The difference between the average salary
at the age of 24 and the average salary after the age of 45 is more than 1,000 euros per month, according to data from the Labour Force Survey (EPA) compiled by the National Statistics Institute (INE).
Most of the increases needed to make up the difference will occur during the first few years of working life. After the age of 44, these wage increases will be smaller for a very simple reason: because the salary is higher, the increases cannot be as big.
However, if you don’t do anything about it, it is very easy to save roughly the same amount when you are 25 as when you are 45. This is one of the most common money mistakes and the culprit is what is known as hedonic adaptation or the hedonic treadmill.
What does hedonic adaptation consist of?
Hedonic adaptation is the ability of the human brain to adapt its level of happiness and habits to new circumstances, both positive and negative.
It is a sort of regression toward the mean that helps you get through bad times without falling apart, but it can be a double-edged sword for your personal finances.
The following example will help you understand this idea better. Imagine you win the lottery. How would you feel? At first, you would undoubtedly feel very happy. However, sooner than you think, that state of joy and excitement would fade until you reach your previous level of happiness or one very similar to it.
It’s the same thing that happens when you buy a new car: It takes less time than you think to get used to it. A similar thing also occurs when your salary increases.
Most people have a physical or mental list of things they would like to do and save for. From going to a particular restaurant to upgrading your gym membership, getting a new streaming service or changing your TV.
It is very common to use pay raises from a promotion or a job change to fulfill those desires. Ultimately, it is the reward for that work.
The problem is that what you’re so excited about at first will eventually stop satisfying you. It will take you less time than you think to get used to the new spending threshold without significantly increasing your level of happiness and without really improving your financial situation.
In other words, you earn more, but you also spend more.
Solution: save part of your salary increase
What can you do to avoid hedonic adaptation? Something as simple as saving a percentage of your salary increase. This is how you reward yourself for your efforts (very important) while also moving toward your long-term goals, like retirement.
In fact, this is one of the most powerful tools for planning your retirement. What can it help you achieve?
If we take as a reference EPA (Spanish Labor Force Survey) data on the average salary by age bracket, setting aside 50% of your salary increases until retirement age would mean a total saving of 195,912 euros in the long term.
If you start putting this tool into practice from the age of 30, you would have only 91,902 euros.
The difference is even greater when we include long-term investment and compound interest. With an interest of 6% per year, the total savings figure would be 702,248 euros.