How a ‘High Earner Not Rich Yet’ Can Harness Their Financial Potential
The term HENRY, as coined by Fortune, stands for High Earner Not Rich Yet. It refers to individuals and families who earn between $250,000 and $500,000 annually but have yet to harness the potential of their paychecks to build substantial wealth. If you’re a HENRY, you know it can be incredibly frustrating to feel like you’re still behind the ball, despite having the resources you need to achieve your financial goals.
Between inflation, a rising cost of living, the student loan crisis, and skyrocketing healthcare costs, it can be hard to feel like you’re in control of your finances, no matter how much money you’re making. But while many of those aspects are out of your control, you’re in full control of how you manage your money. So, if you’re a high-income earner looking to build your wealth, here are a few tips.
Build a comprehensive picture of your finances.
Without total clarity, you can’t begin gaining control of your finances. It may feel like an overwhelming task to create a comprehensive list, but take it one step at a time. Be sure to include your income, spending habits, assets, debt, and any goals that you have for your future.
Don’t be disheartened by the aspects of your financial picture that need work. When it comes to changing your financial habits, the first step is knowing what they are. By reflecting on where you currently stand and where you want to go, you’ll be able to make more informed decisions about what you need to do to get you there.
Determine your financial goals and put them into writing.
As you gain a comprehensive understanding of your financial picture, your short- and long-term goals will begin to come to light. Whether you want to buy a house, go on a trip, pay off your student loans, or even retire early, put it all down on paper so that you can be reminded of what it is you’re working toward. Science shows that writing down goals is key to achieving them, and doing so can give you both a plan of attack and the motivation to follow through with it.
Make a plan to pay off your debts.
One of the simplest ways to raise your net worth is to pay off your debts. Start by making a list of all current debts you have – student loans, credit card debts, car loans, mortgages, etc., and then make a plan to begin paying them off. There are two common strategies that you might find useful:
The Debt Avalanche
Start with the account that has the highest interest rate. This tends to be the most recommended strategy because it results in you saving money in the long run. Interest payments add up more than you’d think, and high-interest rates translate to paying more money over the lifetime of the loan.
The Debt Snowball
Start with the smallest account balance first. While beginning with your smaller accounts may not save you money, feeling the satisfaction that comes with crossing debts off your list can give you the confidence and motivation you need to begin tackling those larger accounts next.
Put your assets to work for you.
If you want to leave your HENRY status behind and build your wealth, you have to ensure your assets are working for you. Ask yourself the following questions:
- Are my assets appreciating or depreciating?
- What’s the total worth of my assets currently? What will their worth be 5, 10, or 25 years from now?
- How much equity is in my home? If you have rental properties, are they performing well? What’s their future projection? Are they aiding or hurting your financial goals?
- What is the state of your investment portfolio? Do you have a financial professional you trust to help you manage your risk?
Be honest with yourself about the state of your assets and how they may be helping or hindering your goal attainment. A 401(k) is likely to appreciate as time goes by, but that fancy sports car isn’t doing you any favors financially. It’s important that your assets are aligned with the goals that you’re working toward, so focus on how you can maximize their current and future value.
Be aware of overspending.
Many people in the High Earner Not Rich Yet category still find themselves living paycheck-to-paycheck. This is akin to playing defense and, if you want to build real wealth, you need to go on offense.
Reducing your monthly spending is a critical first step if you’re a HENRY finding yourself in this scenario. For many, the phenomenon of lifestyle creep is the culprit. Have you adjusted your lifestyle to spend more as you’ve gotten raises over the years? This is common – and incredibly problematic, too. However, it’s not irreversible. Think about your lifestyle spending (home, cars, trips, clothing, shoes, and hobbies) and see where you can make adjustments. If you stop unnecessary spending in those areas, you can channel more of your earnings into your investment portfolio or tax-advantaged retirement accounts that will level up your net worth.
Maximize retirement contributions.
If you enjoy a high salary and you aren’t maxing out your retirement contributions, you should reevaluate your spending priorities. Even if it seems like retirement is a world away, you want to start saving as soon as possible so you can make the most of compounding. Plus, for HENRYs who have large tax bills each year, contributing to your retirement savings accounts can do wonders for bringing that tax bill down since most contributions are deducted before taxes.
If your employer offers a retirement plan, take advantage of it – and max it out. If you receive any raises, put that money directly into your savings rather than increasing your day-to-day expenses. In doing so, you’ll be able to grow your savings while maintaining your current lifestyle.
Make the most of your ‘High Earner Not Rich Yet’ (HENRY) status.
If you’re a high-income earner who has yet to build wealth, you’re not alone. And you’re not necessarily in a bad spot, because you likely have all the resources you need to take full control of your financial future. You may just need to be more strategic and disciplined about how you manage your money. As is the case with most things in life, this will be easier to do once you have a clear plan in place.
Managing finances, and especially investment portfolios, isn’t a skill that most of us learn in school. If you’d like a professional partner by your side, consider seeking the guidance of a Registered Investment Advisor (RIA). At Davidson Capital Management, every portfolio we structure is rooted in each individual client’s priorities and customized toward their unique goals. Contact us today to get started on creating a plan that can help you make the most of your high income and put you on a path towards achieving your financial goals.