“Many Many congratulations you will get your salary increment letter this month”.
These lines give you an exciting boost; fill you with exciting energy. Every employee is very happy when a new financial year starts because you are getting to take a new salary. This is the time where you start planning to buy new things, tried to save more.
The words “salary increment” when hear gives us exciting energy. Even, when we get the salary increment letter in hand then we are out of this world.
When I was writing my article, “Are You Financially Educated” at that time I was also learning about decoding salary performance. When I was doing study and try to understand deeply my salary performance I feel like “what I was doing in my life till now“. There are so many people around me who are earning so much and growing very fast.
In my past 9 years I didn’t grow much but every year my salary was growing. Then suddenly a thought strikes in my mind that if my salary is growing then why I am not growing financially in those years.
Why my salary increment performance is not good?
Why every month end I struggle till next salary credited?
Then I started finding reasons why my salary increment performance is poor. Here, it means how much you are growing your net worth on year on year (Y-O-Y) basis.
“Recently, a popular job portal shine.com surveyed salary hike in India. And found that peoples who living in top major cities in India expecting salary as:-
Mumbai – 19.5%, Delhi/NCR – 21%, Bangalore – 20.8%, Hyderabad – 16.43%, Pune – 9.34% and Chennai – 11.64%.”
Suppose, you are getting this much increment Y-O-Y.
Here, my question is your salary growing?
Are your salary performance is good?
Let’s understand what salary increment performance is?
UNDERSTANDING SALARY INCREMENT PERFORMANCE
Tarun is working in a company where he is getting ₹40k salary every month. When Tarun joined this company 6 years ago he took his first salary of around ₹15k per month. When he got his first increment his salary increases to ₹19k per month. He gets a 21% salary increment. Consequently, in his next 5 years he gets increments as below:
The above table clearly shows his increment in salary is very good at starting than average in the mid and in the 6th increment is very less.
He starts with ₹15000/- per month and end of his 6th year, he is getting ₹40000/- per month. In its overall structure, his increment is very good.
Now, check his salary increment performance. You can also check your salary performance by using the Compounded Average Growth Rate (CAGR Calculator).
CAGR calculation generally used to check growth for companies on year on year basis (Y-O-Y). But this relation you can also apply to check your own performance.
As per the CAGR calculator, Tarun’s salary performance shows a 17.76% Y-O-Y basis. That means to reach from ₹15000/-(starting salary) to ₹40000/-(ending salary) in 6 years his salary grows with 17.76% year on year.
If you look at 1st two increments his salary growing at a very good pace, but after that his salary performance comes under the category of average increment.
The below graph clearly shows his increment performance is declining.
Increasing his salary gives him happiness but due to not financially educated he is not growing. Eventually, his graph is going down.
REAL-TIME INFLATION RATE SALARY INCREMENT PERFORMANCE
Now, if you are getting an increment of 15% from last year’s salary to your current salary, you must deduct the country’s inflation rate from this increment.
Currently, India’s inflation rate is 4% as of Sept. 2019 data.
If you deduct the inflation rate from a 15% increment, your actual increment is only 11%.
“Inflation rate is the rate at which prices increase over time, resulting in a fall in the purchasing value of money”.
Now, let us assume Tarun starts working from 2008 to 2014. In this period, India’s average inflation rate was 10.15%. His CAGR is 17.75% and his actual salary increment performance is 7.6% only.
This performance of Tarun is an average growth performance. With this rate, it is very difficult for Tarun to increase his net worth.
HOW TO INCREASE SALARY INCREMENT PERFORMANCE
Our salary increment performance is directly linked to our net worth. We always have to focus on our net worth. Net worth is a very simple term which you can understand as below:
Net worth = (All assets + Cash & cash Equivalent) – Liabilities
All Assets = Real Estate/Share purchased
Cash and Cash Equivalent = Amount in saving account/FD/SIP/Mutual Funds
Liabilities = Loan EMI/Credit Card payments
If your net worth is positive and increasing regularly that means you are growing Y-O-Y.
If your net worth is negative and declining regularly you have to focus on your salary increment performance. Either you have to ask your employer to increase your salary or change your company to increase your net worth.
THE BOTTOM LINE
Grow your net worth Y-O-Y with at least 10-15% after deduction of the inflation rate. If you can achieve a good rate of increment regularly this directly maintains your performance. And if your performance is good that means it will increase your net worth. (Always remember to limit your liabilities and try never to increase above assets). [Read about Income Generating Assets]