How Pay Raises Compound
Pay raises work like compound interest — each raise applies to your already-increased salary. A 4% raise on $60,000 is $2,400 the first year. But the second year, 4% of $62,400 is $2,496. Over 10 years, your salary grows to $88,815 — a 48% increase from compounding alone.
Inflation and Real Salary Growth
If your raise matches inflation, your purchasing power stays flat. To actually earn more in real terms, your raise must exceed inflation. With 4% raises and 3% inflation, you gain ~1% real purchasing power per year. Over 20 years, that 1% compounds significantly.