Last year, when putting together my negotiation course and teaching workshops, I included a stat about how a small difference in salary could add up to over $1 million in lost earnings over the course of a career. Specifically, how a $7,000 salary difference could add up to over $1 million in lost earnings.

This wasn’t my own genius idea. Business school professors and negotiation researchers have been touting the fact that missing out on negotiating early in your career can cost you big. Carnegie Mellon economist Linda Babcock caught my attention when she shared that:

“I tell my graduate students that by not negotiating their job at the beginning of their career, they’re leaving anywhere between $1 million and $1.5 million on the table in lost earnings over their lifetime.”

Because I love a good spreadsheet, I wanted to do the math myself.

I was also really curious to do the math because when I graduated business school, I didn’t negotiate my base salary. I negotiated an additional bonus to go along with my cross-country move, but the money was spent pretty quickly (if you’ve ever moved across the country, you know it’s not cheap).

So did I make a $1 million mistake? I really wanted to know.

Why pick $7,000 as the starting salary difference?

In additional research done by Babcock, she found that there was a 7% difference in salaries being earned by male and female MBA graduates. Men earned, on average, 7% more than women. A $100,000 salary is pretty standard for an MBA graduate, so I used that as an easy number for the math.

The math

I’ll try to make this as painless as possible, but skip a few paragraphs if you really hate math.

Taking Babcock’s 7% difference and applying it to my $100,000 starting salary, I assumed that Jack and Jane, two MBA grads are both offered jobs for $100,000 upon graduation. Jack negotiates his offer up to $107,000. Jane doesn’t. Poor Jane.

So there’s a $7,000 difference on day one.

What if they both get a 5% raise the next year? Jack’s salary goes up to $112,350 and Jane’s salary is $105,000. Over those two years, he’s now made $14,350 more than Jane ($7,000 + $7,350).

That’s annoying.

Now extend that for 35 years. We’ll say that they each received 5% raises each year and every 5 years they each received promotions, which earned them 15% raises in that year. They receive the same % for raises and promotions each year for 35 years.

Jack comes out earning $935,000 more than Jane at the end of his career.

That’s based on just salary alone. But there’s more.

What if Jack invests only the salary difference that he makes each year. So the first year he invests $7,000. The second year he invests another $7,350, and so on for 35 years. If he makes 5% on his investments he’ll be able to grow that $935,000 difference to $1.8 million.

$1.8 million.

All from negotiating $7,000 one time.

So yes, when I graduated from business school I set myself up to make less than I could’ve. A lot less. Like a beautiful home on the beach in Hawaii + 30 years of plane tickets less.

But hey, at least I figured that out early. I now negotiate with no shame (like when I negotiated my rent) and after learning a few key lessons, I’m making the most out of the money I invest.

If like me, you didn’t negotiate your salary, all hope isn’t lost. You’re not going to be stuck on the same path making the same salary forever like Jane. Just think of this as a good reminder to negotiate even small amounts, because over time they really will add up.

 

Photo by rawpixel.com on Unsplash

 

THE LATEST & GREATEST

How to Stop Overspending – Tools to Organize Your Money

The best things in life are free. Right? When it comes to the tools that I'm currently loving to help me organize my money, that's definitely true. I've shared before how I'm not naturally a saver, but I've managed to set up systems and nudges that make it easier for...

read more

How We Manage Our Money, in 15 Minutes a Month

This month was rough money-wise, but great life-wise. You win some, you lose some, right? With a baby arriving, I have been going a little overboard buying things that I hope will make life easier. We’ve also had a slew of doctors bills, which I’m sure is only the tip...

read more

March Financial Goals Update: How I Make More Money

When Jordan and I sat down to make our goals for 2018, we knew this would be a big year. “Make more money” isn’t a unique goal but the goal was intrinsic to enabling our live bigger goals. We were expecting our first child in March, we are saving up to build a home on...

read more

HAPPY HOUR FOR YOUR INBOX

smart reads + self-care + inspiring interviews all sent to your inbox every Friday. So you can say "see ya" to those Sunday scaries.

The Weekend Buzz

 

Every Friday we’ll bring you a roundup of the most interesting stories, things to learn, and things you’ll definitely want to do toward reaching financial freedom. Sent straight to your inbox.

You're almost in - just head over to your email to confirm and then you're on the list!

Money Makeover The Worth Project

Quickly get your finances in order.

It’s time to use money as a tool to live a better life. And not just when you’re 65. A better life now. Let’s spend the next 24 hours re-thinking your money. Grab my FREE guide and start your 5 simple steps today!

You're almost in. Head to your email to download the worksheet.

No Budget Workbook The Worth Project

Managing your money doesn’t need to take all day.

This is a simple way to put your money on auto-pilot and create the ever so important habit of happiness when it comes to spending. This is easy – and good – and will leave you spending less than an hour each month thinking about your bank account.

You're almost in. Head to your email to download the worksheet.

Pin It on Pinterest

Share This