Investing as a HENRY (High Earner, Not Rich Yet)

Coined in 2003, the term HENRY, or “High Earner Not Yet Rich,” refers to people who make an above-average salary but still don’t manage to accumulate much wealth. The term is said to apply to one of two groups of people: 1) millennials who make between $100,000 and $200,000 per year, or 2) families that make roughly $250,000 to $500,000 per year.

But 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.

How HENRYs Can Reduce Their Expenses

HENRYs are sometimes referred to as the “working rich.” If they were to stop working, they wouldn’t continue to be high earners since they make money mainly from their jobs. This is in contrast to ultra-high net worth individuals, who frequently own significant income-producing assets (like real estate holdings, revenue-creating businesses, or dividend-yielding stocks).

HENRYs tend to face challenges in accumulating wealth since much of their income goes to expenses, such as education costs, housing, and debt payments. There are a few ways that HENRYs could potentially pull themselves out of their situation, though. Here’s a look at how.

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 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 13.30%. Meanwhile, Utah has a flat income tax rate of 4.65%, while Texas residents pay zero state income tax.

Living costs can have an even bigger impact on expenses than taxes. The median price of a home in Hawaii is multiple times higher than in West Virginia, for instance.

HENRYs also 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.

It is 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 if 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.

Examining Tax Deductions

On top of local living expenses, another expense burden that tends to weigh heavily on many individuals, especially HENRYs, is taxes. 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 at higher rates if they earn more money, as opposed to states with 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 IRAs 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.

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. 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.

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. Plus, many states allow for the deduction of funds deposited into these accounts 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.

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 less in interest than if the higher rate debts were 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 HENRYs 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 toward the principal or on already capitalized student loan interest, borrowers might get stuck with a lot of their monthly payments going toward accruing interest. In turn, this may make it difficult to quickly pay off outstanding educational debts.

Becoming as debt-free as possible can help individuals not relinquish income to interest payments.

Diversifying Investments for the Future

Once the above items are taken care of, HENRYs could invest the extra income saved in ways that will help their money grow. Even investors in their 20s may want to research ways to start investing. Here’s a look at the types of investments HENRYs might consider.

Income-Producing Assets

Wealth, understood as an expanding total net worth, is the kind of thing HENRYs are aiming for but can have difficulty achieving — 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, such as bonds, real estate investment trusts (REITs), and dividend-yielding stocks.

Recommended: Income vs. Net Worth: Main Differences

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. This is due to the fact that more shares will be held, and payments are made to shareholders in proportion to how many shares they own.

Exchange-Traded Funds

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 an additional investment option.

Many ETFs yield dividends, although those dividends tend to be somewhat smaller than those offered to individual shareholders of company stocks.

Real Estate

HENRYs often own their own home. As such, 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. Some HENRYs may 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 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’re 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.

The Takeaway

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.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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