary and gets a 3% raise each year. The following chart shows the difference between simply saving 10% of the salary every year versus saving 10% plus half of the 3% raise every year (again assuming a 6% annual return on capital):

Investing just half of a 3% raise over 30 years leaves you with close to an extra $100k in this example. Life doesn’t operate as neatly in real-time as it does on a spreadsheet but this gives you a good idea about the power of compound interest and incremental change.

It’s also important to remember that your education is just beginning when you reach the working world. The best investments I’ve made in my career haven’t come in the markets but in the time and effort I’ve put into self-improvement through reading, studying, research, classes, conferences and building relationships.

If you don’t invest in yourself, you’ll be fighting an uphill battle when trying to increase your earning power.

No one is guaranteed the returns they want or need from the markets. But an increase in earnings, and thus savings, can have a significant impact on your bottom line. And unlike market returns, this is something you actually have control over.

Further Reading:
When Saving Trumps Investing

Now here’s what I’ve been reading this week:


This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.