If you’re someone who earns a lot of money (like, low to mid six figures) but you don’t have enough saved or invested to be considered “rich,” you most likely fall into a group of earners known as HENRYs. The acronym stands for High Earner, Not Rich Yet.
The term isn’t new; it’s been around since 2003 and was coined by writer Shawn Tully in a Fortune Magazine article. Despite their higher-than-average salaries, some HENRYs don’t think they’ll become rich because of factors like high tax rates, high cost of living and low savings. Others may be on their way to building their wealth but, though they’re off to an impactful start, still need some extra guidance.So Select asked Priya Malani, the co-founder and CEO of Stash Wealth, to share some financial moves HENRYs should consider making. Stash Wealth was created especially for advising high earners who aren’t yet rich. Here’s what Malani thinks HENRYs should focus on once they have their other financial bases covered.
Invest outside of your retirement accounts
Financial planners typically recommend that everyone contribute to their workplace 401(k) account (if they are employed by a company, or a solo 401(k) if they are self-employed). The advice usually encourages employees to contribute at least up to the amount needed for their company to match their contributions. This way, they can take full advantage of the opportunity to receive as much additional money for their 401(k) as possible.
It’s also usually recommended that individuals set up an individual retirement account (IRA for short) so they can make retirement contributions outside of just their 401(k). IRA’s have a contribution limit of $6,000 per year, which can really boost your overall cushion of retirement savings. Plus, you don’t have to work with an employer to open up an IRA — you can set up an account for yourself through Fidelity or Charles Schwab, or through robo-advisors like Wealthfront and Betterment.
But if you’ve addressed those accounts and still have some discretionary income, you can take your contributions to another level. Malani recommends beginning to invest your money beyond just your retirement accounts.
You might consider opening a taxable brokerage account to invest in stocks, ETFs, index funds or mutual funds. If you don’t want to put in too much work to manage your additional investments, or if you’re still new to investing, you might consider putting your money in index funds. This type of asset is a passively managed fund that allows you to put money into a basket of the largest U.S. companies with low fees and minimal risk. Mutual funds, by comparison, are actively managed by a fund manager and usually carry higher fees.Select narrowed down some of the best investing apps and Betterment made it out on top for its automated investing features, and Robinhood was recommended for those who want a more hands-on approach to their investing.
Lower your taxable income
Getting a big tax bill can sometimes be a real shock to your bank account. However, there are some strategies you can use to reduce your taxable income so you can keep more of your money for your personal financial goals.
“Work with your accountant to find the ways in which you can lower your taxable income,” Malani says. “One big way [to do that] is by investing in your 401(k), especially up to your company match.”
Generally, contributions you make to retirement accounts — like your 401(k), 403(b), or IRA — can be deducted (partially or fully) from your taxable income. Just keep in mind that there are limits for which levels of income and tax filing statuses qualify for such deductions, so you might want to work with an accountant to figure out whether or not you’re eligible.
Another way to lower your taxable income is to contribute to a Health Savings Account (HSA, for short). HSA accounts allow you to contribute a portion of your paycheck (pre-tax) to save for qualifying medical expenses — but the money in an HSA can also be invested and the growth is tax-free. After age 65 you can withdraw your HSA funds for non-medical expenses, although you will have to pay regular income tax on those withdrawals.
For more personalized strategies for lowering your taxable income, you should speak to a certified financial planner. A CFP would be able to make recommendations based on your entire financial picture and your goals.
Double check your retirement strategy with a financial professional
One other important reason to speak to a CFP is to make sure you solidify your retirement strategy. This could mean discussing what retirement looks like for you and what steps you should take to start progressing toward that goal. It could also mean discussing how much money you’ll need in order to fund your retirement lifestyle.
According to Malani, some high-earners actually save more money for retirement than they actually need to. While it’s always nice to know that you have enough money and won’t outlive your retirement savings, stashing away too much money and not being able to spend it all means you’ll need to figure out how to divvy up the remaining cash amongst your beneficiaries. But you might also realize down the line that you could have afforded to spend more for enjoyment prior to retiring.
“We see HENRYs over-saving for retirement all the time,” Malani explains. “Remember that retirement looks different for everybody so there is no one size fits all advice. If you are a HENRY looking for a more traditional retirement, there are ways you can prepare for the lifestyle you’d like in your last 30 years without compromising your lifestyle today.”
Bottom line
Individuals who are high earners and have extra discretionary income may be in a place where they can begin to make financial moves beyond basics like having a fully funded emergency account and investing in their workplace 401(k).
High earners might consider investing in non-retirement brokerage accounts and working with a professional to find ways to lower their taxable income. They can also benefit from getting advice from a CFP when it comes to ensuring they don’t over-save for retirement.