The 5 Investment Principles Every HENRY Should Know

If you're a HENRY (High Earner, Not Rich Yet), you're in a unique financial position. You have significant income potential but may not have accumulated substantial wealth yet. This creates both opportunities and challenges when it comes to investing.

Traditional investment advice often doesn't apply to HENRYs. You need specialized strategies that account for your high income, potential tax implications, and the need to build wealth efficiently. Here are the 5 investment principles every HENRY should know.

What is a HENRY?

HENRY stands for "High Earner, Not Rich Yet." These are typically professionals in their 30s and 40s who earn $100,000 to $500,000 annually but haven't accumulated significant wealth yet. Common HENRYs include:

• Doctors, lawyers, and other professionals
• Tech workers and executives
• Entrepreneurs and business owners
• Sales professionals and consultants

Principle 1: Maximize Tax-Advantaged Accounts First

Your Tax-Advantaged Investment Priority List:

1. 401(k) with employer match - This is free money. Always contribute enough to get the full match.
2. Health Savings Account (HSA) - Triple tax advantage: pre-tax contributions, tax-free growth, tax-free withdrawals for medical expenses.
3. Traditional IRA or Roth IRA - Depending on your tax situation and income limits.
4. 529 plans - If you have children, for education expenses.
5. Backdoor Roth IRA - For high earners who exceed Roth IRA income limits.

HENRY-Specific Tax Strategies:

• Max out your 401(k): Contribute the full $22,500 (2024 limit) plus catch-up contributions if over 50.
• Use HSA as retirement account: Pay medical expenses out of pocket and let HSA grow tax-free.
• Consider Roth conversions: Convert traditional IRA funds to Roth during lower-income years.
• Tax-loss harvesting: Offset gains with losses in taxable accounts.

Principle 2: Embrace Asset Location Strategy

Optimal Asset Location for HENRYs:

• Taxable accounts: Municipal bonds, index funds with low turnover, individual stocks you plan to hold long-term
• Traditional 401(k)/IRA: High-yield bonds, actively managed funds, REITs
• Roth accounts: High-growth stocks, small-cap funds, international stocks
• HSA: Growth investments since withdrawals are tax-free for medical expenses

Principle 3: Focus on Wealth Building, Not Income

Many HENRYs make the mistake of focusing on generating more income rather than building wealth. While income is important, wealth building requires a different mindset.

Wealth Building vs. Income Generation:

• Wealth building: Focuses on accumulating assets that generate passive income
• Income generation: Focuses on trading time for money

HENRY Wealth Building Strategies:

1. Invest in appreciating assets: Stocks, real estate, businesses
2. Minimize lifestyle inflation: Don't increase spending with every raise
3. Build multiple income streams: Rental properties, dividend stocks, side businesses
4. Reinvest earnings: Use investment returns to buy more assets

Principle 4: Leverage Your High Income for Aggressive Investing

HENRYs have a unique advantage: high income allows for aggressive investment strategies that others can't afford.

Aggressive HENRY Investment Strategies:

• Dollar-cost averaging with large amounts: Invest significant portions of each paycheck
• Real estate investing: Use high income to qualify for larger mortgages
• Private investments: Access to private equity, venture capital, and other alternative investments
• Business ownership: Start or acquire businesses using high income for financing

Risk Management for Aggressive Investing:

• Maintain emergency fund: 6-12 months of expenses
• Diversify across asset classes: Don't put all eggs in one basket
• Consider insurance: Disability, life, and liability insurance
• Regular portfolio rebalancing: Maintain target asset allocation

Principle 5: Plan for the Tax Cliff

Tax Cliff Strategies:

• Bunch deductions: Group deductions in alternating years to exceed standard deduction
• Tax-loss harvesting: Offset gains with losses
• Charitable giving strategies: Donor-advised funds, charitable remainder trusts
• Retirement account strategies: Roth conversions during lower-income years

HENRY Tax Planning Calendar:

• January-March: Fund IRAs and HSAs for previous year
• April-June: Review tax returns and plan for current year
• July-September: Tax-loss harvesting and portfolio rebalancing
• October-December: Year-end tax planning and charitable giving

Common HENRY Investment Mistakes to Avoid

1. Lifestyle Inflation

Don't increase your spending with every raise. Instead, invest the difference.

2. Ignoring Tax Efficiency

High earners pay high taxes. Every tax-advantaged dollar is worth significantly more.

3. Over-Investing in Employer Stock

Don't put too many eggs in one basket, even if it's your employer.

4. Neglecting Insurance

High earners need adequate disability, life, and liability insurance.

5. Trying to Time the Market

Focus on time in the market, not timing the market.

Building Your HENRY Investment Plan

Step 1: Assess Your Current Situation

• Calculate your net worth
• Review your current investment allocation
• Analyze your tax situation
• Identify your financial goals

Step 2: Set Clear Investment Goals

• Define your target net worth
• Set timeline for financial independence
• Plan for major expenses (home, education, etc.)
• Consider legacy planning

Step 3: Create Your Investment Strategy

• Maximize tax-advantaged accounts
• Implement asset location strategy
• Choose appropriate asset allocation
• Plan for regular rebalancing

Conclusion

As a HENRY, you have unique opportunities and challenges when it comes to investing. By following these five principles, you can build wealth more efficiently and avoid common pitfalls that many high earners face.

Remember, the goal isn't just to earn more money—it's to build lasting wealth that can provide financial independence and security for you and your family. Start implementing these principles today, and you'll be well on your way to becoming not just a high earner, but truly wealthy.

The key is consistency and patience. With your high income and these investment principles, you have the potential to build significant wealth over time. The sooner you start, the more time your money has to compound and grow.