Let us start by saying that we are allowed to say "HENRY" freely. Why? Many of our new clients are HENRYs. Our clients are young (Gen X & Gen Y), but they are out there crushing it in the real world (world-class physicians!). And the sad truth is student loans are the main reason why they are "Not Rich Yet." But darn it, we are getting there! Okay, back to the show.
Are you among a growing group of people in the U.S. who have a high household income, yet your savings never seem to grow significantly year after year? Believe it or not, there is a name for people like you, and there is a very good chance that you might be a HENRY. HENRY stands for "High Earners, Not Rich Yet," and it is just the newest socio-economic acronym from a long list of media catchwords. You may remember the popularity of terms like YUPPIES (Young Urban Professionals), DINKS (Dual Incomes, No Kids), or even BOBOs (Bourgeois Bohemians) in the past.
Today it is all about HENRYs. But what in the world does this term mean?
The definition of a HENRY tends to be much more fluid than similar acronyms and can change based on who you are asking. The confusion usually centers on exactly how much a household needs to earn before it qualifies as a "high-earner" as well as the acceptable age range necessary for categorizing someone as a HENRY.
Although most people place the household income of HENRYs somewhere between $250,000 - $500,000, some financial professionals lower the threshold to a "mere" $100,000 a year in earnings. This lower income requirement greatly increases the number of potential HENRYs.
The most popular definition of HENRY only includes those born between 1981 and 1996; a group commonly known as Millennials. But, again, there is disagreement about whether it is appropriate to restrict the term to a single generation. Some people prefer to adopt a more inclusive definition of the term, pushing the top end of the age bracket to 55.
While some conditions of HENRY'ism are debatable, some aspects are generally agreed upon. It is these core characteristics that unities all HENRYs regardless of age or income level. These traits are:
- A higher-than-average income level,
- Little to no savings, and
- Feelings of low material wealth despite income level, leading some financial experts to dub these individuals "the working rich" — those who must continue to work potentially long hours despite high-earning careers.
The History of HENRYs
The term HENRY first appeared in a Fortune Magazine article in 2003. In the original article, the writer Shawn Tully used the term HENRY to describe those individuals who were most affected by the alternative minimum tax, or AMT. Since that time, the definition has expanded, and the list of problems facing HENRYs has grown.
Regarding HENRYs and Finances
HENRYs have it tough. They work long hours and earn a good salary but have little to show for it. This is mostly due to HENRYs having to pay a huge percentage of their income as taxes, student loans, and the majority of the rest on ballooning day-to-day expenses. As a result, instead of living like the top 1 percent of earners in the U.S., which they are, HENRYs wind up feeling the same as any other paycheck-to-paycheck individual.
Okay, so you're a HENRY. Now, how do you stop being a HENRY? Well, there is only one way out: increase your net worth! Below are a few very simplified ways to build your net worth.
"Net worth" is the simplest indicator of your overall financial well-being. Simply defined, it's the difference between your assets (such as investment accounts, retirement funds and properties) minus all liabilities (including mortgages, credit card debt and other loans). Your net worth is very important in helping you determine how much debt you have and how it can affect your future wealth. It also helps you to highlight critical areas in your financial life that you should focus on early enough.
If you have already calculated your net worth and found that it's lower than you expected, or that you need to increase it starting now, we have a few simple ways to help.
Review Your Liabilities and Pay Off Debt
This is one of the simplest ways to raise your net worth. A good starting point is to get all your debts organized by listing the amount you owe, the current interest rate, and the monthly payment you are making. Next, review all your liabilities keenly and try to reduce or eliminate them altogether. Your liabilities may include student loans, credit card debt, car loans, and mortgages, among many other types of loans that you may owe to friends and colleagues.
Focus on paying off the debts with the highest interest rates first, and pay off the other low-rate debts along the way. A lower debt burden means a higher net worth, and the vice versa is also true.
Pro Tip: If you are not in a position where you can make extra payments on your debt, a good alternative is to ask your creditor to lower your interest rate(s). Lowering your interest rate will reduce your monthly payment, allowing you to pay down the principal faster. If you carry a balance on your credit cards month-to-month, you should absolutely be calling your credit card company to ask for a lower rate. Often, they will accept your request if you have been a customer for several years and have consistently made your payments on time. There is no guarantee your creditor will lower your rate, but it never hurts to ask!
Review and Increase Your Assets
Determine the total worth of your assets and how they are likely to change over time. Are your assets appreciating or depreciating? How much equity do you have in your home? How are your rental properties performing or likely to perform in the future? What is the state of your stock investments, bonds, mutual funds, and/or retirement funds?
Ask yourself as many questions as possible about your assets and review them thoroughly. It is important to make sure your assets align with both your long-term and short-term goals. Ideally, your income will allow you to increase your assets while simultaneously lowering your debt, and your net worth will automatically shoot up.
Reducing your expenses is easier said than done, but it's a great way to help boost your net worth. Work out your current expenses and see if there are expenditures that you can afford to cut back. Remember, the less money you spend, the more you are accumulating in net worth. A great tip on how to start spending less is to avoid the use of credit cards in favor of cash. A large bulk of uncontrolled debt comes from the use of credit cards.
"Budget" might be the most dreaded word in the English language, but it can be an incredibly useful tool when trying to cut back on spending. Creating a budget allows you to see how your money is being spent. Once you know where your money is going, you can decide for yourself whether that spending aligns with your goals. Like dieting, when reducing expenses, it can be difficult to make large changes all at once. Instead, try to make small incremental changes you can build on. Using your budget to identify areas of spending to cut back on is an easy way for you to create more money to pay down debt or increase savings with or without having to increase your income.
Avoid Buying an Expensive Car
A major item to avoid purchasing while trying to get out of the HENRY phase is an expensive car. Everyday cars for personal use (not collectibles) are typically awful investments. They will depreciate as soon as you pull off the lot, and they will often saddle you with additional debt and a large monthly payment. This makes it even harder to climb out of the hole of being a HENRY. Consider buying a more affordable car that you will be able to buy with cash or pay off in a short amount of time. Once it is paid off, you will be able to pay down your other debts or increase your savings. We aren't suggesting that you can never buy that expensive car but rather to delay the purchase until your net worth has improved.
Find New Sources of Income (aka Side Hustles)
Getting additional income from several sources can go a long way in helping you increase your net worth. It will not only help you pay off your debts sooner, but it will also take away your need to borrow often. You can get additional income from a second job, doing some freelance work, selling items online, or starting a part-time business. There are many endless opportunities out there; all you need to do is find the one that works for you.
Maximize Retirement Contributions
Retirement contributions benefit you in two ways. One, they defer your taxable income, because they are deducted before taxes (assuming it is not a Roth). Second, they boost your available generative assets. Check if your employer offers a retirement plan and start contributing towards it. If you already have a 401(k) plan through your employer but aren't contributing to the maximum, consider doing it if you want to boost your net worth by a big margin. You can also open an IRA (Individual Retirement Account) and start investing there.
Pro Tip: At bare minimum, make sure you take advantage of the full match (if they offer one)! For example, if your employer offers a 50% match on the first 6% you contribute, make sure you are contributing 6% of your salary. In return you will receive 3% (50% * 6%) from your employer to your retirement plan. This is why they call it "free" money. Would you ever say no to a 3% bonus each year? Yeah, that’s what I thought! Get your full match!
Store Your Money Where It Can Grow
Avoid storing your money in savings accounts (besides short-term needs and your emergency fund) where it can't grow or earn interest. Keep the money in interest-bearing accounts or invest it where it can work for you. Your best friend is compounding interest! This is one of the simplest ways to increase your net worth through long-term investing. Investing doesn't have to be complicated — just continue to save!
Make a Plan
As we have discussed, there are several areas that can contribute to someone being a HENRY. Luckily, there are also many opportunities to improve your finances to graduate from the title of a HENRY. Like most aspects in life, it helps to have a plan. Start by identifying what is causing you to have a low net worth relative to your above-average income. In all likelihood, it is due to a combination of things like large student loans, poor spending habits, not saving enough, or not having enough time to build up assets since your income increased. If this is the case, create a plan that allows you to increase income, reduce spending, pay down debt and increase your savings. This is definitely easier said than done, but having a plan will help remind you why you're doing what you're doing.
Being a HENRY is not a bad thing — you must have done something right to earn that high income! Now, let's get the net worth growing, and you can ditch the HENRY status! It won't happen overnight (unless you hit the lottery…which is not common), so you need to start making good decisions now. Success in personal finance comes from many small victories. The get-rich-quick dream is just that — a dream. You can do this. Go get 'em!