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- HENRY stands for "high earner, not rich yet," which can happen because of lifestyle creep.
- Financial advisors suggest developing positive routines from the start and preparing for potential raises in earnings.
- It’s advised to treat yourself first, all while ensuring you have some funds left for fun.
Even individuals with very high incomes may find themselves grappling with debt, saving inadequately for retirement, or failing to meet various financial objectives due to what’s referred to as lifestyle creep. This term, also called lifestyle inflation, describes the situation where expenditures rise alongside increases in one's earnings.
"As it’s quite a typical practice," financial advisor Brittney Castro explains to Business Insider.
"Gideon Drucker, a financial planner, notes that the adverse effects of lifestyle inflation might only become apparent when you reach your late 40s or early 50s and begin contemplating retirement," he explains. Drucker Wealth Management and author of " How to Prevent Becoming a HENRY: Strategies to Avoid It " HENRY stands for "high earner, not rich yet," a common description of those who have fallen victim to lifestyle creep.
Drucker explains that there are plenty of people who come to him later in life with high incomes, sometimes over a million a year, without corresponding 401(k)s , investment portfolios, or other assets. "If we just looked at their incomes, you'd have said, 'where'd all the money go?'" he says. "Over the years, all of their expenses piled up: the vacation home, the cars, just everything one after another."
How to combat lifestyle inflation and avoid becoming a HENRY
But it's not just high earners who can fall into the trap of lifestyle creep — it can happen to anyone whose income increases over time.
Plan for a raise or increase in income
"We're all going to spend our money if there's no plan for it," Castro explains. That's why it's essential to have a plan for your new income before you even start receiving it.
Castro advises that if you anticipate getting a raise, it’s crucial to review your budget and objectives prior to when it comes into play.
"Think before that raise even hits my account, where could you send it? Why don't you just redirect it?" She suggests using the raise to contribute to savings goals, retirement, or investments rather than directly to your checking account .
Develop habits when you're young.
Drucker suggests that one of the most effective ways to guard against lifestyle inflation is to develop robust savings and investment practices early on. He explains, "Once this habit takes root, regardless of the initial amount, as the figures grow over time, it will seem ordinary and natural."
He points out that even with modest sums, by gradually contributing more to your savings, retirement funds, and investments over time, you won't feel the impact as significantly.
Not sure how to begin? Think about consulting a financial advisor.
Finding a financial advisor It doesn’t have to be complicated. With SmartAsset’s free tool, you can connect with up to three financially savvy advisors within moments. These advisors not only operate in your vicinity but also adhere to a strict fiduciary duty as certified by SmartAsset, ensuring they always put your needs first. Start your search now.
Put money aside for yourself right from the start.
Rather than setting aside whatever remains at the month’s conclusion, it's crucial to save immediately after receiving your paycheck—automating this can make things simpler still. This approach is referred to as “paying yourself first.”
As one gets used to living within a specific income limit, the urge to overspend and undersave diminishes.
Castro suggests that individuals who achieve financial success often reallocate any additional earnings and persist in maintaining their lifestyle with a particular fixed amount.
Although this doesn’t guarantee that you won't reap the advantages of a higher wage or bigger paychecks, it circles back to the importance of strategizing for your additional earnings and having that extra money directly allocated to savings or investments. high-yield savings account and other financial goals.
Without a strategy, "you'll end up finding reasons to use those additional funds," according to Drucker.
Make sure to leave some space to savor your funds.
When your earnings increase, it’s only natural to desire a way to celebrate the effort put into achieving higher income. “Maintaining equilibrium is key,” remarks Drucker, underscoring the significance of balance. financial plan This covers the items and experiences you aspire to have or enjoy, beyond merely the essentials.
"Castro suggests that if you receive a 4 percent increase in salary, perhaps you could allocate just 1 percent of that extra money towards leisure expenses," he offers as an easy method to enjoy some of your additional earnings without getting carried away.
Although it’s certainly not a mandatory approach, considering your raise in this manner enables you to deliberately plan how your additional earnings will integrate into your lifestyle.
Return to the fundamentals
If you're dealing with a lifestyle inflation issue, both financial advisors suggest returning to fundamental budgeting techniques. "Examine your finances, identify areas where expenses can be reduced, create a budget plan, and monitor your spending accordingly; this is truly the best approach," advises Castro.
“It’s about having an open discussion,” Drucker states. “What do you spend each month? What are your actual costs, and which of these go toward essentials?” Once you thoroughly assess your finances, you can start crafting a strategy to address the issues caused by lifestyle inflation.
To assist with monitoring where your funds are going, you might want to look into one of the best budgeting apps , enabling you to connect your accounts so you can view all your earnings, expenditures, and savings in a single location.
As Castro puts it, "This is precisely why financial planning is crucial; even though you might make a substantial income, the challenging aspect remains your ability to disciplined enough to save it."
The initial publication of this article took place in July 2021.
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