You’re making great money and excelling in your career, but for some reason it just doesn’t feel like it. Every month you’re living paycheck to paycheck and the life you thought those accomplishments would bring hasn’t arrived. That’s the gap HENRY financial planning exists to close. You might be a HENRY, a High Earner, Not Rich Yet.
People usually find themselves in this position because of a combination of factors. First is the hard work and success that got you to be a “high earner”. Then lifestyle creep sneaks in. Finally, your life starts to look and feel more complex. This may be because you’ve purchased your first home, you’ve started a family, or you’re dealing with equity compensation or deferred compensation with little or no guidance.
Someone earning $250k can feel just as financially stretched as someone earning $90k. Despite your income growing, your savings/net worth did not follow proportionately. This is why it is incredibly important to have a plan. You did not put in all the extra hours and hard work to feel broke. The earlier you build and implement a plan, the less time it takes for income to become wealth and to feel like your money is finally working for you.
Lifestyle Creep Is the Silent Wealth Killer
Lifestyle creep is an extremely common experience. You may have heard it referred to as lifestyle inflation. Every time you receive a raise, it gets absorbed by a nicer apartment, a new car, expensive vacations, and more.
It’s the ‘silent wealth killer’ because it is often difficult to notice. No single purchase feels irresponsible. It is the accumulation of these purchases that erodes your ability to grow wealth. A common suggestion to combat this is to bump your contributions by 1% every time you get a 2-3% raise.
This has been a tried-and-true method that I have personally witnessed work in practice. We have all had moments when we decided today is the day things change. We will spend less and save more. In most cases, that is not sustainable. While it is the right mindset, it is extremely difficult to change your habits and decrease your lifestyle once they have been set. That’s why increasing your savings at opportune moments, such as when you receive a raise, feels seamless. You end up saving more without noticing it, and you still experience an increase in cash flow.
Another opportunistic moment for increasing your wealth is to pause when you receive a bonus or when your equity compensation vests. This is where you can allocate a portion of these suddenly available funds towards investing or paying down high-interest debt.
This is not about penny-pinching or not getting to reap the benefits of your hard work. You need to enjoy life at all stages and should not deprive yourself of experiencing it by traveling, making material improvements, and acting your wage. I’m simply saying you should be intentional about your spending rather than letting it become subconscious.
Tax-Advantaged Investing: A HENRY Financial planning priority
Tax planning is a central piece of HENRY financial planning. Every dollar not sheltered is taxed at your highest marginal rate. There are several ways to do this.
A Few Ways to Shelter Your Income Through Tax-Advantaged Investing
- 401(k)/Roth 401(k): Your income level and financial picture decide which is appropriate for you.
- Backdoor Roth IRA: Your income may be too high to contribute directly to a Roth IRA. Current tax law allows you to contribute to a non-deductible traditional IRA, then convert that money to a Roth IRA right away. *If you have existing traditional IRA funds you will be subject to pro rata rules.
- HSA: If you have a high-deductible health plan, this triple tax-advantaged account is hard to beat. Contributions are deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free at any time. After age 65, you can withdraw for any reason, and it’s taxed like a traditional IRA. Currently, you can pay for medical expenses out of pocket, save the receipts, and cash them in whenever you would like.
- Mega backdoor Roth: If your employer plan allows for after-tax contributions, a mega backdoor Roth may be available to you. You’ll also need in-service withdrawals or in-plan Roth conversions to make it work. Here’s how it works: max out your regular contributions, then add after-tax dollars up to the total plan limit (minus what you and your employer have already contributed). Then convert those after-tax dollars to Roth, either through an in-plan conversion or an in-service withdrawal to a Roth IRA. Do the conversion the same day you contribute if you can. Any growth on the after-tax money before you convert is taxable.
A few of these get technical fast. Loop in your advisor and tax professional before acting on any of them.
Student Loans vs. Investing: Which Comes First?
A common question that comes up for HENRYs is whether they should prioritize paying down student loans that can be in the six-figure range or invest that money. The answer, like most things, is it depends. This is part of HENRY financial planning where math alone doesn’t settle it.
Often, I lead with what makes mathematical sense first. This means comparing the interest rate on each of those loans to the expected annual return of your investments. If you expect an average annual return of 8% on your investments, paying extra toward a 5% loan means giving up that spread over time. The trade-off is a guaranteed 5% versus a probable, but not guaranteed, 8%. Most years, math favors investing. But ‘expected’ isn’t the same as ‘promised.’
If your employer plan, such as a 401k, provides a match, that is more important to earn than ever paying additional money towards student loans. For example, a 100% match up to 3% of your salary means you receive an immediate 100% return on the first 3% of your salary that is contributed. You will never have a student loan with an interest rate of 100%, and if you do, please find a lawyer…
That’s the math. Here’s the part math doesn’t capture. It is important to weigh the psychological variable of carrying student loan debt. If your student loans are making you lose sleep, are causing you frustration, or you would feel much better having them paid off, that is something to consider. As a financial advisor, my job is to tell you what makes the most financial sense. But what makes the most sense on paper isn’t always what’s in your best interest overall.
If you don’t qualify for loan forgiveness and you’re carrying a high interest rate, refinancing may make sense. Refinancing federal loans means giving up income-driven repayment plans and other federal protections, so weigh that tradeoff. On the other hand, if you work for a qualifying public service, you may be eligible for PSLF instead of refinancing at all. This is something I will cover more in depth in future blogs. Still, it is currently available to those who qualify to wipe out their remaining federal student loan debt after 10 years of qualifying payments.
Some industries this can apply to include:
- Government & Public Administration
- Military & Defense
- Education
- Healthcare
- Emergency services & Public safety
- Social Services & Nonprofits
- Other Public Services
Buying Your First Property as a High Earner
Something almost every HENRY is looking to do is purchase their first property. This is a decision that many consider immediately necessary and an investment. Purchasing a property is a lifestyle choice, not just an investment. First time home buying is one of the trickier parts of HENRY financial planning, because the numbers and the lifestyle pull in different directions.
Paying 20% down is ideal on paper for your first property. Still, HENRYs often put down less than 20% on purpose because tying up all your cash in a down payment can leave you without the reserves to cover furnishings, moving, repairs, or investing. You’ll also need to budget for closing costs, which are typically 2-5% of the purchase price. It is also recommended to budget 1% of the home’s value per year for property upkeep.
A large mortgage can quietly become its own version of lifestyle creep. A bigger house also means bigger utility bills, bigger furniture, bigger taxes, bigger everything. You’ll also need a bigger emergency fund. As a homeowner, there’s no landlord to call when the water heater dies.
You may have the income to qualify for a much bigger mortgage than makes sense for your actual financial picture. The pre-approval amount is not the same as what you should spend. You should aim to pay no more than 28% of your gross monthly income towards housing, and your total debt-to-income ratio should be less than 36%. Just because you can purchase a home that costs 28% of your gross income each month does not mean you should purchase that much home. Consider what makes sense for you, your lifestyle, and your other money ambitions.
It may be worth buying a smaller home now so you can build equity and invest the leftover cash flow to grow the wealth you are aiming for. There is value in continuing to contribute to your investment accounts rather than stretching your ability to afford a home. Every dollar put toward a bigger mortgage is a dollar not compounding in your portfolio. The wealth you build through your investments will give you financial freedom and the flexibility in your life to make changes and achieve the retirement you want.
Building a Plan Before You’re “Rich”
That’s the whole idea behind HENRY financial planning: most people wait until they feel rich before seriously putting a plan in place. The earlier you start planning for the life you want, the sooner you actually get it.
Building habits in your 20s & 30s will shape your future net worth. Getting a structure for how you deal with your finances and a game plan that all work towards the same goals helps compound your wealth.
An actual plan does not stop at investing. An actual plan involves understanding your cash flow, planning for taxes, ensuring you have proper insurance coverage, having your basic estate planning documents in place, and much more. You can have the right investments while losing potential value by ignoring tax considerations, have strong cash flow but no plan for if you become disabled, or have plentiful assets but lack liquidity.
The point is this: a cohesive plan, with everything working together toward your goals, beats a pile of disconnected good decisions. If you feel that you might be a HENRY, consider taking some time to make sure that all areas of your financial life are accounted for. It might be time to bring in someone who can look at the whole picture with you. Stop being a HENRY and start being wealthy on purpose.
Signs You’re a HENRY Without a Plan
- You don’t increase your savings with every raise
- You have more income than strategy
- You’re maxing your 401(k) but nothing else
- You don’t know your real net worth off the top of your head
This isn’t about what you did wrong. It’s about what’s missing: a plan.
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You’ve done the hard part already. You’ve built the income. Now it’s time to build the plan that turns it into wealth.
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