Being a HENRY, or a High Earner, Not Rich Yet, might sound like an enviable position to be in. After all, these individuals earn substantial incomes, often working in competitive fields like finance in bustling cities like New York or London or technology in the San Francisco Bay Area. However, beneath the surface, HENRYs face significant financial challenges that can hinder their path to long-term prosperity. In this blog post, we will explore the dangers that HENRYs encounter, sharing real-life examples of individuals living in coastal cities and highlighting the impact of the Instagram-driven lifestyle.
Lifestyle Inflation
HENRYs often fall into the lifestyle inflation trap, wherein their spending increases in proportion to their rising income. This phenomenon is particularly prevalent in coastal cities and competitive fields like finance, where bonuses can make up a significant portion of annual earnings.
One of my college friends, Alex and his wife Sarah live a lavish lifestyle in New York City. Their Instagram-worthy lifestyle is sustained by their hefty finance industry bonuses. Once every few months, you can see them vacationing in a beautiful Aman hotel (~$2000+ per night). For Sarah’s recent 40th birthday, Alex surprised her with an all included trip with her friends to an island in the Caribbean.
Alex admits that, while they enjoy the finer things in life, they inadvertently neglect building a strong financial foundation. As their income rises, so do their expenses, leaving little room for saving and investing. And since a lot of their friendships are based on such lifestyles, they find it challenging to break free from the cycle of lifestyle inflation.
Limited Savings and Uncertain Path to Retirement
One of the most significant dangers HENRYs face is insufficient savings for their future needs, particularly retirement.
Despite their multi-six figure salaries, my coworker John and his wife Emily in the Bay Area struggle to save significantly due to the high cost of living. With John as a principal product manager at a MAANG company and Emily as a marketing manager in a startup, they earn north of $350,000 per year.
Based on the calculation in how much it costs to live in San Francisco as a family of 4, the annual spend is around $225,000.
Source: Minimum Income for a Luxury Lifestyle in San Francisco, Financial Otters
For John and Emily’s case specifically, their two kids are under 2 years old. They are spending over $45,000 per year on childcare related expenses. Established daycare centers can charge around $2500 per month. Nannies charge around $25-30/hour. With a part time nanny of 20 hours, it amounts to $2000 per month. On top of that, the first year of the baby can cost quite a lot.
John told me that they’ve adjusted their expectations that for the first 5 years of building a family, they will not be saving that much. Luckily, they’ve saved up for years before starting to have kids. So the 5 years of minimum savings will set them back a bit, but they do have a financial cushion to fall back on if something urgent happens.
Balancing current expenses with future financial goals becomes an uphill battle, casting doubt on their ability to achieve a secure retirement.
Lack of Investment Experience and Financial Management
With a minimum amount of savings, HENRYs can miss out on valuable opportunities to develop essential financial management skills.
Learning how to manage our own investment portfolio is a multi-year exercise. In their pursuit of the Instagram-worthy lifestyle, some HENRYs focus more on experiences and immediate gratification rather than investing for their future. Because of the lack of savings, HENRYs miss out on exposure to navigating investment decisions.
Personally, I find it significantly educational to have gone through the Great Financial Crisis early in my career, then the recent financial market correction. I have experienced first hand how it feels to see my portfolio go up significantly and go down significantly. I am learning how to take profit, to rebalance my portfolio to manage risks etc. In addition, I have also made two real estate investments over the years. Even though these investments have yielded mixed results, I continue to gain significant insights to how the real estate market works.
HENRYs are Running Naked
In the terminology of personal finance, I am more of a FatFire person, rather than LeanFIRE or baristaFIRE type. In other words, I am all about growing wealth for a comfortable retirement, enjoying wealth, rather than living an extremely frugal lifestyle that deprives myself.
That being said, when I see many coastal professionals pursuing the HENRY lifestyle, it feels alarming. HENRYs are a by product of the zero interest rate environment when money was essentially free and almost infinitely abundant. Across the San Francisco Bay Area, it is common to see HENRY behaviors in startup founders who raised multi-8/9 figures from venture capital.
HENRYs are always waiting for the big payday to make up for their lack of savings. That payday can come in the form of a large bonus at the end of each year, or an eventual IPO or sale of their startups.
With monetary policies continuing to stay restrictive, this payday may take a while, if ever, to arrive. HENRYs will need to adapt when the music stops.
Being in the Arena
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
Theodore Roosevelt
By cultivating financial discipline, focusing on long-term goals, and seeking professional advice, HENRYs can take control of their financial journey. Ultimately, the key is to start early and stay in the arena when it comes to managing our own finances.
