Are America’s “Rich” Are Wasting Their Financial Potential?
We all have different understandings of what it means to be “rich.” It used to be that people earning a six-figure salary were automatically considered rich, but that’s changed.
You may have heard a term floating around over the past few years: HENRY. This stands for “high earner not rich yet.” The term was coined by Fortune, and is supposed to give a name to families who earn between $250,000 and $500,000 but haven’t been able to amass a high net worth after paying for childcare, living expenses, taxes, and more.
You may be thinking that this it’s pretty ludicrous that people earning this much aren’t feeling like they’re rich, and indeed, those who earn a net salary of around $165,000 per year are in the top .05% of richest people in the world by income. You’d think that people earning that much wouldn’t have any issue amassing wealth! But for many individuals and families in high cost-of-living areas like the San Francisco Bay Area, New York, or Seattle, the reality is that high income earners often feel far from rich.
So why is this? And if you are a HENRY, what can you do to start building a healthy net worth?
Some High-Earners are Living Paycheck to Paycheck
While it might seem crazy that high earners aren’t rich, the HENRY phenomenon is real. A 2015 Nielsen study found that 25% of families making $150,000 or more are living paycheck-to-paycheck. And a 2016 GoToBankingRate survey states that 23% of Americans earning $150,000 or more have less than $1,000 in savings. Why is this? It could be for a number of reasons. The student debt crisis, increasing levels of credit card debt, increased lifestyle spending, and high cost of living could all be culprits.
Other Reasons High Earners Are Struggling to Get Ahead
Of course, it’s important to note that a six-figure salary doesn’t go as far as it used to – especially in certain parts of the country. Take San Francisco, for example, where the median home value ballooned from $420,000 in January of 2000 to $1.38 million in 2019. That means that you’ll need to make at least $172,153 to afford a normal home in San Francisco on an ongoing basis, assuming that 36% of your income is going to housing costs.
In addition to high housing costs, there are other financial hurdles that working Americans have to face that are out of our control. For one, when accounting for inflation, median household incomes in the United States have shrunk over recent decades. Meanwhile, the cost of commodities and household necessities have risen significantly. A few examples*:
|Expense||Cost in 2000||Cost in 2019||% Change|
|Private College Tuition||$22,000||$46,950||113.4%|
|Avg. Cost of a New Car||$20,300||$37,185||83.2%|
Got kids? Ask any parent how expensive it has become. According to the U.S. Department of Agriculture, the price tag for raising one child (excluding the cost of college) was $233,610 in 2018. Then if you have two kids, like the average American family, it’s no wonder that there is a HENRY epidemic!
How HENRYs Can Build Their Wealth
If you look only at the factors working against you, it’s easy to feel like you’ll never be able to build the amount of wealth you want, or that you’ll never be as successful as previous generations. But that would be a mistake. No matter what, remember that you have control.
You may not be able to dictate the cost of healthcare, daycare, or college tuition, but you are 100% in charge of how you spend your extra funds. Be honest with yourself – are you reaching your potential? Are you saving and investing as much as you could be?
If you know for a fact that you aren’t, there’s still time to turn things around. Changes you make today can mean the difference between having money for emergencies or living paycheck to paycheck, retiring early or never retiring at all, having peace of mind or struggling to make ends meet. What you do today matters, even if you’re late to the game.
Are you a HENRY ready to make a change? Here are some steps you can take to do just that:
- Track your spending – One of the most efficient ways to see how much you’re wasting on lifestyle purchases is to track your spending. Personal Capital’s free financial tools, for example, groups all of your purchases into categories and presents them in easy-to-interpret pie charts and graphs.
- Find ways to save – Once you begin tracking your purchases and discover your problem areas, there’s nowhere to hide! Find ways to save on your most common splurges. Cut dining out down to once per week, for example. Subscribe to a less expensive streaming service rather than cable, cancel monthly memberships you don’t use, and whittle down your grocery bills. Small changes will add up over time!
- Create a budget – Tracking your spending can be an eye-opening experience, but it’s also a great first step towards creating a monthly budget. Once you figure out your ideal spending for the month, put it down on paper. As the month progresses, track your spending to stay on track. It might take a while to stick to new spending limits, but you’ll eventually learn to live within self-imposed limits.
- Maximize tax-advantaged retirement accounts – One of the easiest ways to grow your nest egg, and lower your tax bill, is to maximize tax-advantaged retirement accounts. The IRS raised 401k contribution limits up to $19,500 per year starting in 2020, and anyone with earned income can also open a traditional IRA. Raise your retirement contributions at work or set up automatic contributions on payday so you can “set it and forget it.”
- Hire a financial advisor – If you feel overwhelmed, it may be worth it to hire a personal financial advisor. Personal Capital, for example, also offers advisory services where conflict-free financial advisors can help you lay out your short-term and long-term goals, and make a plan to reach them. Another thing about being a high earner is that you’ll also be subject to hefty taxes, so having a professional financial advisor and tax accountant in your corner to help you plan and invest in the most tax-efficient way possible.
Our Take: How to Break the HENRY Cycle
The most important thing when building wealth is to think long-term. Don’t just get through this week, month, or year. Think about how well off you’ll be in five, 10, or 20 years if nothing changes. Picture yourself as a little old lady living with the money you set aside for her. Be honest; are you taking good care of her?
It may be harder and harder to save, but it’s not impossible. And if you’re a HENRY living in America, you’re probably luckier and more privileged than you realize. Don’t forget the “not rich yet” part of the acronym. You can absolutely get there, but it’ll involve taking some action.
If you haven’t already, download Personal Capital’s free financial dashboard, where you can aggregate all of your bank, investing, and retirement accounts as well as your loans and liabilities to get a real sense of your net worth. You can also use the tool to create a budget for yourself and track your spending to make sure you are sticking to your plan.
*Sources:All 2000 numbers: https://www.personalcapital.com/blog/wp-content/uploads/2015/06/Americas-Rich-Chart.png Source: David Stockman; Eggs in 2019: https://www.ams.usda.gov/sites/default/files/media/Egg%20Markets%20Overview.pdf; Ground Beef in 2019: https://beef2live.com/story-retail-ground-beef-prices-month-89-114059; Movie Tickets in 2019: https://www.hollywoodreporter.com/news/average-movie-ticket-rises-926-second-quarter-1225385; Private College Tuition in 2019: https://www.valuepenguin.com/student-loans/average-cost-of-college; Cost of a New Car in 2019: https://www.prnewswire.com/news-releases/average-new-car-prices-up-nearly-4-percent-year-over-year-for-may-2019-according-to-kelley-blue-book-300860710.html Disclaimer: The information on this website is for informational purposes only and does not constitute a complete description of our investment services or performance. No part of this site nor the links contained therein is a solicitation or offer to sell securities or investment advisory services, except where applicable in states where we are registered, or where an exemption or exclusion from such registration exists. Third party data is obtained from sources believed to be reliable. However, Personal Capital Advisors Corporation cannot guarantee that data’s currency, accuracy, timeliness, completeness or fitness for any particular purpose. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.