HENRY

WTF is

HENRY stands for High Earner, Not Rich Yet

HENRYs work hard to land that six-figure salary but they are consumed with consumer spending, education costs, and housing costs. Despite making between $250,000 to $500,000, they have not saved or invested enough to be considered rich. Of course, you should enjoy the salary that you earn! However, HENRYs are living well beyond your means.

The lifestyle creep is when you start spending more when you earn more. You upgrade your apartment, you buy your friends more rounds of drinks, you travel every weekend for fun, or buy a nicer wardrobe. It’s super fun to live in the moment and feel like Carrie Bradshaw in SATC. But you’re leaving yourself at risk! What if your car break down? What if you lose that job? What about retirement?

Is that money really going where you want? What do you want? Where do you see yourself in 5 years? 10 years? How are you going to get there? More salary comes with more opportunity to set yourself up for a stable and independent life down the road. Instead of treating yourself to costly dinners every night this week, start your emergency fund, pay down your debt, lower your bills, start saving for retirement. You can be rich now if you start being intentional with your money!

Check out our new episode with Jen Smith to learn more about the lifestyle creep!

Cost of Living Adjustment

WTF is

A cost of living raise or adjustment makes up for inflation. When the cost of living goes up (see CPI) by a certain percentage, employee wages should increase by the same percentage. For example, if the cost of living increases by 2% this year, employee wages increase by 2%.

CPI?
Consumer Price Index – this looks across the market at prices to measure inflation. You know your aunt that always talks about how she could go to the movies for $1? Or when grandma used to get groceries for nickels and dimes? That’s inflation! The prices on goods went up (inflated)!

INFLATION?

Inflation is the general rise in prices over time. The combination of supply shortages and pent-up consumer demand has prices soaring right now. Overall, prices increased 5% in May 2021. We are seeing price increases in airfare, housing, restaurants, rental cars, women’s clothing, and nearly every other industry. 

SO MY RAISE?
The end of the calendar year is when most companies host performance reviews and set budgets (and salaries) for the next year. The most recent CPI report showed that the U.S. inflation rate for 2021 reached 6.1% (highest in 30 years). With prices rising across the board, an increase in pay should be a given— otherwise, it’s  effectively a pay cut!

With the tight labor market and high inflation, don’t forget to ask for a well deserved raise based on current rates. A 6% adjustment should be the base for your discussion and then talk performance bonus plus market rates!

Credit Score

WTF is

A credit score (also known as FICO score) are numbers that represent the creditworthiness of a person, the likelihood that person will pay their debts. Lenders, such as banks and credit card companies, use credit scores to evaluate the risk of lending money to consumers.

Your credit score is made up of several factors that have a different weight on your score. 

PAYMENT HISTORY is a large contributing factor to your credit score. Banks and credit card companies want to know that you can pay back your loans on time.

AMOUNT OWED (also known as credit utilization) refers to how much credit you are using at any given time compare you how much is available to you. If you have a credit limit of $10,000 and you’re spending close to that limit each period, you are going to look more risky, even if you are making payments on time.

CREDIT HISTORY meaning the length of time that you’ve had access to credit (number of years you’ve had a credit card or loan). This is one that you might have less control over but the key part is to keep your accounts open so you have years of proof that you are a responsible borrower.

CREDIT MIX (# of loans vs credit cards) and applying for NEW CREDIT are also contributing factors. A variety of credit is good but always applying for new credit accounts can look risky.

As you can see, there are a lot of contributing factors to consider. The general rules are (1) make your payments on time and (2) keep balances low.

BONUS: WTF is a Credit Limit?

Increasing your credit limit is an easy way to improve your credit score and all you have to do is request an increase! CNBC reported that Americans have an average of $22,751 in credit available to them across all their credit cards. 

A credit limit is the amount of available credit you have or the amount of money you would have access to on your credit card. By itself, it doesn’t have much impact. But credit utilization, the ratio of amount owed against the amount available, can make a big difference. 

Some credit issuers automatically increase your credit limit if you have made 6-12 months of on-time payments. If you do not receive an automatic increase, usually all you have to do is ask! You can usually request an increase in the banking apps or call the customer service line for the credit card. The bank will check if you have a healthy credit history and then let you know what you are eligible for. It’s as easy as that!

If you are not regularly making on-time payments or you know you are a big spender, increasing your credit limit might not be the best idea. Consider your whole financial picture before making big moves across all your credit cards. 

When used in a healthy manner credit can be useful and rewarding. To learn more about credit scores, check out our episode with Gerri Detweiler available on Apple Podcasts, Spotify and iHeart Radio.

Mortgages – Fixed Rate vs. ARM

WTF is

ARM stands for Adjustable Rate Mortgage. An adjustable-rate mortgage (ARM) has an interest rate that changes with the market.

Fixed-rate mortgages and adjustable-rate mortgages (ARMs) are the two popular mortgage types.

A fixed-rate mortgage charges a set rate of interest that does not change throughout the life of the loan. The 30-year mortgage is the most popular choice because it offers the lowest monthly payment. However, the trade-off for that low payment is a significantly higher overall cost.

An adjustable-rate mortgage (ARM) has an interest rate that changes with the market. ARMs have a fixed period of time during which the initial interest rate remains constant, after which the interest rate adjusts at a pre-arranged frequency. The fixed-rate period can vary significantly—anywhere from 1 month to 10 years; shorter adjustment periods generally carry lower initial interest rates. After the initial term, the loan resets, meaning there is a new interest rate based on current market rates. This is then the rate until the next reset, which may be the following year. ARMs can be complicated so you’ll want to review all the different factors that impact the interest rate changes. ARM mortgages can often be cheap for the first few years that the lower rate is locked in but you will need to be prepared if interest rates rise when the adjustment kicks in.

529 Plan

WTF is

AKA ‘a qualified tuition plan’ – A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. Usually a college fund!

The 529 plan can be set up by a parent and designate a child as the beneficiary of the account. And fun fact – you don’t have to wait until a child is born to start saving money for their education! You can start a 529 plan with yourself as the beneficiary and then add your child as a beneficiary when they are born. There are annual limits on how much you can put in a plan for someone else without paying a gift tax but for the most part, you can contribute what you want.

It is important to note that 529 plans are considered in financial aid packages. This means that your child could receive less financial aid for having money in a 529 plan. Not all savings vehicles are like this. For example, financial aid does not look at ROTH IRAs and you can withdraw this money to pay for education penalty free.

In addition, you will have to pay taxes on the money if it is withdrawn for a purpose other than the intended purpose.

Interested in learning about other ways to pay for school? Check out our episode with Nikki Wells on different ways to fund college education.

Expense Ratio

WTF is

An expense ratio (ER) or management expense ratio (MER) is the cost or the amount charged by a mutual fund or an ETF (exchange-traded fund). Funds have to pay for portfolio management, administration, marketing, and distribution, and other expenses. The cost is always expressed as a percentage of the fund’s average net assets (instead of a flat dollar amount).

HUH? An expense ratio measures how much you’ll pay over the course of a year to own a fund. For example, a fund may charge 0.2 percent. That means you’ll pay $20 per year for every $10,000 you have invested in that fund. 

Funds can be actively managed (meaning a person or team are actively picking which stocks, bonds, etc are in the portfolio) or passively managed (meaning they mirror the market or existing benchmark like the S&P 500). Actively managed funds cost more because someone is actively trying to beat market returns. 

SO WHAT’S LOW COST? A reasonable expense ratio for an actively managed portfolio is about 0.5% to 0.75%, while an expense ratio greater than 1.5% is high. For passive or index funds, the typical ratio is about 0.2% but can be as low as 0.02% or less in some cases. Robo-advisors typically invest in low-cost ETFs with much lower expense ratios, ranging from 0.05% to 0.20% in most cases. Or you can do it yourself! The cheapest option would be to open an account and invest in low cost index funds or ETFs.

WHY IS THIS IMPORTANT? Expense ratios significantly affect a fund’s return and an investor’s profit, especially over time. 1% doesn’t sound like a lot but it is!

Check out our episode with Amanda Holden to learn more about the importance of low cost investments.