Earning six figures sounds like a lot, but for some, it just doesn't feel that way.
If you relate to that statement, it might mean you're a "Henry," short for "high earner, not rich yet." The acronym was invented by Shawn Tully in a 2003 Fortune magazine article, and has come to characterize a certain group of six-figure earners who are mostly millennials, Melkorka Licea wrote for the New York Post.
The typical Henry earns over $100,000, is in their early 30s, and lives in an urban area. They're also prone to making some big money mistakes that prevent them from building wealth.
To find out what exactly those mistakes are, Business Insider spoke with two experts: Gideon Drucker, a certified financial planner at Drucker Wealth and author of the book "How to Avoid H.E.N.R.Y. Syndrome," and Priya Malani, the founder of Stash Wealth, a financial firm that bills itself
as "Home of the Henrys."
According to Drucker and Malani, these are three of the most common money mistakes Henrys are making.
1. Henrys live above their means.
Henrys typically live above their means and fall victim to lifestyle creep, according to Drucker. Lifestyle creep happens when someone increases their standard of living to match a rise in their discretionary income.
But just because a Henry's income keeps going up doesn't mean they have to spend more money, Drucker said. In fact, they shouldn't spend more. If they get used to living off $3,000 or $4,000 a month, they might wake up a decade later and find they're spending $10,000 a month, he added.
Avoiding lifestyle creep is often touted by experts as one of the key ways to build wealth. Thomas C. Corley, who studied 233 wealthy individuals, 177 of whom were self-made millionaires, similarly found that lifestyle creep was a bad habit common
among those who suddenly found themselves making more money. The better habit to pick up instead, which he calls the "Rich Habit," is to forgo the desire to spend and instead focus on saving.
2. Henrys don't have a savings plan.
It's easy for Henrys to succumb to lifestyle creep when they don't have a plan to make sure they're saving consistently and automatically. According to Drucker, Henrys only save whatever money they have left at the end of the month after prioritizing all their other needs.
This, as it turns out, is exactly the opposite of what they should be doing.
Drucker said the better financial strategy is to pay yourself first — allocate money toward savings before your other budgeting categories. It's a classic piece of money advice for avoiding lifestyle inflation.
What Henrys need to do, he added, is take advantage of compound interest and allow balance and older interest payments in a savings account to earn interest over time. "Henry's don't have an understanding of their time horizons," Drucker said.
He helps them set up a "bucket" plan that segments money in three ways, based on each Henry's purpose:
- The "now" bucket is money sitting in the bank that's easily accessible — known as liquid money.
- The "later" bucket is for growth-oriented money, meant to be flexible in how you can take out the money. It's good for short-term goals such as buying a house.
- The "last" bucket is for long-term goals: retirement money. This bucket couldn't be touched even if you wanted to, Drucker said.
"We buy ourselves a time horizon with the first two buckets," he added. "Segmenting money allows you to not freak out so much."
3. Henrys buy houses they can't afford.
The pressure of keeping up with the Joneses can lead Henrys into buying homes they can't afford. But this isn't entirely their fault, Malani said.
"Henrys are prey to the mortgage industry: Because of their high income levels, oftentimes, Henrys are approved for a home loan much larger than their monthly incomes can support," she said. They end up "buying too much house and end up house poor."
The mortgage industry is incentivized to let you buy as much house as possible because the larger the mortgage, the more money the lender makes in the long run, Malani added. She advises not buying a home based on your pre-approval amount.
Consider this: Sarah Stanley Fallaw, the director of research for the Affluent Market Institute, surveyed more than 600 millionaires in America and found that most of the millionaires she studied had never purchased a home that cost more than triple their annual income.
The key to building wealth, she wrote in her book "The Next Millionaire Next Door: Enduring Strategies for Building Wealth," is living in a home you can easily afford.
