Invest Half Your Raises

In the financial literacy class I teach for educators we frequently talk about the concept of “paying yourself first.” Think of “yourself” (or your future self, if you prefer) as an expense that you have to budget for and, just like you set aside money for the mortgage and the electric bill, set aside money for the “expense” of yourself. And it’s important to do this right away each time you get paid, so that you aren’t tempted to spend it on some other expense. (If at all possible, automating this process makes it much, much, much more likely to happen.)

As part of the discussions around this in the class, we also talk about the idea of saving and investing half of your raises (sometimes referred to as “Spend Half, Save Half“). Most teachers are on some kind of salary schedule, with yearly step increases as well as horizontal lane advancement for additional education (and then the salary schedules themselves are typically adjusted each year with a cost-of-living increase). While “Spend Half, Save Half” makes intuitive sense to most people, Matt Raleigh, my California co-author (who also teaches a class similar to mine for California educators) thought that actually demonstrating what this looks like could be a very powerful motivator. So he developed a spreadsheet to illustrate this, which I’ve modified for a typical local school district (Greeley Evans 6 SD).

Note: You can choose File–>Make a Copy to get an editable version of the spreadsheet, and then fill in your district’s salary schedule. Input the existing salary schedule as is, don’t inflate future year salaries. That way everything will remain in today’s dollars.

Some notes to help you interpret/use the spreadsheet:

• The entire spreadsheet is in today’s dollars. While salaries will increase in the future, so will inflation. So the numbers in the spreadsheet aren’t inflated and therefore reflect today’s purchasing power (which is easier to put in context than future inflated dollars).
• It’s unlikely anyone will spend their entire teaching career in one lane, so while the column totals are still very meaningful, they also will not match anyone’s actual salary path.
• The spreadsheet assumes you save half of your raise each year and then invest it. In future years you continue to save and invest what you did before as well as half of that year’s increase (if there is an increase).
• The assumed rate of return on investment is 7% (cell U2), but you can modify that if you’d like.
• The spreadsheet assumes no return on the additional savings you add each year during the first year you add those additional savings (so just investment gains on the previous years’ savings and investment growth).

It’s worth taking some time to explore the spreadsheet, but here is the bottom line.

First, look at those numbers in the green-highlighted cells. Simply by investing half of your raise each year (in this school district) you’ll end up with at least $800,000 and perhaps more than $2 million (and, again, these are in today’s dollars).

Second, this is another demonstration of the importance of moving horizontally across the salary schedule as quickly as possible. While it’s unlikely that anyone will stay in the same lane for their entire career, many people don’t move as quickly across the lanes as they perhaps could. And, in many districts, there is a hard dividing line if you don’t get a Master’s degree. In this district, the max lane for folks without a Master’s degree is BA+30. The difference between BA+30 and MA+45/60 is over $500,000 in total accumulation (not counting the cumulative difference in salary or the effect on their pension).