The importance of salary negotiation

I have a good friend who recently graduated from MIT with a PhD in something I can't even pronounce, let alone do. Even in this rocky economy, he has competing job offers. That's a great position to be in, and I'm happy for him.

But when he told me about his options, I was surprised to hear him say he didn't plan to negotiate his salary. One company offered him $10,000 less than another for a comparable position. “It's okay,” he said. “That seems like Enough. Besides, it's not a conversation I want to get into.”

I encouraged him to rethink his position.

My advice boiled down to one sentence: No matter how much money an employer offers you, it's never Enough. Ask for more.

Money Isn't Everything

In my own financial life, it's a constant struggle to balance finding ways to live more frugally while trying to earn more money. I believe there is some amount that's Enough; infinite money won't make my life perfect. It's not how much money I have, but how I manage that money. And it's how I manage my expectations about what I can do with the money, and what it can do for me.

J.D. is fond of quoting Charles Dickens from David Copperfield:

Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Translated into modern financial language, that's:

Annual income $40,000, annual expenditure $39,000, result happiness. Annual income $40,000, annual expenditure $41,000, result misery.

This is the heart of mind over money: understanding that your financial happiness rests on what you make of your dollars, not how many dollars you make.

That said, making more dollars doesn't hurt. Having more money to work with expands your options for everything from where you live to how you travel to what charities and causes you can support.

More Is Generally Better

You wouldn't leave a crisp $100 bill lying in a gutter, would you? But you're walking away from a lot more than that if you don't negotiate your salary properly when starting a new job.

Perhaps the first thing to understand is that your salary is negotiable. I've never yet walked away from a salary negotiation empty-handed. Often, more money really can be had just for asking. In other cases, the salary has turned out to be a fixed point, but by starting a conversation about it I've been able to pick up higher paying contracts with the same clients or negotiate for additional vacation time and other benefits.

Every salary negotiation is crucial, but your first one matters most of all. Your starting salary determines the number that all of your future raises will be based on. If you get a 3% raise each year, each of those raises will be larger if it's based on a higher starting salary. Over even a few years, that can add up to a lot of money.

Your first salary is also the basis for your salary history. When you change jobs, that salary history becomes part of negotiations with your new employer. If you talk your first employer into a 5% during the initial negotiation, that increased salary will stay with you throughout your life.

Another reason to negotiate your first salary is that you're probably starting more than just your career. The moment in your life when you take on your first Grown-Up Job often coincides with other major life changes: getting married, buying a home, having kids. These things are expensive, and a lot of the expenses are front-loaded. You want money to pay for a wedding, a down payment, and all of the expenses associated with setting up house and welcoming a family sooner rather than later. A higher salary gives you a jump start on those goals.

Doing Your Future Self a Favor

It's awesome that I have a decent income and good savings habits now, but I'll never get back the chance to earn a good living in my early years. Instead, I'm still repaying debts incurred in my 20s. Over my whole life, I'll have less saved for retirement and pleasure because I'm paying interest on the start-up costs of a grown-up life, instead of having saved for them ahead of time. Having a higher salary from the get-go might have helped me better handle some of these expenses.

Asking for more money can be tough. In my friend's case, he's moving from being a grad student on a stipend to a highly-paid professional. His salary will increase by nearly an order of magnitude. It's hard to ask for more when the numbers already seem big.

But remember: In a few years, those numbers won't be so big. They'll be your new normal. Whatever salary you accept today will become the money you expect to be earning. Hopefully, in a year or two that salary will still feel comfortable, but it won't be a surprising amount of money. You'll have gotten used to it. Your lifestyle and expectations will have grown to match your income level. And if you're at all like most people, you'll wish you had a little more.

So, do your Future Self a favor and ask for more money when you're negotiating a new job offer — especially if it's your first time doing it.

Reminder: Last year, J.D. wrote about how to negotiate your salary. He's a big fan of the book Negotiating Your Salary: How to Make $1,000 a Minute by Jack Chapman, which you can download from the author's site.
More about...Career

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others

Leave a reply

Your email address will not be published. Required fields are marked*