Categories
Work

The Raise You Shouldn’t Take

Is there a certain point at which it no longer makes sense to pursue a greater income? Maybe.

I think you must consider the tradeoffs when contemplating a position with more responsibility and pay. Because the more you make the less you keep.

Much of the developed world has a progressive tax structure, in which people who earn more pay a greater proportion (and dollar amount) of their income in taxes. Marginal tax rates for top-earners in Canada are displayed in the table below, and are as high as 54%!

The marginal tax rate is the portion of each additional dollar earned that goes to the government. The more you earn in total, the more each incremental dollar is taken away by the tax man.

Source: BDO

I’m not here to debate whether or not this progressive tax structure is morally right or wrong. My point is that this tax structure creates a rising disincentive for individuals to pursue ever-greater incomes.

Once a person attains a certain income level, I feel the added career risk, burden and responsibility is often not adequately compensated by the extra income from climbing the corporate ladder. For some other perks – extra vacation, corporate perks, ego boost, etc. – offset this imbalance. For many, beyond a certain point pursuing a higher income simply isn’t worth the sacrifice.

Put differently, those who do wish to climb the corporate ladder must require increasingly large dollar increases in pay to rationalize the tradeoff.

Here’s an example:

Let’s say you’re a typical employee of Big Corporation XYZ in Toronto and you’re looing at building your career. You start off at the bottom of the barrel working as a clerk in the back office making $45,000 (and probably living in your parents’ basement). You work hard and after a couple years find a better role within the company that comes with a $20,000 pay increase. To you this raise is everything – to Big Corporation XYZ it’s not a huge deal as they weren’t paying you much to begin with.

At that time, when you earned $45,000, a twenty grand pay increase was huge! Not only did you just increase your pay by 44%, you kept 71% of it because you were in a low marginal tax bracket. In other words, most of that earnings growth ended up directly in your pocket. So you were highly incentivized to increase your gross salary, as you got to keep most of it.

However, this incentive changes as salaries grow. The chart below shows how much of your gross salary (red) that you get to keep (blue) as your gross salary rises. When you earn $25,000 you keep almost everything. But as your gross salary rises the tax man benefits almost as much as you.

This next chart shows similar information, but focuses on the gap between gross and net income.

Finally, this third chart shows the effect of $25,000 pay increases on your total net income. A $25k pay increase is way more impactful to someone earning $50,000 than it is to someone earning $150,000.

Anyone making $150k has a high stress job. Taking on additional stress and responsibility isn’t financially worth it for another $25k. Of course, there’s more to the decision than just money. However, if money is a motivating factor the amount must be considered after tax, and the marginal pay raise worthy of action must rise with total income.

Categories
Wealth

8 Simple Wealth Hacks for Financial Literacy Month

November is financial literacy month so here are some easy wealth-creating hacks:

  1. Sleep on major purchases. This allows time for emotional excitement to ease, so you can rationally consider your actions. Often, either the novelty of the potential purchase wears off or you forget about it altogether.
  2. Consider the pre-tax cost of purchases. Someone in a 30% tax bracket that pays a 13% sale tax needs to earn $161 to buy something that costs $100. (($100*1.13)/0.7)). Take this one step further and consider the number of hours you must work in order to earn that $161. You might re-consider more discretionary purchases.
  3. Immediately allocate your pay raises. For example, if you receive a pay raise of $100 month, you could increase your automatic monthly mortgage payment by $50, investment contribution by $25 and bank the rest. You’ve invested in your future while retaining a bit more spending money.
  4. Consider the ‘real estate’ required for each purchase. If a purchase simply adds to home clutter, perhaps it isn’t really needed.
  5. Start investing at a young age. The longer investments have to compound, the less you need to invest over your lifetime to reach a specific goal. In fact, if feasible, parents and grandparents can provide a 20yr head-start by investing a small amount during infancy.
  6. Avoid unnecessary expenses. Many administration fees, late fees, overdraft fees, etc. are unavoidable with good planning.
  7. Time vs. money. Your time is finite, so it’s important to balance time with money. If a purchase earns you valuable time to spend with family or build a business it might be worth the expense.
  8. Less investing activity is best. For most, the best investing strategy is to invest when you have the money and remain invested as long as possible. Few people – even professionals – are able to time the markets. So keep it simple and stick to a routine.
Categories
Work

There Is No Such Thing as a “Self-Made” Man

If you trace the careers and business ventures of successful men and women, many have one thing in common: they had support.

Very few people become successful entirely on their own. We all need help. Arnold Schwarzenegger emigrated to the US with $20 in his pocket. As a young, broke bodybuilder it was his friends that helped him get on his feet.

Arnold was lucky. Many people in his situation – regardless of talent – would not have experienced his success. He could have easily ended up as a personal trainer or supplements salesperson. He could have had a pretty average job and pretty average life, like most of us.

Perhaps the support from his friends made all the difference in his life. Support can help open doors for people, but the true benefit isn’t the opportunity that is created, it’s the safety net that’s provided.

Imagine for a second that you won the lottery but decided to keep working. Assuming you retained a sense of professionalism, how would your behaviour at work change? You’d probably be a lot more bold and take more calculated risks. Money is a safety-net that enables one to push beyond the safety zone. Of course, this is exactly what’s needed to become highly successful.

Most people I know who have led successful careers or built great businesses were not self-made. In fact, they had a lot more support than Arnold Schwarzenegger. Most of them came from middle-class families, at a minimum. Many had their educations fully-funded – thus, didn’t graduate immediately into indentured servitude. Most had early career breaks or internships opened up by family members. Alternatively, if they created a business their first clients were family and family friends.

Starting early in life, their parents taught them how to succeed, gave their first breaks and, most importantly, if all else failed provided a financial back-stop. These people could take calculated career or entrepreneurial risks and know they would always have a bed to sleep in and table to eat at.

Unfortunately, few of these people recognize their privilege. I have friends who think they were self-made, yet lived in apartments paid for by their parents, had access to whatever they needed (e.g. computers, working space, cars) and could ask for money whenever needed. Almost everyone I know who had that level of support is now highly successful, either at a big corporation or as a business owner.

In contrast, I know plenty of people who were literally on their own from high school. They had minimal parental guidance, zero financial support and no fall-back. In other words, past a certain age, if they screwed up they would be homeless.

Everyone I know who had this kind of foundation is middle-class at best. Most lack confidence and have had to struggle to overcome hurdles just to keep their heads above water. Few were brave enough (or stupid enough?) to take career or business risks, instead sticking to a working class lifestyle to quickly become self-sufficient. Some were lucky enough to become middle class professionals by following well-worn paths such as accountancy, law or medicine.

In this sense, I agree with Arnold’s premise that there’s no such thing as a self-made man. So next time you compare yourself with someone more successful, bolder or more confident remember they probably got there because they had a lot of help dating back to a well-supported childhood.