These days, a high salary doesn’t necessarily guarantee a life of luxury. Even after paying their bills, over one-third of high-income individuals still find themselves living paycheck to paycheck. This is the financial reality for HENRYs — or “High Earners, Not Rich Yet.”
HENRYs typically earn a high income — between $100,000 and $500,000 – but still have a low net worth. For example, HENRYs residing in expensive coastal cities often make between $150,000 and $300,000 a year, while dual-income households range from $200,000 to $700,000. Yet, even at this income level, they still have to carefully watch their expenses and learn how to invest.
HENRYs struggle to save for a variety of reasons, with the cost of living, debt, and lifestyle “creep” contributing to their ability to build a high net worth. In this article, we’ll delve into various strategies that HENRYs can use to become a HNWI (High Net Worth Individual) and take their net worth to the next level.
Wealth building
To break free from the HENRY trap, a well-crafted financial plan is key. Ideally, this should include ways to increase your income, reduce spending, and pay off debt, as well as seek investing advice. Having a plan provides a clear direction forward and empowers you to make smarter financial choices.
1. Pay Off Debt Paying off debt is one of the simplest ways to increase your net worth. To begin, create a list outlining what you currently owe, interest rates, and monthly payments. This can include anything from student loans to credit cards.
After identifying all your debts, prioritize the ones with the highest interest rates. The reason? Higher interest rates mean paying more over the life of the loan. For example, a $50,000 student loan with a 7% interest could cost you about $19,600 in interest over 10 years, while one at 3% would cost around $8,000.
If you cannot make extra payments, try negotiating a lower interest rate with your creditor, especially if you’ve been a reliable customer. For example, when carrying a balance on your credit cards, ask your credit card company for a better rate.
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2. Increase Your Assets Review assets like your 401(k), Roth IRA, brokerage accounts, checking/savings accounts, and even real estate, to make sure they align with your short-term and long-term goals. Ideally, you will be growing these assets while reducing debt to boost your net worth.
Some key questions to ask are:
- What are your assets worth now versus 10, 20, or 30 years in the future?
- Are your assets appreciating or depreciating?
- Do you have home equity or rental properties? How are they performing?
- What is the status of your stocks, bonds, and other investments?
3. Reduce Day-To-Day Expenses Many HENRYs make good money, but daily costs eat into their earnings. To tackle this, take a snapshot of your cash flow and identify any non-essential expenses you can reduce. Ask yourself: Do I really need another pair of designer shoes? Do I have too many streaming subscriptions? How many times a week can I afford to dine out?
Then create a realistic budget and commit to following it. By tracking your spending, you can determine if your spending aligns with your goals. Instead of making drastic cutbacks, aim for smaller, manageable changes. Your budget will highlight where to scale back, letting you pay down debt or save more, even without a salary increase.
4. Diversify Your Income Streams Diversifying your income can be a game changer for growing your net worth. Extra income doesn’t just help you pay down debts faster, it also reduces your need to borrow in the first place.
Where will this extra cash come from? Consider picking up a second job, freelancing, selling online, or starting a part-time business. Even saving a little extra each week can put you in the fast lane to go from HENRY to HNW.
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5. Maximize Retirement Contributions Your 20s and 30s might feel light-years away from retirement, but it’s important to take advantage of compounding interest now. Here’s why.
First, most retirement contributions are pre-tax, which lowers your overall annual taxable income. For 2023, you can contribute $22,500 to your 401(k), essentially reducing your taxes by the same amount. This is particularly advantageous for HENRYs who often face large tax bills.
Second, retirement contributions allow you to grow your wealth through compound interest. For example, if you start with $1,000 and add $100 monthly for five years at a 6% return, your initial investment could grow to over $8,000.
So, if your employer offers a retirement plan, start contributing today and take advantage of any contribution matching. However, keep in mind that as you progress throughout your career, you will need to save more than the match to retire on time. So, aim to max out those contributions in 2023.
6. Grow Your Savings Do you have extra savings? If so, put them into an interest-bearing account or investments. Over time, the compound interest will significantly impact your overall net worth. And if you want to be a real pro, schedule recurring contributions to your retirement and investment accounts. This way, you’ll make saving and investing a regular part of your everyday routine.
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The good news is HENRYs have a distinct advantage when it comes to optimizing their financial life. Even if you are grappling with debt or trying to control daily spending, a high income can accelerate your journey to financial stability and long-term prosperity.
However, to progress from HENRY to an HNW, it’s crucial to go beyond just earning a high income. Investment strategies should be a core part of your financial blueprint. That’s why Blankinship & Foster, San Diego wealth advisors, are fiduciaries committed to providing personalized guidance tailored to your unique financial situation. Call us today.
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