Are You a HENRY (High Earner, Not Rich Yet)?
You’re a High Earner (but you’re) Not Rich Yet? If that description fits, you could call yourself a HENRY. The acronym was created in a Fortune magazine article in 2003; twenty years later, it is still relevant. Hence, HENRYs earn a significant income and could become wealthier than most people. However, and here’s the critical point, they don’t manage to save and invest much. As a result, they are jeopardizing a comfortable future retirement and other financial goals that they may think of as a “given” for people in their income bracket.
How do HENRYs get that way?
HENRYs can be thought of as the “working rich” (in contrast to the more familiar “working poor”). Ironically, they typically have what most people in the middle and lower income brackets would consider a lavish lifestyle. But because many HENRYs spend most or all of their income as fast as they earn it, they often feel like they are living paycheck to paycheck – and that’s true. HENRYs often face challenges in building wealth, proving that a high salary does not guarantee a financially healthy life. Since they are high earners, HENRYs are not forced to prioritize spending like people who earn less do. HENRYs often have a Fear of Missing Out (“Doctor so-and-so is going on an African safari/wearing a Rolex/driving a Porsche, so I’m going to do that”). There may even be a touch of indulgence involved—HENRYs may think, “I earn enough to do what I want, and I want to enjoy myself now.” But that ignores the fact that to achieve wealth, savings need time to grow. Another factor relates to the psychological scars left by the 2008 Financial Crisis. Today’s 35-year-olds, who at age 20 saw adults losing their jobs and homes, may feel there is no point in investing. Unlike their parents’ generation, some Millennials don’t mind talking about how much money they make, but they rarely talk about the fact that they haven’t saved much and do not connect the dots between their wasteful spending and their lack of savings. They often have no financial plan—“I’ll save money later; it will all work out” is not a plan. None of us knows the path our lives will take, and as an old song says, someday never comes. Many physicians and lawyers end up in the HENRY category. They get a delayed start on their careers because they spend many years in school (and, for MDs, in a medical residency). They usually command high salaries when they start working and feel that they have to “catch up” in getting all the stuff and doing everything that has been out of reach until now. People in this category often feel deprived because they lived frugally for years while preparing for their careers. Now that they are bringing in a nice income, they want to enjoy it. We believe there is nothing wrong with using some of your income to enjoy your life today. In fact, we often encourage it in many circumstances. You first need to consider that a high income can mean a secure, comfortable future, but there are thousands of stories of people who made big money and are just scraping by in their later years. It is all too easy to fall victim to lifestyle creep. We quickly grow comfortable in our current way of living and then yearn for more. Practically no one desires a replacement vehicle that isn’t nicer, and therefore more expensive, than their existing automobile. It’s easy to get caught up in that cycle and spend more than you should.
Outgo Versus Income
Perhaps the most significant challenge for HENRYs is that their spending rises along with their income. Imagine you want to fill a bucket with sand, but there are some holes in the bottom of the bucket. As you put sand in, some of it will run out through the holes. But if you add sand faster than it drains out, the level of sand in the bucket will rise. The sand is your income, the amount of sand in the bucket is your wealth, and the holes in the bottom represent what you spend money on today – food, housing, cars, vacations, and so on. For HENRYs, there’s a twist: as they increase the amount of sand they pour into the bucket, the holes in the bottom get bigger. In other words, as they earn more, they spend more. That means there is no way the level of sand (wealth) will ever rise. Changing this situation doesn’t have to mean living like a pauper, but it does require not spending as much as you earn. As a general rule, as your income rises, so should the percentage of your income that goes toward saving and investing for your future. And remember, the more you save when you are younger, the bigger the impact due to the astonishingly powerful impact of compounding returns.
Analyzing Spending Is Eye-Opening
Many HENRY physicians and lawyers carry student loan debt, so part of their income goes to paying that off. But HENRYs often take on additional debt to live above their means. They buy big homes in nice neighborhoods, usually with a big mortgage. They drive nice cars and make large lease or car loan payments. They take high-end vacations and sometimes even use credit cards to pay for them. With interest rates on credit cards averaging 20%, those vacations can cost far more than they paid for hotels, airfares, and dining out. Analyzing where your after-tax income is going can be eye-opening for anyone. For HENRYs who often spend money without giving it much thought, going through this exercise can be a shock. For example, one HENRY couple with no children discovered they were spending $40K per year on food. Armed with that information, they consciously chose to cut back on dining out to save more. Without this material information, these choices are simply not apparent. Note that this is not about setting a strict budget, although a budget provides useful guardrails for high earners who want to escape the HENRY “curse.” If the idea of a budget is unsettling, think of it as maximizing the utility of each dollar you spend. The question then becomes, what would provide greater utility – continuing to spend $40,000 on food (about $55 per person per day for our HENRY couple) or cutting back to about $40 per person and being able to retire months or years earlier? Perhaps if early retirement is not a desire of yours, then it could allow you to attain some other aspiration sooner. A good financial planner can help the HENRYs we described above overcome an aversion to budgeting. Some may be embarrassed to reveal how they spend their money, but remember – we take off our clothes with our doctors so they can evaluate our health and treat what needs to be treated. Doctors have seen all kinds of people without their clothes, and financial planners have seen all kinds of spending behaviors. It’s not about judgment; it’s about making informed choices so you can live your best life now and in the future.
High Earners Can Do More (for themselves and the people they care about most)
To recap, HENRYs:
Have a much higher-than-average income
Spend almost everything they earn (sometimes more)
Feel they have little to no wealth (and they’re right)
Working with a good financial planner can help HENRYs to save more in the most tax-efficient, tax-conscious way. This reduces stress and offers long-term financial benefits that bring peace of mind and fulfillment. If you are a HENRY, other people probably depend on you. That can be a wake-up call. And, you want to be a good steward of the opportunities your high earnings represent. You worked hard to get where you are and want to make the most of the financial rewards you are now enjoying; don’t squander them. Furthermore, if you have charitable inclinations and want to “pay it forward” someday. In that case, you want to position yourself to be able to do that without worrying about running out of money. HENRYs can turn into HEWS (High Earners Who Save – admittedly, we just made that up), but it’s not about piling up as much money in stocks and bonds as you possibly can. At Gold Medal Waters, we talk about “return on life.” To us, that means using your money to create value in your life. You work for your money, and you want your money to work for you, not just today – for the rest of your life and beyond. If someone you know and care about fits the HENRY profile, share this article with them. If you fit the HENRY description and are ready for a positive change, we invite you to contact us to discuss how to use your income to enjoy your lifestyle today and in the future.
This post is for informational purposes only and is not intended to be a solicitation or substitute for individualized investment advice. Information provided is believed to be from reliable sources, but no liability is accepted for any inaccuracies. Past performance is no guarantee of future results. Advisory services offered through Gold Medal Waters, a Registered Investment Advisor.