I shared my personal experiences with these personal finance topics with r/HENRYfinance. This brings them all together and links to the comments. HENRY stands for High Earner Not Rich Yet. I also keep notes about personal finance in jch/personal-finance and build a investment and spending tracker at jch.app.
I love cars, and have seen a few posts and comments in this sub. Thought I’d share my experiences as a car enthusiast with specific advice for HENRY’s. I have no qualifications in this area, just a guy who thinks about cars and money too much. I’m sure others have smarter ways of doing this, but this is what’s worked for me.
Should I buy one now?
Short answer: No, wait till summer.
Long answer: The pandemic, global supply chain shortages, increased interest rates, and decreased used inventory are all working against the buyer right now. The average new car transaction price peaked in November 2022 at $48k. Supply chain shortages means longer waits or custom orders, or missing features like auto start-stop (a hidden blessing imo).
My experience: I bought a 2022 Jeep Wrangler Willys Sport 4dr last year. I ordered it in April and took delivery in July at MSRP ($40k). It was much more expensive than a year ago when discounts were everywhere, but cheaper than the increased MSRP this year. I had never custom ordered a car before, but getting exactly the trim and color I want (and nothing extra) was a great experience. Everything was done over email until I went in to take delivery. No haggling, no BS, just sign the paperwork and go.
New vs Used
Short answer: Yes.
Long answer: Conventional wisdom says you’ll spend less on a used car, but it’s a set of trade offs. For most high earners in good financial shape, here’s my reasons for choosing new:
New cars have more safety features, both passive safety (stronger materials, more airbags) and active safety (blind spot monitoring, emergency brake). Saving money won’t matter if you’re seriously hurt. IIHS has safety ratings.
New cars have better financing. Manufacturers subsidize new car loans to make them affordable.
Yes, the depreciation curve is sharpest in the first year. But unless you’re constantly switching vehicles, the average is not bad. Edmunds Total Cost of Ownership calculator can give rough estimates over a 5 year span, Kelley Blue Book can give pricing on used cars and what you can expect to sell a used car for.
My experience: Growing up, the first car my family had was a $400 Toyota Corolla Tercel. I loved that car. My parents drove it from NY to CA. Dad taught me to drive stick in an empty parking lot. We drove it until it died, and gave it away to a family who fixed it up and drove it some more. Bang for the buck, I’ll never beat that car. I bought other used cars over the years, and bought my first new car after we had a kid. We’ve had the Mazda 6 for 9 trouble-free years now, and looking at my spreadsheet of costs, it’s been less than some used cars I’ve had in the past. There are old cars I love because of their character, but I’m talking about general transportation tools in this case.
Buy vs Lease
Short answer: Buy, unless there’s an amazing deal on a lease
Long answer: At the end of the day, you’re getting a car for a period of time and mileage for a sum of money. Leasing sets a cap on usage and guarantees you a depreciation cost up front. Buying offers more flexibility.
My experience: I’ve only bought cars, but I’m open to leasing. We don’t commute with cars, so we typically use fewer miles. Fiat 500e for $80/month was a great deal, but we couldn’t fit car seats.
Sometimes it makes sense to lease even if you intend to finance at the end of the lease. When we bought our Mazda in september, we opted to lease because interest rate on the lease (0.29%) was much lower than finance (3-3.5%). So effectively leasing is paying a lower interest rate for three years, then having some option value -Any-Panda2219
Cash or finance
Short answer: Finance
Long answer: Doug Demuro explains this better than I can. On the finance side, it’s good for building up credit, and if you have good credit, you’ll get good rates. Interest rates that are below expected equity return rates also means you’ll have more time in the market. It’ll also smooth out your cash flows.
My experience: I regret not taking 0.9% financing on my Mazda. At that point in my life, I was aiming for “no debt”, even if debt is a good value (I can write more about using debt effectively if there’s interest in a separate post, lots of options open up for HENRYs). For the Jeep, I paid $5k on my credit card that gave me 2.6% cashback and financed the rest with a 2.25% interest-only personal loan. I paid the $5k off immediately with the loan, and kept the cash value of the car in a savings fund yielding 4.3%.
TL;DR
Cars are expensive. Cars can be basic tools, or they can be passionate hobbies. I used to feel a lot of guilt when spending on cars, but after looking at my history, I realize the joy it brings me is worth the money.
When to use debt
My parents viewed debt as a bad thing. The only form of debt they used was a home mortgage, and that was out of necessity. I started with this view initially, but slowly realized that debt is just a tool. There’s good debt that gives you more opportunities, and there’s bad debt that drags you down. This is a pragmatic guide on what debt options are available to HENRY’s and leave it up to you to decide whether an opportunity is worth financing or not.
Credit cards
Good: Rewards Bad: Everything else
I have all my credit cards on autopay. I don’t see them as an effective financing tool because of the high interest rates.
Personal loans / Credit Unions
Good: consolidating debt with higher interest rates
These are unsecured loans that typically have higher interest rates than secured loans, but much less than credit cards.
My experience: I used a 2.25% interest-only loan to buy a car.
401k Loans
Good: Borrow against your 401k, pay yourself back the interest, fast turn around Neutral: plan specific amounts, mine was the lessor of 50% of 401k balance or 50k. Bad: Entire balance due on employment termination.
I’m not sure how common this feature is, but I had it in my last Fidelity 401k. It cost $100 to setup, and funds are ready within 7 days. I didn’t end up using it, but I liked that it was a very liquid and fast option that didn’t require a heavy underwriting process. Note that this is not the same as a hardship distribution. You’re borrowing from your 401k, and making payments back into your 401k. The interest rate you pay also goes back to yourself.
Pledged Asset Lines
Good: Borrow against your portfolio Neutral: interest-only or amortized options, fixed or variable rates Bad: Beware margin calls during market downturns
These are basically margin loans, but with more attractive rates and terms depending on your relationship with your custodian and how much assets you have with them. Morgan Stanley had a product called Liquidity Access Line that allowed you to have a fixed rate.
Mortgages / HELOCs
Good: home buying, mortgage interest deduction
It pays to shop around. I liked using a mortgage broker because he found better rates than I could. I did not like using any of the mortgage quote sites. If you do use one, use a spam email or google voice account because they’ll spam you for a long time.
Specific to HENRY’s, work out how much the mortgage interest deduction and property taxes can save you on federal taxes.
Rate discounts
Look for discounts from having status at a particular bank. For example, Bank of America offers discounts on loan fees, HELOC’s, and auto loans based on how much assets you have with them.
Credit Scores
Having a good credit score helps you get better loan rates. I used to use CreditKarma for tracking scores, but noticed that banks include the scores now. Annual Credit Report is a terrible site, but is actually the official way to dispute any past credit issues, or put a credit freeze.
TL;DR
HENRY’s shouldn’t be afraid of debt. It’s a tool that helps you manage cash flow, and sometimes comes with tax benefits.
The High Earning part of HENRY’s benefits from minimizing taxes. I am not a tax professional (though I’ve considered taking the EA tests and becoming one for friends). I’m sure there are smarter people out there with better strategies, and different situations. This is just what’s worked for me over the years.
Tax advantaged retirement accounts
Short version: Max out contributions to all tax advantaged accounts before starting a brokerage account.
The IRS has a great overview of the types of retirement plans. Even in plans without matching, long vesting periods, or high fees, I’ve found the instant tax savings and additional contributions justifies the cost, especially if you’re in a high income tax state on top of high federal taxes. Tax efficient fund placement is also a good read.
Traditional vs Roth
Short version: Contribute to traditional plans at 22% marginal tax rate and above, Roth otherwise.
The r/personalfinance wiki has a great page on traditional vs roth. Both are great options. I built a spreadsheet and so have many others, but there are enough variables that it’s more important to be headed in the right direction, than to be precisely right (impossible b/c unknown future rates). My “a-ha moment” was realizing that traditional accounts gets you tax savings at your highest marginal tax rate, and you start paying taxes from your lowest tax bracket progressively.
Health savings account HSA
Short version: Max it out
I was on the fence about HSA’s for 2 reasons.
For both these points, if I don’t use it all for medical expenses, after age 65, I can take distributions out and pay tax on it. Even if I take distributions out before 65 and take the 20% penalty, there’ll be decades of compounding growth for a one time 20% penalty. For example, $100 invested at 5% annual compounding will give you $128 on the 5th year. If you take a 20% penalty ($128 * 0.20 = $25.6), you’re still breaking even. Over long timelines, and higher returns, I don’t worry about the 20% penalty. If I don’t withdraw till 65+, it’s a non-issue. Fidelity has even more details and benefits in their guide. I also rolled over my old HSA’s into Fidelity because they don’t charge fees, and the have great investment options.
529 College Savings
Short version: Yes if you have kids
Similar thinking as HSA. No immediate tax savings, but savings on distribution. If I overcontribute, the penalty won’t be that bad after 18 years of growth.
Required minimum distributions RMDs
Short version: Don’t worry about it until you stop being a high earner
If our income taxes decrease, that’s when we’ll roll over traditional accounts to Roth. There’s also no guarantee RMD rules won’t change in the future.
Backdoor contributions
Short version: Yes, do backdoor roth IRA, and mega backdoor 401k if available
Donor advised funds DAF
Short version: Use them to smooth out high tax years
Again, I like Fidelity’s guide and their account. I used DAF’s to gift appreciated stock on a high income year. It’s a tool to help control which years you want to take a tax deduction on charitable giving.
Tax loss harvesting TLH
Short version: Yes, but it doesn’t save as much as you think
Kitces has a good explanation that covers the actual value of tax loss harvesting. I learned how to do it by signing up for a robo-advisor and observing it for a year. After a year, I decided to manage it myself and skip the fee. I don’t think robo-advisors charge too much, but the assets under management pricing model doesn’t make sense for TLH. When talking about broad ETFs, they become less likely to have losses over time. However, you’re going to pay for all assets under management. I use jch.app to track holdings and also as a rebalance tool.
Real estate
I don't have experience in real estate other than itemizing taxes and claiming depreciation and property taxes. I'm aware of 1031 exchanges, qualified opportunity zones, but don't have personal experience. I'll update this section if there's good info from the comments.
TL;DR
A good piece of advice my friend gave me: “Taxes shouldn’t be the primary reason for you doing something, but it’s good to be aware of it”. How this works in practice is I have my primary objective: buy a home, invest for retirement, and then decide how taxes play into it.
DM me other HENRY topics you’re interested in?
Bonus: for anyone who’s interested in tax policy, I loved “A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System” by T.R. Reid. It’s a fun read, and I liked it’s survey of different tax systems, and the concept of “broad base, low rates”.