In 2003, a writer at Fortune Magazine coined a term for people who make an above average salary but still don’t manage to accumulate much wealth—”High Earner Not Yet Rich,” aka HENRY.
The term HENRY is said to apply to one of two groups of people— 1) millennials (born between 1980 and 2000) who make between $100,000 and $200,000 per year, or 2) families that make $250,000 to $500,000 per year (roughly).
HENRYs are often discussed in terms of the millennial generation, but there are also Gen X HENRYs and Baby Boomer HENRYs.
No matter their personal situations, HENRYs share something: namely, they make high incomes but aren’t saving a sizable chunk of their earnings. Despite taking home higher than average salaries, HENRYs’ expenditures leave little money left each month for either savings or income-producing investments.
HENRYs are sometimes referred to as the “working rich.” If they were to stop working, they wouldn’t continue to be high earners. Work income, not other investments, produce this sort of person’s earnings.
Whereas ultra-high net worth individuals frequently own significant income-producing assets (like real estate holdings, revenue-creating businesses, or dividend-yielding stocks), HENRYs make money mainly from their jobs.
A high earner not rich yet may enjoy several vacations per year, drive an expensive car, and have a larger-than-average home for their area.
Still, even high-earning individuals can find that there’s not much left after paying essential bills, covering educational expenses, spending on discretionary items, and putting money into a retirement fund like a 401(k) or an individual retirement account (IRA).
Part of what defines this group is that more of their income goes toward monthly expenses than into savings and wealth-building investments. So, from a financial planning perspective, they might not be that different from the millions of people living from paycheck to paycheck.
There are a few ways that HENRYs could potentially pull themselves out of their situation, though. These include things like lowering tax liabilities, paying down debt, cutting discretionary spending, diversifying investments, and investigating the possibility of relocating to a more affordable location.
Here’s an overview of potential investment strategies that HENRYS could research:
Relocating to a More Affordable Area
One important factor for HENRYs to consider is location. Where an investor lives can make a huge difference in terms of their ability to accumulate wealth. The cost of living can vary dramatically from region to region—as can state taxes.
The state of California, for example, has a state income tax rate of up to 13%. Utah has a tax rate of about 5%, while Texas has a tax rate of 0% (residents of the state of Texas pay zero state tax).
Living costs can have an even bigger impact on expenses than taxes. The median price of a home in Hawaii is $636,000. In West Virginia, the median price of a home is only $108,000.
According to data published by Equifax, HENRYs tend to live in metro areas with higher costs of living, which may make growing assets harder.
Choosing to relocate to a more affordable area might be an appealing option for those who can work remotely or transfer locations at their current jobs. Savings from a reduced cost of living could add up significantly over time.
Here’s a summary of tax rules for out-of-state remote workers.
(It’s worth noting that the average annual salary in more affordable areas is often lower as well, so HENRYs may want to investigate whether their jobs can be done remotely or their skills are in high demand in other towns, cities, and states).
While moving may not be easy or simple, it could be one way for a high earner not rich yet to cut income-consuming costs and begin setting aside more money for wealth-aimed investments or savings.
On top of local living expenses, there are two other expense burdens that tend to weigh heavily on many individuals, especially HENRYs—taxes and debt.
Examining Tax Deductions
Employees who earn higher salaries tend to pay more in income taxes. This is especially true in states that have state tax brackets that tax individuals higher rates if they earn more money, as opposed to states that have flat tax rates.
One common way to reduce income tax burdens is by contributing to a traditional individual retirement account such as a 401(k) or IRA. (Contributions to Roth IRA aren’t deductible).
Some HENRYs might already have a retirement account through their employers. In that case, they may opt to make the maximum contribution, especially if their employer will match it as some do. (For more information on IRA deduction limits, check out the IRS site ).
Certain amounts of donations to qualifying charitable organizations can also be tax deductible. Of course, if a high earner not rich yet has little disposable income left at the end of each month, sizable cash or non-cash property donations might not be a viable option for some.
For HENRYs who own a home, energy-efficiency tax benefits could be something to look into as well.
Installing solar panels and solar-powered water heaters are among the most common items that can qualify for this kind of tax deduction. Others that are less common include geothermal heat pumps, renewable-energy fuel cells, and wind turbines.
Homeowners can receive a tax credit of up to 30% of the cost of this kind of home improvement project—broadly, this alternative energy equipment credit does not apply to properties put into service after the end of 2021. Other than fuel cell installation, there’s no maximum limit on the amount of money that can be tax deductible.
Energy-efficiency tax deductions can apply to a primary residence. And, where applicable, they can be claimed on other properties an individual might own.
HENRYs who have children and live in a state that allows it might be able to deduct 529 savings plan (aka a college fund) contributions from their state income taxes.
Opening a 529 plan can address both how to pay for a child’s college expenses and, potentially, reduce state income tax liability. (Nota bene: 529 plans are not deductible for federal income taxes).
A high earner not rich yet with no children could still open a 529 plan for friends, nieces, nephews, or even for themselves if they plan on going to college in the future.
While 529 contributions aren’t tax-deductible on the federal level, the funds can grow tax-free. Some 30 or more states allow for the funds deposited into these accounts to be deducted from state income taxes.
Paying Down Debt
It’s common for HENRYs to carry heavy debt burdens. Most often, this comes from student loans, a mortgage, auto loans and credit card debt. The average HENRY in 2017, for instance, had a total credit balance of $160,000 with 10 different credit accounts on average.
One reliable way to pay down debt is to make higher-than-minimum payments on debts carrying the highest interest rates. In this way, individuals can pay back less in interest than if the higher rate debts were allowed to continue compounding.
Credit cards typically have the highest interest rates of any debt that most people carry (payday loans and some other types of unconventional loans might have higher rates still, but let’s assume HENRY’s aren’t relying on these services).
For many borrowers, student loan debts can quickly become a problem. Interest rates on student loans can vary—especially, if borrowers have a mix of federal and private student loans.
And, when large enough payments aren’t made towards the principal or on already capitalized student loan interest, borrowers might be stuck with a lot of their monthly payments going towards accruing interest—which may make it difficult to quickly pay off outstanding educational debts.
Being as debt-free as possible can help individuals not to relinquish earnings income on interest payments.
Diversifying Investments for the Future
Once the above items have been taken care of, the extra income saved could be invested in ways that will help it grow. Even investors in their 20s may want to research ways to start investing.
Wealth, understood as an expanding total net worth, is the kind of thing HENRYs are aiming for but never seem to achieve—despite their high-earner incomes. Breaking this cycle could involve first cutting certain expenditures (i.e., cost of living or high interest debt).
Then, individuals may opt to take some of their newly freed up funds and invest in income-producing assets. Income-producing assets may span securities that bear interest or dividends – bonds, real estate investment trusts (REITs), and dividend-yielding stocks.
Dividend Reinvestment Programs (DRIPs)
HENRYs can take advantage of the power of compounding interest by utilizing what’s known as a dividend reinvestment program (DRIP). Enrolling eligible securities into a DRIP means that any dividends paid out will automatically be used to purchase shares of the same security.
With the DRIP approach to investing, the next dividend payment will be larger than the last—as more shares will be held and payments are made to shareholders in proportion to how many shares they own.
Given that some HENRYs might not have a lot of non-work time to actively manage their investments, passive investment vehicles —like exchange-traded funds (ETFs)— might be a one additional investment option.
Many ETFs yield dividends, although those dividends tend to be somewhat smaller than those offered to individual shareholders of company stocks.
According to Equifax, 78% of HENRYs own their own home. And, mortgage payments combined with interest can make up a substantial portion of their regular monthly expenses.
While some people opt to buy a home as an investment, hoping that the property will grow in value over the years, buying real-estate does not always guarantee a profitable return.
Someone seeking to shirk off their HENRY status could decide to switch or downsize to a less expensive apartment or home—assuming the cost of rent or a new mortgage is less than their current house payments.
In some areas, rentals can be quite pricey, so it’s worth doing your homework to compare the pros and cons of renting vs. buying where you live.
When individuals can cut back on monthly housing expenses, it may then be possible to invest some of their freed up income into additional assets. If an investor still wants to have exposure to property, they could choose to invest in real estate investment trusts (REITs), which are known for having some of the highest dividend yields in the market.
Since REITs are required by law to pay a certain percentage of their income to investors in the form of dividends, it’s not surprising that they are a favorite among investors seeking potential earnings.
Naturally, as with any real estate investment, fluctuations in interest rates and demand may impact an REIT’s market performance.
Investing Now for the Future
When it comes time to start investing, there’s no need to wait until retirement is nigh. After all, the longer certain securities are owned, the more time they could potentially accrue value or that dividends could be paid out.
SoFi Invest® offers individuals the tools they need to start investing online, whether they’re a new investor, HENRY or experienced market watcher.
With SoFi Invest, members can access complimentary financial planners, who can discuss the investor’s financial goals and help them map out various paths to a financial future.
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