Thursday, November 12, 2015

Can a pay raise be a bad thing? Absolutely… and here’s how to evaluate your raise.

Pay Raise - Just Ahead

Every year, many employees receive a pay raise or a “merit” increase. Some are even so unlucky as to receive no raise at all. Receiving a raise at first glance appears to be a wonderful thing. You’re bringing home a bigger paycheck, allowing you to buy more of what you want, or to save more for retirement. What could possibly be bad about that?

At closer inspection, a raise can actually be a bad thing. Imagine that your income is $40,000 per year and your living expenses are $30,000 per year, netting you $10,000 per year. Next year, you receive a 2% raise, increasing your income to $40,800. You can’t wait to receive that extra $800 each year. That’s a brand new TV right there!

Before you get too excited, unfortunately there is a little problem with that measly 2% raise. Historical inflation tends to settle right around 3.32%. Inflation is the gradual increase in the price level of goods and services, meaning that over time, each dollar buys fewer goods and services.

This means that the 2% raise is actually a 1.32% pay decrease! Although your income is now higher at $40,800, your expenses have increased to $30,996. This means that your expenses increased by $996 while your income grew by only $800, making you $196 worse off each year!

The next time you receive a raise, check how it compares to the inflation rate. You’ll probably find that the raise is actually right in line with inflation, meaning that you’re actually no better or worse off than in the previous year. If you receive no raise at all, you’re actually making 3.32% less than you did last year. Saying that your pay hasn’t changed is actually deceptive way of decreasing pay.

On the other hand, for a business, an owner can slip through a pay decrease by raising salaries by less than inflation or by claiming there will be no raise for the year. It’s a sly way of cutting pay without raising eyebrows, and sadly, most employees likely wouldn’t notice the difference.

By checking the inflation rate and comparing it to your raise, you’ll be in a better position to decide whether it’s something to celebrate or not.

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