3 financial moves for every High Earner
If you’re someone who earns a lot of money (like, low to mid six figures) but you don’t have enough saved or invested to be considered “rich,” you most likely fall into a group of earners known as HENRYs. The acronym stands for High Earner, Not Rich Yet.
The term isn’t new; it’s been around since 2003 and was coined by writer Shawn Tully in a Fortune Magazine article. Despite their higher-than-average salaries, some HENRYs don’t think they’ll become rich because of factors like high tax rates, high cost of living, and low savings. Others may be on their way to building their wealth but, though they’re off to an impactful start, still need some extra guidance.
Open up retirement account outside of Workplace
Financial planners typically recommend that everyone contribute to their Retirement Funds. This way, they can take full advantage of the opportunity to receive as much additional money for their retirement as possible.It’s also usually recommended that individuals set up a PPF – public provident fund. You can invest up to 1.5L every year and claim tax benefits under section 80C. Interest earned is close to 8.5%(8.0% in 2016) and tax-exempt. You can withdraw the money prematurely only under certain circumstances like marriage, education, house etc. So they can make retirement contributions outside of just their work.
But if you’ve addressed those accounts and still have some discretionary income, you can take your contributions to another level, beginning to invest your money beyond just your retirement funds.
You might consider opening a taxable brokerage account to invest in stocks, ETFs, index funds or mutual funds. If you don’t want to put in too much work to manage your additional investments, or if you’re still new to investing, you might consider putting your money in index funds. This type of asset is a passively managed fund that allows you to put money into a basket of the largest companies with low fees and minimal risk. Mutual funds, by comparison, are actively managed by a fund manager and usually carry higher fees.
Save up on Taxes
Getting a big tax bill can sometimes be a real shock to your bank account. However, there are some strategies you can use to reduce your taxable income so you can keep more of your money for your personal financial goals.
“Work with your accountant to find the ways in which you can lower your taxable income,”
Generally, contributions you make to PPF (Public Provident Fund), Tax Saving FDs, ELSS (Equity Linked Savings Scheme), NSC (National Saving Certificate), Life Insurance Premium, NPS (National Pension Scheme), Home Loan Repayment, PDF (Employee Provident Fund), Senior Citizens Savings Scheme, Sukanya Samriddhi Yojana, ULIP (Unit Linked Insurance Plans), Tax Saving Mutual Funds, Child’s tuition fee amount can claimed up to 1.5 lakh can be deducted (partially or fully) from your taxable income. Just keep in mind that there are limits for which levels of income and tax filing statuses qualify for such deductions, so you might want to work with an accountant to figure out whether or not you’re eligible.
You should speak to a certified financial planner for more personalized strategies for lowering your taxable income. A CFP would be able to make recommendations based on your entire financial picture and your goals.
Double-check your retirement plan with a financial professional
One other important reason to speak to a CFP is to make sure you solidify your retirement strategy. This could mean discussing what retirement looks like for you and what steps you should take to start progressing toward that goal. It could also mean discussing how much money you’ll need in order to fund your retirement lifestyle.
Some high-earners actually save more money for retirement than they actually need to. While it’s always nice to know that you have enough money and won’t outlive your retirement savings, stashing away too much money and not being able to spend it all means you’ll need to figure out how to divvy up the remaining cash among your beneficiaries. But you might also realize down the line that you could have afforded to spend more for enjoyment prior to retiring.
We see HENRYs over-saving for retirement all the time. Remember that retirement looks different for everybody, so there is no one size fits all advice. If you are a HENRY looking for a more traditional retirement, there are ways you can prepare for the lifestyle you’d like in your last 30 years without compromising your lifestyle today.
Bottom line
Individuals who are high earners and have extra discretionary income may be in a place where they can begin to make financial moves beyond basics like having a fully funded emergency account and investing in their retirement funds.
High earners might consider investing in non-retirement brokerage accounts and working with a professional to find ways to lower their taxable income. They can also benefit from getting advice from a CFP to ensure they don’t over-save for retirement.
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