8 Places Your Money Should Go as a High-Income Earner, According to Humphrey Yang

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Many money experts are quick to differentiate between high-income earners and wealthy people. A six-figure salary does not necessarily mean that a person is rich, particularly if they do not know where to put their money. Often referred to as HENRYs (High Earners, Not Rich Yet), these individuals are in a top-tier income bracket but may be making money mistakes that keep them from becoming truly wealthy.

In a recent video on his YouTube channel, financial influencer Humphrey Yang offered “The Ultimate Playbook for High Income Earners,” based on a Reddit post in the r/HENRYfinance subreddit by user ProfessionalHat3555. Here is his take on eight places money should go for high-income earners.

Create an Emergency Fund

First, the playbook suggested that high-income earners should create an emergency fund consisting of three to six months’ worth of expenses. The emergency fund can help cover any unexpected financial challenges that arise, such as job loss. The Reddit guide recommended keeping six months’ worth of expenses in something like a high-yield savings account or a Treasury exchange-traded fund (ETF), and Yang agreed. He noted that the lifestyle of a high-income earner is often more expensive, so having a larger emergency fund is vital in the case of a true emergency. 

The guide also encouraged individuals with larger balances (over $50,000) to deposit money into a cash management account (CMA), a recommendation with which Yang also agreed. He explained that a common mistake high earners make is letting cash sit in regular savings when they could be earning 2.5% to 5% while still maintaining liquidity.

Maximize HSA Contributions

If eligible, the playbook said HENRYs should maximize health savings account (HSA) contributions. According to Fidelity, an HSA is a tax-advantaged health savings account that can be used to pay for qualifying medical expenses.

Yang explained that it is the “most tax-efficient savings vehicle because it offers triple tax benefits.” He noted that contributions are tax-deductible, it grows tax-free and withdrawals for qualified medical expenses are tax-free.

In addition to these advantages, Yang said individuals can reimburse themselves in the future for medical expenses paid out of pocket today. He called the recommendation “spot on,” but wanted to ensure that people were actually investing the funds, as many only deposit money into the account without investing it.

Contributing to Retirement Accounts

Next, high-income earners should plan to contribute to retirement accounts with a goal of setting aside 10% to 15% of their paycheck for a retirement fund. The influencer also advised taking full advantage of any employer match options, such as a “mega backdoor contribution,” which allows employees to contribute beyond the normal limits of $23,500.

According to the financial services firm Edward Jones, a mega backdoor Roth IRA allows individuals with an employer-sponsored retirement plan, such as a 401(k) or 403(b), to save money beyond the annual deferral limits. If offered, the strategy involves making an after-tax contribution and then converting it to a Roth within the plan or rolling it into a separate Roth IRA.

Pay Off Debts With Interest Rates of 5% or Higher

The next step in the playbook is to pay off debts with interest rates of 5% or higher. Yang explained that the guide recommended draining savings only for debts with interest rates above 10%, favoring maintaining liquidity over paying off debts with lower interest rates.

It was also suggested that individuals do not prepay a mortgage under $750,000 in order to take advantage of the interest tax deduction if they itemize. “This type of recommendation is only good if you have a mortgage under $750,000, you’re itemizing deductions and if you have an interest rate low enough that perhaps investing would be paying off your mortgage in terms of the return rate,” Yang said.

Invest In a Taxable Brokerage Account

If the previous four steps have been completed, extra savings can be placed into a taxable brokerage account, according to the YouTube video.

The guide recommended investing in ETFs rather than individual stocks. Yang explained that it is more risky to invest in individual stocks, though it could offer greater rewards.

“Picking individual stocks can be a tempting way to try to beat the market and build your wealth quickly, but if you’re not someone who likes to do a lot of research or you perhaps don’t have a lot of high conviction in any given stock and you might not be willing to accept the fact that you’re going to lose money, you might want to just stick to index funds,” Yang said.

Decide What To Do With RSUs

RSUs, or restricted stock units, are issued by a company to incentivize employees to stay longer, as explained by Yang. In the video, he noted that while the playbook encouraged employees to sell RSUs as soon as they vest, it may not be the best strategy for everyone.

The experts at SmartAsset note that RSUs may have different vesting schedules and should be reviewed by a financial advisor to determine the best investment strategy. 

Well-Diversified Portfolio of Equities

The high-income earners’ playbook suggested that people under 50 have 80% to 100% invested in equities, such as the Vanguard Total Stock Market ETF (VTI) or the Vanguard S&P 500 ETF (VOO), and 5% to 10% in alternative investments, like cryptocurrency or precious metals.

It suggested adjusting down to a 70%/30% or 60%/40% ratio as retirement approaches. Yang agreed, noting that younger individuals can take more risks.

Protecting Assets With Insurance

The final step in the playbook is to protect assets through insurance by purchasing term life insurance, disability insurance or an umbrella policy.

Yang, however, didn’t see this step as a necessity. “I personally think this step is optional,” he said.

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