The balancing act of income and net worth

Family & Lifestyle

Maintaining a balance between net worth and income will need to be adapted throughout your lifetime – learning strategies to manage the two can help.

There are a multitude of acronyms used to describe households and financial status. You may have heard of KIPPERS (Kids In Parents Pockets Eroding Retirement Savings), MUPPIE (Middle-aged Upcoming Prosperous Professional) or RINKs (Retired Income No Kids). But has HENRY made it onto your radar? And might it apply to you, or your younger loved ones?

Who are HENRYs?

HENRY stands for High Earner, Not Rich Yet. You may be someone who pursued higher education and makes a salary commensurate with the investment you put in – but on the flip side, you’re saddled with student loans, pay high taxes, have a hefty mortgage and are up against high living expenses. Maybe you’re a doctor, lawyer, psychologist, educator or other professional with little savings or investments, making you feel like generational wealth might be a far-away destination.

It can vary a bit If you’re looking for the strict definition of a HENRY. Some cite HENRYs’ earnings between $100,000 and $500,000. But salary is relative because costs vary significantly depending on where you live. Being in the HENRY category means you might need a strategic plan to make long-term progress if your income is tied up in expenses and loan payoffs. Plus, the loss of your job could be a financial catastrophe; locking yourself into expenses that track with your current income, but not your overall wealth, can also be a problem.

Building wealth over time

Some simple but effective strategies can allow you to build long-term wealth while addressing your immediate needs like debt repayment and living expenses.

Consider two moves that could free up more cash to invest in other assets. First, reduce your current tax bill by contributing the maximum to your employer-sponsored pretax 401(k), and consider other tax-advantaged savings vehicles like traditional IRAs and HSAs that can further reduce your current tax burden.

Second, consider your location. For some, where you live is intrinsic to your current position – but for others, if you have the option for hybrid work or working from home, consider moving to a less expensive geographic area.

A thorough look at day-to-day fixed and flexible expenses is also necessary to free up more cash to invest. You may have some “lifestyle creep” in the form of leisure, entertainment and other flexible expenses that may seem like necessities but, upon closer inspection, wouldn’t leave you in a dire situation if they were reduced.

Debt is another area where HENRYs should be mindful. School, auto or personal loans – and credit card debt – are often the primary areas where you can make changes. In addition, consider asking for an interest reduction from your credit card companies if you’ve been an on-time payer with a long and consistent track record. All this requires is a “goodwill letter” to your credit card company – a sample of which can be found easily online.

The high net worth but low-income camp

Those with high net worth but low income are on the opposite end of the spectrum. Some who fall into this category are business owners whose wealth is tied up in their businesses; others may be early retirees who’ve built up a meaningful investment portfolio and own paid-off properties, but no longer receive a steady income from a paycheck. They’re asset rich, but the major issue is the low amount of available reliable income.

The lack of liquidity comes with risks. This can cause problems in a volatile market, or when there are unexpected higher taxes from selling investments or liquidating portfolio assets, for example, or other unforeseen expenses.

Short- and long-term plans

Diversifying your assets for more short- and long-term flexibility and reduced risk over time can help meet your cash flow needs. Ideally, if you have a three-to-six-month emergency fund in cash savings, consider where to put money according to liquidity. Your emergency fund, for example, may go into a high-yield savings account or a money market account. Funds you might need access to in the next one to five years can go into T-bills, I-bonds or CDs. Illiquid assets like your house, car or other real estate holdings will be part of your long-term net worth plan and can build your equity.

The bottom line when it comes to balancing your net worth and income throughout your life is that a diverse portfolio with different types of liquidity may be the most appropriate for building long-term wealth, maximizing your cash flow and creating a life you love. Talk to your advisor about where you fall in these categories and how you can move the needle to create a more balanced outlook.

There is no assurance any investment strategy will be successful. Investing involves risk including the possible loss of capital. Diversification does not guarantee a profit nor protect against loss. Any withdrawals from tax deferred accounts, such as a 401(k) or IRA, may be subject to income taxes and prior to age 59 1/2 a 10% federal penalty tax may also apply.

Sources: wealthkeel.com; experian.com; moneymade.io; manulife.sg; investopedia.com; bestevercre.com