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Afford Anything | Make Smart Money Choices
Six Levels of Wealth, with Nick Maggiulli [GREATEST HITS]
01:12:19
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- [00:00]
A
Hello from Boise, Idaho. I am here for a conference. I've been traveling a lot lately, and one name has come up in many conversations. Actually, I take that back. It's not the name that's come up. It's an idea. It's a concept that's come up in several recent conversations that I've had, and it's the concept of six levels of wealth. This concept was popularized by Nick Maggiuli in his book the Wealth Ladder. I recently was at Camp Fi, and I was having a conversation with a handful of people on a train, and. And we were talking about the wealth ladder, which is this notion that there are six different levels of financial freedom, each distinguishable by the order of magnitude that your net worth is in and each with its own set of rules. So that conversation came up recently with some friends, and then it came up again here in Boise, and it also came up in an interview that I did with Jack Raines, which is going to. It hasn't aired yet, but it's going to air in mid August. He and I actually talked about it during that interview. And so I was thinking, all right, given that this subject keeps organically coming up over and over, we should replay this episode. It is our interview with Nick Magiulli. He is the chief operating officer and data scientist at Ritholtz Wealth Management. He runs the website of Dollars and Data. He studied economics at Stanford. He published an investment book called Just Keep Buying, which has sold over 400,000 copies. And. And he published the book the Wealth Ladder, which is a New York Times bestseller. This interview, which originally aired in 2025, is about that concept of a wealth ladder. Oh, I should introduce the show, shouldn't I? Welcome to the Afford Anything podcast, the show that knows you can afford anything, not everything. This show covers five pillars. Financial psychology, increasing your income, investing, real estate, and entrepreneurship, acronym, Double I.
- [01:52]
B
Fire.
- [01:52]
A
I'm your host, Paula Pant. And the notion of the wealth ladder, which you're about to hear, is that letter F Financial psychology. It's the second letter I, Investing. It's maybe a smidge of a tiny hint, a sprinkle of the letter E for entrepreneurship. So it covers fi. So for this discussion on a framework around how to think about the level of wealth that you have, the net worth level that you're at, and the implications that that has for how you spend, how you save, how you invest, enjoy this interview originally aired in 20.
- [02:26]
B
Welcome, Nick.
- [02:27]
C
Yeah, thanks for having me.
- [02:28]
B
Thanks for being here. So what got you here won't get you There. Talk us through this concept of how personal finance advice changes depending on what stage you're in.
- [02:39]
C
Yeah, so the idea with the wealth ladder is that there are different levels of wealth, and in each level there's different investing advice, spending advice, income advice, etc. Depending on which level you're in, you might have to take a different strategy and a different approach. And we can definitely get into that. I can expand on what those levels are, et cetera.
- [03:00]
B
But I'm sure some people who are hearing this, and in a moment we'll talk about what all of those levels are. There are some people who are hearing this who are having an immediate knee jerk reaction and saying, well, wait a minute, isn't spending less than you earn always valuable advice, regardless of whether you have a net worth of $100 or $100 million?
- [03:19]
C
Yes, of course, that's still valuable advice, but I think what a lot of people get themselves tripped up on is as their wealth goes up or as their income goes up, they start to spend more. That's okay. I think your spending increasing with your income makes sense. It just needs to increase at a slower rate than your income. So that means you're always saving more. Right. So that's one way to think about that. And I can talk about the spending rule that gets you there and the different ideas related to that. But yeah, I would say you can spend more as you earn more. It's just a question of how much. The wealth ladder actually has a rule for this that will solve that.
- [03:51]
B
Yeah, it's the 0.1% rule.
- [03:54]
C
Yes, 0.01% rule, or you can think of it as the 1 10,000th rule. And net worth is comprised of all your assets minus all your liabilities. You divide that by 10,000, and that is the marginal amount of money you can spend on a daily basis without impacting your wealth. So let me just run a quick example. Let's say your net worth is $10,000. Let's say your income and your spending is completely the same, right? You spend every dollar you earn. If you have $10,000 in wealth, if it's growing at a point.01% per day, that allows you to spend $1 per day, you know, on average. And you would stay at the same level of wealth over time. By the time your wealth hits $100,000, you can spend $10 a day. By the time it hits a million dollars, you can spend $100 per day, et cetera. And once again, this is an excess of your income. So this is Kind of like that marginal decision you make when you're like at a grocery store, when you're at a restaurant. The size of that spending decision is determined by your wealth. For example, we're going to talk about the levels here. Once we get into the levels, I think it'll make more sense. But level two is what I call grocery freedom. And that's a net worth between $10,000 to $100,000. And so the idea is the marginal spend is anywhere from 1 to $10. So when you go to a grocery store and you want to, oh, I want to get this slightly nicer eggs or the slightly nicer cottage cheese or whatever you're buying, you can spend that extra marginal one to $10 on that item without worrying about it. That's kind of the idea. And that scales as you gain wealth and it changes categories. Right. Level three, which is 100,000 to a million dollars in wealth. That's what I call restaurant freedom. So you can spend, you know, 10 to $100 more when you're at a restaurant. That's kind of like the idea. And I think most people spend on the margin. Thinking about spending in this way, I think is very helpful because it allows you to spend a little bit more without necessarily jeopardizing your wealth.
- [05:40]
B
So with the 0.01% rule, the mental shortcut is it's $100 per every million dollars of net worth. So if you have a $500,000 net worth, that's 50 bucks. You got a million dollar net worth, it's 100. If you have a $2 million net worth, it's 200, et cetera.
- [05:57]
C
Exactly.
- [05:58]
B
And that is an excess daily spend. And you said that that's in addition to your income. So would that mean, hypothetically, let's say you have a $1 million net worth. So we're talking about a $100 excess daily spend according to the 0.01% rule. And let's say you have a million dollar net worth. Let's say that you have an income of $100,000. You save. We'll just make it easy. And say your take home pay after taxes is $100,000 and you save 20% of your take home pay, and you're just committed to doing that forever. So you save that 20%, you live on $80,000 a year. Does that mean that you can spend $80,000 per year plus spend an additional $100 per day?
- [06:39]
C
Yes, exactly. The whole idea of this rule is, okay, where can I spend more money? And not have to worry about money. And so I say level two, grocery store, right? So you have 10,000 to $100,000 in wealth. Don't worry about what you spend at the grocery store. Once you go 100,000 to a million, which is level three, you don't have to worry as much as restaurants. And then once you go level four, which is 1 million to 10 million, I call that travel freedom. So you can start to spend more, you can start to upgrade your seat a bit more. Of course, right at the beginning of 1 million you may not be able to do that too much, but you can get a better seat, get a window seat. Oh, I want more legroom. Stay in a slightly nicer hotel. And as you do that over time, what this allows for, as your wealth grows, you get to spend more. And it also doesn't jeopardize your financial future. That's the idea. So in your example where someone's spending 80 grand, they're already saving 20 grand a year. So they can in theory could spend that and their wealth would stay flat, all else equal. Of course we don't want that. We want them to grow their wealth. So they're saving 20 grand a year, which is great. They could spend a hundred dollars a day on top of that and they would still see their wealth grow over time.
- [07:41]
B
Let's actually stay at that example then. Let's say that your take home pay after taxes and deductions is a hundred thousand a year. And let's just assume that you spend the full hundred thousand dollars a year and you have a net worth of 1 million. So you're spending every penny that you bring home. You also spend an extra $100 a day on top of that. I'm assuming you pull that from your investments.
- [08:01]
C
You could assume your investments are earning.01% per day, which is annualized 3.7% per year.
- [08:08]
B
So you pull that from your investments and that basically then would be enough to keep you flatlined.
- [08:12]
C
Yeah, you would be. I mean this is on average, of course, if the market's down 50% in a year, this is not going to work. Right. But on average, if we assume that your wealth grows at 3.7% per year, which is very conservative, I don't think anyone's going to argue with that. Then we can assume that you can spend that level of and your wealth would just stay at a million dollars indefinitely. That's the assumption. Of course, the real world's much messier than this. I think most people who have a million dollars and probably have a decent income are saving money. And that's good. The whole idea is just creating some sort of heuristic. So like when can I spend more money and not worry about this? And I wanted to provide a little bit of lifestyle creep over time without going overboard because I think the, oh, never spend anymore. Don't have any lifestyle creep. I don't think it matches the data. I don't think it matches human nature. People want to reward themselves for doing well. And so this rule which we've kind of gone through these specific details is just a simple way for you to say, hey, you know what? I'm in this wealth level. I can go splurge a little bit more in restaurants now or I can go and upgrade my seat on an airplane, for example. When I was in level three, I never did any sort of travel freedom. I always took the cheapest seat, the cheapest everything. And now that I've slowly kind of gotten into level four, I will upgrade my seat. I will do small stuff like that. So my behavior has changed based on this. I actually use this rule. I came up with it obviously after the fact, but I came up with it while I was building wealth. I didn't know it from 10 years ago or something, but that's kind of the thinking that I actually use. And I think it's very valuable in that sense.
- [09:35]
B
The assumption that it's predicated on which is that your money grows at an annualized average of 3.7% a year. You said earlier that that's very conservative. Nobody would argue with that. And one thing that strikes me is when I think about the overall growth across your basket of total investments, of course your equities, your stocks are going to grow a long term annualized average at a much higher rate. But you're also going to have a bond allocation, you're also going to have a cash allocation. So across the entire basket of all of your money, it is actually quite feasible that you might be at. Depending on how big your bond and cash allocation is. Yeah, maybe 4%, maybe 5%, maybe 6%.
- [10:11]
C
Of course. And that's what I think. Everything I do with future estimates is like 4% real returns. This is even more conservative than that. And it's also simple, right? It's like, okay, take my wealth divided by 10,000. That's the number I can spend on a daily basis. Of course. What if you don't spend it for a week? Could you pull it for a weekend? Yes. There's all sorts of ways you can play with this rule, I think I just want to keep something simple like, oh, hey, I have a little bit of travel freedom. Oh, I have restaurant freedom, et cetera.
- [10:36]
B
You also had another rule, and wasn't it like, whatever you buy, make sure you can double that. Like, if you buy a pair of shoes for a hundred dollars, then make sure that you actually can afford $200 for those shoes.
- [10:48]
C
People like that one as well. That's called the 2x rule. So if you want like a pair of nice high heels as a woman or a nice pair of leather shoes as a man, whatever is, let's say you're spending $300 on these shoes, okay? Save double. Save 600. Take the 300, buy the shoes, take the other 300 and invest in a diversified portfolio or the S&P 500. Whatever you want, it doesn't really matter. Invest it or give it to charity. There's a lot of different things you can do with this rule. I like coming up with these rules because every person's going to have different feelings and reactions to them, and some will attach to one rule more than another. And so I don't think any one of these rules is completely correct. I think I'm just trying to provide options for people because I do think the spending guilt is very deep in our society. And I don't want to name names. I think there's a lot of very popular personal finance people out there who are very anti spending and a lot of host ways about, you know, lattes and all this other stuff, which is kind of crazy. I know you've had people on this podcast. You've discussed these ideas before, but I'm just trying to reverse that. So I'm like, hey, if you don't like this rule, try this rule. If you don't like this, try this. There are different ways of looking at it. I personally like the 0.01% rule, even though it's a little more technical because it moves over time. So the 2x rule is great as well, but everyone kind of will see what they like.
- [11:56]
B
Since you mentioned it moves over time, let's talk then about the wealth ladder and what the various stages of the ladder are. So there are six stages. Walk us through starting at level one.
- [12:06]
C
I'll also give some data as well. I think this is going to be helpful for your listeners because understanding, okay, well, how many people are in this wealth level, et cetera. So this is US Households. If you have a spouse or something that includes both of your net WORTHS Together, basically 20% of U.S. households are in level one. That's less than $10,000 in total wealth. So once again, include your home equity, include your vehicle cash in your bank accounts, your retirement accounts. Take all those assets and take out all your debt. That's student loans, mortgage, credit card. You take that difference and that's your net worth. That basically determines where you fall on the wealth ladder. So Once again, level one, less than $10,000, that's about 20% of households. Level two, that's $10,000 to $100,000. That's also about 20% of households. Level three, that's $100,000 to $1 million. That's what I would call like the middle class. That's around 40% of households. So I know people say the middle class doesn't exist, but if you actually just look at the wealth data like they are there and they are the largest cohort, level four, that's 1 million to 10 million. That's going to be about 18% of households. And then level five, which is 10 million to 100 million, and then level six, which is 100 million or more. Those two cohorts represent the top 2% of households going through it again, 20% level one, 20% level two, 40% in level three, which is 100,000 to a million, that's the middle class. 18% in level four, it's 1 to 10 million. And lastly, you have 2% in the level five. Plus, we'll just say, because, I mean, there's so few households there that there's not a lot of data on them. And then it's very hard to track as it is.
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B
Right. So let's talk through how a person can move through these different levels across the span of their life. We'll start with a person who's 18 years old. They have a zero net worth. They're at the beginning of level one.
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C
Yeah, there's a lot of different ways this can happen. So let's say you're in level one, you're 18. There's a few different paths. You have. There's a good portion of the United States. I'd say maybe a third to 40% wind up going to college. They'll get an education that ends up getting them a job that gets them out of level one. You get that education that raises your
- [14:09]
B
income, but it also gives you a negative net worth.
- [14:11]
C
Yes, eventually it can give you a negative net worth, but you'd hope eventually the income increase that you wouldn't have had if you hadn't gone to College end up getting you out of level one eventually, right? That's one path. Second path is you just start working at 18 and there's different ways, different jobs you can have. You can start working at a grocery store and work your way up. You work at a Chipotle and become a Chipotle manager. They're making six figures now, so there's a lot of different paths there. The thing I like to focus on in level one is just getting that safety net, right? Because having that emergency savings is so important. And, and I like to think in every wealth level, something is being amplified in your life. And so in level one, I think the thing that's being amplified is bad luck. And what do I mean by that? Something that is just annoyance for someone in, let's say level three or level four could derail your life completely in level one. Let's just take a simple example. Let's say you have a car, you drive to work, you get a flat tire, you don't have money to replace the tire, okay? So you just can't get to work. Now if you can't get to work, you could lose your job. You lose your job, you get behind, you know, get on credit card debt. You could just see how that spirals out of control from there. That's a very simplified example. But it goes to show how just a simple piece of bad luck is just so much worse for someone in level one than it is for someone in level two, et cetera. The thing I focus on in level one is like, hey, you're 18, starting out, whatever you're doing, find a way to just get some sort of safety net. And it doesn't have to even be you. If you have friends or family that can help you and just provide that initial safety net, that's great. And then find ways so that you can actually do that for yourself. You want to get some sort of just base level of self sufficiency. And it's okay if you have some debt that's not the end of the world. But if one of these bad luck events happens to you, it's not going to knock you out completely. That's the goal. Because you can pay that over time. That's not necessarily always an issue. It depends the type of debt as well. But that's what I would focus on in level one. That starting out person, right?
- [16:06]
B
Level one, it sounds as though the focus is survival.
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C
Yes, exactly.
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B
So how would a person progress then from level one to level two? Is that simply just a matter of time? Time and anything over zero compounding.
- [16:18]
C
Yeah. So I think time is going to be consistent throughout the wealth ladder line. We can get into that. Especially at the higher wealth levels. The median age in each wealth level just keeps going up. For example, the median age in level four is 62. Getting to $1 million is not 20 and 30 year olds. So in terms of that time, time is a piece of it. But I think it's getting skills that can create the income that makes it easier to save money. We like to demonize poor people and say, oh look, they spend all their money on this and that. But if you actually look at the data, they don't have a lot of places where they can cut. They're spending everything just on necessities. They're not splurging all that much. They just don't have income. I haven't seen a data set that shows otherwise. And it's great to be like, oh look, I'm doing well because I made the right decisions and this and that. It's like, well, you also had a decent income and maybe your decisions led to that income, which is great. But it's not just like spending decisions that are the problem. And so I don't want to demonize the spending issue. I'm not saying that there aren't people that have spending problems in level one, there definitely are. But I think for the most part, if you look at it, it's an income issue, not a spending issue. So that's the thing I would say is like find ways to get those marketable skills so that you can start saving money to get out of level one. And once again, 10,000, that's your net worth. So you could have a car that's worth a few thousand dollars. You could have a couple thousand dollars in a checking account. You could maybe start a stock portfolio. There's going to be some combination that's going to help you get there.
- [17:37]
A
I agree completely.
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B
And this actually goes back to the theme of personal finance is not one size fits all. So much of personal finance advice out there is spend less, spend less, spend less. Like a lot of advice really focuses on frugality. And where that falls short is to your point, in level one, which as a reminder is a net worth of less than $10,000.
- [18:00]
A
In level one, you don't have a
- [18:01]
B
spending problem, you have an income problem. Maybe actually on this topic, you can talk about the correlation between income and net worth because you've actually found data that shows how well correlated these two are. People often say like, well, no matter what your income, if you're just great at saving and investing, you can build a big net worth. You can build a good net worth relative to your income. But you've found data that shows that even people with a lower income who have the highest net worth of their income cohort still have a lower net worth than people with a high income who have a low net worth relative to their cohort.
- [18:40]
C
It's very rare to have low income and high wealth or high wealth and low income. Let me just give some data. This is by wealth level. I'm just going to read the median household income in each wealth level. Level one, which is less than $10,000 in wealth. The median income there is $32,000. Level two, which is 10K to 100K in wealth, the median income is 47,000. Level three, the median income is $83,000. Level four, the median income is $197,000. Level five, that's for people with $10 million to $100 million in wealth. The median household income is $724,000. And in level six, the median household income is $4.3 million. So you see, it just launches up. Now, of course, these feed on each other. If you have $100 million and you're earning, let's say, 4% a year, that's just on that. Just your investment portfolio is generating you $4 million a year. So this whole, like, okay, level 6, 100 million plus, looking at the number 4.3 million, like that shows that the investment income or business income is a large portion of that. So it's something to keep in mind when you're thinking about these things, is these things are a flywheel and they affect each other. And as you get wealth and you invest in that wealth, obviously you're going to start having more income and it's just going to feed on itself. So something to keep in mind there. And yeah, once again, I don't want to go through all these numbers here because it's just a little complex thinking about saying this just through a podcast. But I have a table in here which says, like, hey, if you're in the lowest income group, how is wealth broken out across each one of these income groups? And then as you can see, like, those with the lowest income tend to have the lowest wealth. Right? Even the highest wealth people in the lowest income group have less wealth than the lowest wealth people in the highest income group, which is, once again, it's a tongue twister.
- [20:24]
B
It's a tongue twister. But It's a little bit like newsflash. Earning more money like leads to having a higher net worth. But it's good to have the data to back it because there are so many voices in the personal finance space that finger wag and say, well, it doesn't matter how much you make. It, you know, matters how much you spend. No, no, it does matter how much you make.
- [20:42]
C
Yeah. And the data, it's just so clear. It's the strongest relationship I've seen in personal finance. I'm just so tired of the spending argument, I wanted to put it to bed forever. I haven't found a better data set on this and if I do, I will change my tune. But until then, I will stick with what I have.
- [20:57]
B
And for those of you who are listen via audio, I would encourage you to watch the YouTube version of this interview because we will be showing the numbers on the screen. I know sometimes it's hard in audio format to listen to a bunch of numbers. You know, we're like 772,000.
- [21:12]
A
We're just speaking numbers into a microphone.
- [21:14]
B
But when you visually can see numbers written on a screen, it sometimes helps the information absorb a little bit better. So YouTube.com afford anything. Check out the video version of this. And I think that'll allow some of these concepts to gel a little bit more.
- [21:29]
C
Yeah, I think that'll help solidify some of these.
- [21:36]
A
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- [21:49]
B
So I have a daybed.
- [21:51]
A
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- [24:55]
B
I like to wear a lot of
- [24:56]
A
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- [25:38]
B
We've talked about what to do when you're in level one, which means that you have a net worth of $10,000 or less. Let's talk about what happens when you get to level two, which is a net worth that's between 10,000 to 100,000.
- [25:50]
C
Yeah. So I think the big thing to focus on in level two is education and skills. That's still true in Level one, but I think it's even more true in Level two, because if you think about the trajectory of your career path, if you can get the skills that increase your income, like that can set you up to end up saving so much more. And I keep coming back to income and I know, like it's beating a dead horse, so to speak, but it's so true in the data. And if you actually look at the difference between households that, let's say stay in level two versus those that make it out of two and go to level three, and we do this over the course of a decade, I've looked at the same set of households. This is not different households. The same set of people over time, the ones that make it to level 3 either A had a higher starting income and they also generally spent less relative to their income. They might have spent more money than those that stayed in level two, but as a percentage of their income, they spent less. The main thing to take away there is like, those that are earning more are making it up higher up the wealth ladder. Right. And so I've looked at all this data and that's just the overwhelming overarching point there. It doesn't have to necessarily be a college degree. It could be a trade school. It could be coding boot camps. I know now people are like, oh, coding is all solved by AI. And I don't believe that as much. I think there's a lot of things that coding can do. I think having those skills is still very valuable, even if right now, yes, it looks like, oh, we're never going to need software engineers again. I'm a little bit of a programmer. If you've actually tried to code something up just from scratch, these things are pretty dang good. I'm very impressed by them. But they have not completely solved it. And if you Think they have. Like you haven't actually done it yourself. I still think these skills are valuable. And it's like figuring out what are those skills that are going to be useful in the future and working on those and then finding a way to increase your income. That's the end goal for all of these things because that's what builds wealth and there's just no way around that.
- [27:37]
B
Learning how to negotiate as well. So either asking your boss or supervisor for a raise or angling for a higher starting salary when you are switching jobs, that's a major piece of it because there is variation between how much two people will get paid for exactly the same role at the same company. And sometimes that variation can just be based on who was better at asking for more money.
- [28:00]
C
Yes, that's completely true. And I think that it's actually overlooked. I think negotiation is one of the best skills you can have. People will spend hours looking through coupons trying to find deals and this and that. They won't spend that same amount of time on a negotiation, which could have a much bigger impact. Right. You're getting a multi thousand dollar raise or even a few dollars per hour if you're paid hourly. Those little things add up in much bigger ways than trying to find a deal on Facebook, marketplace or something. I think it's one of those things where a lot of people don't prepare and you need to rehearse and go through it. And what if they say this, what should I do? Think through that. Rehearse it with someone you know and trust. And I think you'll actually see that it's quite a good exercise to go through and just thinking about how that would play out.
- [28:42]
B
It's a money making skill.
- [28:43]
C
Yes, it is.
- [28:44]
B
So increasing income is key to ascending the wealth ladder. But there are endless income producing opportunities, some of which are worthwhile and some of which are not. So for example, any of us could sign up to drive for Uber right now, assuming that you have a driver's license, any of us could sign up to drive for Uber. And for some people that investment of time will be worth it. And for others it won't be. Is there a heuristic for making that determination as to whether or not it's worth your time?
- [29:17]
C
Yeah. So in terms of the wealth ladder, the rule I came up with, unlike the.01% rule, I call this the 1% rule. So instead of taking 0.01% of your wealth, you just take whatever your wealth is and take 1% of it and that amount is the minimum amount you should consider doing something for. Right? So let's, let's go through an example. If your net worth is $100,000, you should only look at income opportunities that will eventually get you $1,000 total. Of course, it's divided by the amount of time you put in as well. But I think it's a very simple heuristic. If someone's like, hey, would you do this thing for me? It's going to take a few hours and you're going to get paid 50 bucks. If you're worth 100k, it's probably not worth your time. If you're worth a million, it's probably not worth your time. If you're in level one and your net worth's less than 10,000, you probably should take those opportunities. It's just a very simple heuristic, but it's just like, hey, let me think about this opportunity and is this going to add at least 1% to my net worth? If not, then maybe I should pass on it. And I think as you're wealth grows over time, you find yourself thinking like, yeah, should I keep doing this? I'm not sure. A lot of people don't necessarily do that and they just keep doing the same thing over and over, like, hey, this worked, but at some point you're not going to get the same return. At some point, the thing that used to add a lot of value to you, I mean literal value to your net worth is not going to. So unless that thing is growing over time, it's just something else to consider when you're thinking about that.
- [30:46]
B
And so what's interesting to me about that heuristic is that it measures is this job or is this project worth my time? It measures that against net worth rather than against your hourly rate, some measure of your compensation. Because so much of the time when we hear different heuristics around making that determination, we hear it as a function of your compensation. So let's say that at your day job, at your nine to five day job, you get paid $60,000 annually. Well, assuming that you work full time, which is 40 hours a week times 50 weeks a year. So you work 2,000 hours a year. So a $60,000 salary means that you're making 30 bucks an hour, you know, ignoring benefits, you use that as a heuristic and say, well, am I making at least 30 bucks an hour or more? Which is another way of saying, am I making at least as much as I'm making in my day job? This is different, though, because in this, you're not looking at what you earn. You're looking at what your net worth is.
- [31:45]
C
I still think hourly rate is very useful and the first starting heuristic. But if you're thinking about this, you're like, hey, 1% of my net worth at $60,000 is 600 bucks. Does that mean you need to make $600 in an hour? No. But if there's a project that someone's willing to hire you for, the question is, over the life of this project, is this going to make me $600 at least? And otherwise, you probably shouldn't even spend the time. Because remember, a lot of projects, you have to go talk to the person, set things up. It's not just like, oh, I just spend the time to do the project. There's other hidden costs and hidden time costs that you're not thinking about. Let's say my net worth is a million dollars if someone's going to come and bring an income opportunity to me. And if it's not worth at least $10,000, I'm going to say, like, I don't know if I want to do that. Right. Of course, it depends the time, too. Thinking about those types of things is kind of what matters when we're determining what type of opportunities we pursue or we don't pursue. Right. Like, I think writing a book is a larger income opportunity than $10,000 opportunity. In the case of like, a million dollars, using that as our benchmark, I would be like, okay, yeah, I'd be willing to write a book, but maybe I wouldn't be willing to do something else that wouldn't pay that.
- [32:51]
B
What would you do if the income is uncertain and there's a chance for a big upside, but there's also a chance that it might falter?
- [32:58]
C
That's a very good question. I think you have to kind of imagine the future in some way and say, like, what's the median outcome here? And going from that, then determining, like, this is an art more than a science. So I'm trying to come up with rules that help people. And I think it's mostly about just waking people up to be like, wow, I've never even thought of using that. The hourly rate is actually a very good starting point. It's where most people should start with is actually using an hourly rate. But then in addition to that, say, hey, okay, well, as my wealth grows, like, I need to really be more protective of my time. I think it's another thing people don't think of you're just saying, oh well, that's my hourly rate. I should just always give up my hourly rate. Well, not necessarily. I think as you gain more wealth, your time should be more valuable in your head so that you protect it a bit more. And I think the people that don't do that end up working so much and they only value money and they overlook a lot of other things in life.
- [33:46]
B
How long might it take a family to get out of level two? So again, level two being a net worth of between 10,000 to 100,000. How long would it take through saving your income investing, how long would it take to make it to that next order of magnitude?
- [34:01]
C
I don't have the exact number of years it typically takes, but I can tell you all the data we have is like snapshot data every few years. And so let me give you an example. If you started in level two, after 10 years, 44% of households would be in level three. A decent number. Right. How many would make it to level four? About 1%. So within 10 years. Right. I'm going to give you the same data again. By the way, if they're not in level three or level four, they're still in level two. So for example, 38% of households that start in level two end up staying in level two. You can still build wealth. You can have, you know, a net worth of, let's say $15,000 when you start and then 10 years later you have a net worth of 80,000. You still built wealth, but you're still on the same wealth level anyways going back to over a 20 year time span. So not just looking at a 10 year time span. Right. Over a 10 year time span. As I said, 44% of households went from level two to level three over a 20 year time span. It's actually 55% of households make it to level three. If we say how many of those make it to level four over a 20 year time span, it's about 5% of households become millionaires. And once again, level four is 1 million to 10 million. The levels are pretty easy to memorize. Once you know one of them, you just multiply or divide by 10 to get to the next level. Level two is 10,000 to 100,000. Level three is just 10x of that which is 100,000 to a million and etc. This data, it goes to show 60% of households over a 20 year period. 60% of level two households are going to either be in level three or level four after 20 years. That shows some good mobility. And obviously 20 years, there's time, people are older, they've saved money, et cetera. But it shows that there actually still is financial mobility in the United States, at least historically. We could argue about that going forward. People say, oh, there's no mobility, but this data shows there definitely is.
- [35:50]
B
Is that with adjusting for inflation, are we talking about purchasing power parity?
- [35:54]
C
Of course, all this is adjust for inflation. I did everything in 20, $21 and just took all the prior data which goes back to 1984 and I just adjusted all for inflation and just averaged out all the 20 year periods in there. So 1984 to 2004 and then the next one, which is 1989 to 2009, et cetera, took all those 20 year periods, looked at all those household changes and then I quantified all that. So it's a lot going into that. But yeah, I'm looking at real purchasing power changes. Of course, because of inflation that's going to happen. It's like, no, this is real purchasing power changes and real wealth being built.
- [36:25]
B
And is the primary way that people in level two ascend to level three? We've established that there is that mobility. The data shows that that does exist and that does happen. What is the primary mechanism through which that happens?
- [36:38]
C
I think for the most part it's having a higher income.
- [36:42]
B
Then what do they do with that higher income?
- [36:44]
C
They save it and you don't have to invest it. There's obviously some investing going on, but I can't say with certainty that that's everything. I think most of it personally, if we actually look at the investment data for households in level three, so let's assume you made it out of level two into level three. The biggest asset for those in level three is their home. What do they really do? A household that goes from level two to level three, and let's say they don't get beyond level three, they buy a home. Buy a. They're saving over time through the equity in their home. And that's kind of how they do it. I can tell you from a balance sheet perspective, that's what we see in level three. So if I know a household went from level two to level three, assuming like the typical level three household, that's what we're going to see. So specifically, among those that own a home in level three, around 65% of their assets end up being in their house. In level two, it's something like 75%. In level four, it's only 30% in their home. By level five, it's 10%. And then for those in level six, it ends up being less than 5% of their total wealth is in their home. So if you're saying how are people actually getting there, at least in terms of net worth, it's through purchasing a
- [37:50]
B
house, that actually raises an important point, which is we've been talking so far about net worth as a singular unit, but the assets that comprise a person's net worth shift as they move through these different levels. As you've just stated, a person's primary residence is the bulk of their net worth. In level two and level three, how do other assets start becoming bigger pieces of the mix as you ascend through level 3, 4, 5?
- [38:19]
C
Yeah. So the main difference, if I have to classify this is levels 1, 2 and 3, the majority of their assets are in non income producing assets. So that's things like cash. Cash can actually produce some income, but let's just say it's really non income producing. Your home, your vehicle, these are things that are not necessarily paying you. Now, when we shift to level four, five and six, that's where you have more stock ownership, more money in retirement accounts, bonds, other real estate outside of your home, and private business ownership. Right. And it's very clear in the data, if you just look at like the percentage of a household's assets that are income producing, you're seeing that it's just increasing in each wealth level to the point where that's the main summary of like looking at the asset level data is that by the time you get to level six, over 80% of their assets are income producing compared to someone in level one who has on average 5% of their assets are income producing. And the reason why is someone in level one doesn't have a lot of money. Right. So it makes sense why that's the case. And so they can't afford to go and buy a second property. I can't even get my first property. It's very obvious when you say that, but when you actually look at the data, it's very interesting that there's this huge step function in the sense that in level three, 20% of the assets are income producing. By the time you get to level four, it's 50%. So there's a huge jump in kind of how people use money as they go up the wealth ladder. And so it's something to keep in mind, say, okay, well, I want to get to level four. What are the types of things that people in level four do? Well, they own a lot of Income producing assets that can just be ETFs, that can be individual stocks, that could be physical real estate. There's a lot of different ways to do it, but that is just based on the data kind of what their balance sheets end up looking like.
- [40:01]
B
It seems as though a lot of like the bulk of personal finance advice is for people who are in levels two or three who want to get to level four. Which is another way of saying the bulk of personal finance advice is for people who have a net worth of somewhere between 10,000 to a million. Yeah, it's a wide range, but somewhere in that range and they want to get to a net worth that's in the single digit millions as you've talked about, that is levels two and three together comprise about 60% of the US population. That is the majority of the US. It seems as though most personal finance advice is really directed towards that. Which leads to the question, once you get to level four, then what? There's not quite a lot of information about how to ascend beyond that.
- [40:49]
C
I think that's probably for good reason though. Going beyond level four requires a very different set of actions than what caused you to get into level four as you intro the show. Like what got you here won't get you there. And that idea I think is very powerful. The only difference I think between level three and level four is really just going to be your income that's going to be the main driver. But if you are investing over time, saving money, doing all those things, you know, being diversified, I think you can get to level three or level four. It just depends on how large your income is. If you have a job that's paying you higher in the six figures and it'll be easier for you to get to level four. If you're paying maybe not even six figures, then you can probably get to level three. So it really depends on your income. But putting that aside, getting to level five is a whole nother beast in itself because the types of jobs that get you there are very rare. For example, I can only think of like entertainers, right? You can think of like celebrities, musicians, athletes. Those people can get to level five doing that, but they have to also be pretty highly paid. So it can't just be any athlete. Like you have to be kind of a little bit of a star and then you have to save your money. You have to actually do quite well doing that to get beyond 10 million. But outside of that, for the typical person that's not in one of these like outlier occupations we'll call it. You're going to have to have some sort of business ownership. You either need to have a little bit of equity in a very large company, so you're like at a startup or something, or you go join like Nvidia before its stock goes bonkers, or you own your own business and you grow it, you own all the equity in a smaller business that you end up selling for a good amount of money, whatever that is. It could be 20 million, 50, 100 million, something like that. And then after you sell that, that's when you've now turned that business equity into wealth of that level. And you can see that those actions are very different. Like working a job, saving money, investing it in an index fund is very different than, oh, I need to start a business, build the business and then one day sell it for a lot of money. So those actions are completely different. And that's why once you get into level four, I call it the no man's land of wealth, because you're basically going to be there forever unless you can make that change to go get a business of some sort and sell a large portion of it for a lot of money.
- [42:55]
B
I have some follow up questions to that, but before we get there, I realized we've sort of skipped over level three. And I don't want to shortchange level three because that is 40% of the population. So once a person has progressed from levels 2 to 3, what are the best practices as well as the biggest mistakes that you see as a person moves? Even from the beginning of level three, which is a net worth of 100,000, to the end of level three, as they approach a net worth of their
- [43:23]
C
first million, the big differentiator there is how much are you investing over time? And once again, as we saw when I was talking about, the percentage of income producing assets in level three is like 20%. By the time you get to level four, it's 50%. So there is a big shift in the balance sheet and ownership. What's happening is if you're not really investing a lot of money and you're already in level three, you probably need to start investing. It takes time. It's not just like, oh, you start investing, you're going to be in level four. No, once again, the median age of someone in level four, which is 1 million to 10 million, is 62. So if you took all the households in the United States that have at least 1 to $10 million in net worth, you put them in a room and you took the Middle age. Right. The Median that answer, 62. So it's not people in their 20s and 30s. In fact, only 1% of households make it to level four before age 30. So it's an incredibly rare thing. I know we see it on Instagram and Twitter and this stuff all the time, but that is an incredibly rare thing to do, and you should not expect that. So a lot of this is time as well. And I touched on this earlier, but time is going to be one of the biggest factors. Like, you got to get everything set up and then just keep moving in that direction. And time will naturally build your wealth, not just from the investment returns, but you have more time to save money. You have more time to put it away. So all those things are what creates that value.
- [44:41]
B
What percentage of level three households get to level four?
- [44:43]
C
So let's do this over 10 years. About 18% of households that are in level three make it to level four after 10 years. So it's like one in five. It's not impossible, but it happens. And then over the course of 20 years, it's actually 28% of households that are in level three make it to level four. Not everyone's going to make it out of there, but I don't think level three and level four are all that different. I know they may. And you're saying. What are you talking about? You're Saying someone with 500,000, someone with 5 million has a similar life in many ways? Yes. I think the only difference is they just have luxuries. They have, like, slightly nicer things. The person in level three and the person in level four are both sitting on the same airplane. I'm telling you, $5 million is not enough to fly private more than, like, three times, you know? And then you're like, okay, I can't keep doing this. The someone in level four is not flying private. They're probably sitting in a nicer seat. They're probably living in a nicer area. Maybe they're eating slightly nicer food, but outside of that, their lives are pretty much the same. There's this line from Warren Buffett where he says, the only difference between me and you is I travel better than you. Outside of that, I drink Coca Cola just like you. I eat McDonald's. I eat the same food, drink the same stuff. The only difference, once again, he lives in a very normal house, by the way. Everyone knows it's very public, but the only difference is how he travels. And so that's why I think level four and up, it starts to get into that like deep travel freedom stuff. When I look at this, I'm like, these levels are very similar, 3 and 4. And I think the only difference is status and ego and all this stuff we build. On top of that, when I'm thinking about level three and level four, I'm thinking that these households are actually quite similar. And that's why I say that level three is the middle class and level four is just the upper middle class, which is. That's the only differentiator I see. There's.
- [46:21]
B
That's a great point. The quality of life difference between a person who has a net worth of say 700,000 versus a person who has a net worth of 1.2 million is probably unnoticeable. There may or may not be slight variation, but we're talking about an extra half million in terms of the difference between their two net worths. And yet there's probably not much of a differentiating factor when it comes to the actual day to day of what that lifestyle looks like.
- [46:50]
C
Yeah. And unless you plan on actually spending down all of your assets, which very few people ever do, only difference is just how much you leave to the next generation. That really is a difference. But then how that's being split, that's everything else. Right. Because we've done all these, you know, oh, I want to reach financial independence. I need $100,000 a year. You do the 4% rule. That means you have $2.5 million. Okay, so let's say I wanted $200,000 a year. Now you need 5 million bucks. So don't get me wrong, like 2.5 million and 5 million, they are different numbers. There's $2.5 million, but that only generates you an extra 100k a year in income. So $2.5 million, which is a large amount of money, ends up impacting your life by only a hundred thousand dollars a year on an income basis. I'm not saying that's nothing to have an extra 100k a year, but that's not going to get you to fly private. That's not going to get you to be in the absolute fanciest hotels. It will change your life. You can spend a little bit more with that, obviously, but it's not going to change your life as much as you think. And so as you ascend the wealth ladder, money becomes less and less useful in that sense.
- [47:50]
B
Right. How would a person maintain motivation given the declining marginal utility of every dollar?
- [47:57]
C
I think they don't, honestly. And that's why Coast Fire These different ideas and for the listeners, I'm assuming you've discussed it probably many times before, but it's just like, I have enough now or I don't have to save anymore and I'll be fine in retirement. I can just let that money grow. I'm going to take a step back at work and spend more time with my kids and maybe take a job that doesn't pay as much or less hours, cut my hours or just even do consulting work or something, something else so I can reprioritize my life. There's going to be a lot of people that are thinking about that now today, because there's more households than ever in level four, right. 18% of the US that's the highest it's ever been. And this is on an inflation adjusted basis. I think there's going to be a lot more people saying, hey, I'm not really motivated to do this corporate grind thing. And there's going to be new paths and new ways of living that don't just focus on money as much. You can do that in level three too. You don't have to get to level four to do that. But I think once you get to level 4, the math starts to become, I don't know if the words difficult, but it's just, you start looking at it, you're like, wait, I'm doing all this just to barely make an impact on my wealth. Like, why am I doing this? You know, and that you start to wake up. I've actually had friends do this. Like my buddy was working this job, is really stressed out. His wife was very fortunate. She was early at a tech company. And he's like, I'm sitting here getting yelled at by this person and I'm getting paid less per year than what my wife is vesting in equities. This doesn't make sense. I'm going to take a step back. And now he's coast firing. And it's great and he loves it. Obviously a very fortunate position to be in. That's a caveat of this, but something to think about.
- [49:26]
B
I've also heard the term because it sounds like he's wife firing. I think they call that WI fi.
- [49:31]
A
Yeah, yeah.
- [49:32]
C
Well, it's working. And I guess, hey, they went, I don't know if I would do something like that. But if it works out for them, hey, more power to them.
- [49:39]
B
For the subset of the population that does make it to level four, what happens next, given how hard it is to make it to level five, actually, we'll Start with how many people in level four do make it to level five.
- [49:50]
C
There's not a ton of data on this because there's not too many people in level five. But I do have the data. So here, over a 10 year period, roughly 3% of level 4 households make it to level 5. And over a 20 year period it's 8%. So you're talking less than 1 in 10 are going to make it to level 5 over even 20 years. So there are people that do it. Like if you're a high paid professional, you know, you're a lawyer for 10, 20 years, a lot of that time you're making good money, but you also own equity in the business and you're, you probably become a partner and you start. So that's kind of business ownership and you're getting paid. So it's a little bit different than just pure compensation. But if you do that, you do that for 20, 30 years. Yeah, by the end you're probably making really good money and you have the investments and all that stuff. So you can definitely make it to level five without necessarily having your own individual business.
- [50:44]
A
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- [51:53]
B
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A
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B
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A
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- [54:44]
B
For the people who are in level four. Is business ownership the predominant path to level five? I mean, is there any other way? It seems as though BTS X is not going to get you there.
- [54:54]
C
Yeah, it generally won't unless you do it for a very, very long time. Right? So if I think if you hit level four at 30 and let's say you have like an income of like 300, $400,000 and you're saving 100k a year, you can do it. Because let's just do the math. If you hit a million dollars and you save $100,000 a year, how long will it take you to get to $10 million? So basically, how long does it take you? You just hit the cusp of level 4. How long does it take you to get to level 5? Assuming your wealth's growing at 5% a year, you're saving 100k a year. It takes 23 years to get there. 23 years of working hard, saving 100k after tax, investing that money, and your world has to grow at 5% a year, every year. And this is all inflation adjusted. That's not easy to do. And most people don't make it to level four until they're in their 60s. So who wants to go and do that from their 60s to their 80s? Very few people. They're gonna be like, yeah, you know what, I'm good in level four. I'm gonna just retire or coast, fire or whatever. So most people won't do that. Let's say you're saving even more. Let's say you save $300,000 a year. Now, once again, this is after tax, so you're saving a lot of money. Your income is going to be probably at least double that, if not more. So now you're making 700k, like that's an insane income. It's a very high income. You're making your household income 700k a year still, even if you're doing that or earning 5% a year, it still takes you 17 years to get to level 5. It's not impossible. But do you want to do those types of jobs that pay that? There's a lot of stress, a lot of hours involved. Generally there are exceptions out there, but for the most part, it's very strenuous. And then you got to do that for almost two decades. That's the cold, hard math behind it. And another way to think about this, if you have a million dollars and you're saving $100,000 a year after tax, you're impacting your wealth by 10% a year. Just ignoring the changes in the investment returns. Your wealth went from 1 million to 1.1 million. All else equal, right? You added 10% to it. By the time you get to $5 million, your $100,000 in savings is only impacting your wealth by 2% a year. So when you start doing that math, you start to say, huh, why am I doing this? You're doing all this math, all this hard stuff. You're saving money. You're not spending as much as you could, right? You have $100,000 in excess, right. So you're sacrificing in some way all just to change your net worth by about 2% a year. It's just like, why would I do that? That's why I think these coast fire, I'm going to take a step back. Things get so popular because at some point the math gets so out of your favor for your labor versus what your money can actually earn you as an investments that you just say, hey, I'm not going to work as much or do something else.
- [57:26]
B
Right, exactly. Back to the declining marginal utility in every additional dollar that you invest. So the people who are in level four who make it to level five, it sounds as though investing can get you there, but it's going to take you between 17 to 23 years and it's going to require consistency and dedication and a lot of sacrifice over the span of two decades. And that will happen to 8% of people.
- [57:51]
C
The other 92%, most of them will just stay in level four. They could still be building wealth, they just never make it to level five. Some of those will go down the wealth ladder for various reasons, which we couldn't get into. But yeah, there's a lot of different things going on there.
- [58:03]
B
So when people in level four are making investment decisions, because of course there's more than just broad market index funds that are available to a person. Let's say a person is at level four and they want to use business ownership or use investments as a method of making a big bet that might get them to level five. What are some of the examples that you've seen more broadly of investments and big bets in which some people have made concentrated bets that have sent them to level five and others have made concentrated bets that have pummeled them in the wrong direction?
- [58:36]
C
Yeah, I think there's plenty of examples of this where it's not even the level five. Most time it's in people in level six who have the bulk of their net worth in an individual business. And that business just goes under for some reason or another. Maybe it's outside of their control, maybe something happens, maybe there's a scandal about the business and as a result they end up losing basically everything. So they don't go, oh, it's not like they went from level six to level five, they go all the way down to like level three or even the level. I mean one, technically, if they lose everything, right, they don't have anything saved aside or there's a court proceeding. Like you can see stuff like that. But I think concentration is the thing that gets you into level five, but it's also the thing that can get you out of level five. So you have to be very careful in how you think about that. Even someone who's starting a business and doing all this stuff in level four, I would say you want to make sure that some level of wealth is locked up somewhere. And what I mean by that is like it's in a much safer portfolio, more diversified. So even if this bet goes bad, you have something to fall back upon. A lot of people don't think about that. And they say, well, I have to go all in my business, because that's how you do it. Well, sometimes it requires that. There have been very famous business leaders that have gone all in. I mean, we can talk about Elon Musk has done that multiple times. I know he's very divisive figure now, but back in the day he went all in and he was like, I have to literally put everything I own, all the money I've made off PayPal and all these other things into Tesla because I'm not going to make payroll. And so people have to do these things. And that's how he ended up becoming one of the richest people on earth, or the richest man now. But I mean, it fluctuates a lot. So do you want to make those concentrated bets? And if you do want to make those bets, think about what the cost could be if they don't turn out the way you want.
- [60:13]
B
What happens when you reach level five, which is a net worth of over 10 million?
- [60:18]
C
So level five and we'll just do six together. I think they're very similar in a lot of ways. So level 5 is 10 million to 100 million. Level 6 is over 100 million. At this point, I don't think money is the thing you should be focusing on. I know it's very cliche to say that, but every wealth level has something that gets amplified. And I think in level five and level six, it's actually all the non monetary aspects of your life that are amplified. And why do I say that? Because when you're level one, a lot of your problems are money problems. Like they can be solved literally with money. By the time you get to level five and six, you almost have very few money problems. And the problems you probably have have to do with your health, your relationships, friendship, a lot of things that money can't buy. You can't just say, hey, cardiovascular system, here's a check for a hundred thousand dollars. Get better blood pressure numbers or something. You can't do that. You can't write your kids a check and say, hey, take this check and love me. Like it doesn't work. I think the focus needs to really shift away from money in a big way because all those other things in your life, you can't use this resource that you have so much of to impact them all that much. I'm not saying it's useless. Of course not. Money can help. Of course people that have more money have generally better health outcomes. You can afford better care. I understand that. But at the end of the day, like, better care is not going to overcome decades of not taking care of your health or decades of neglecting your spouse or whatever. And like, divorce is expensive anywhere. It's the most expensive. The further you go up the ladder, just something to think about is like, what are all the things I'm neglecting right now because I'm still chasing money. Of course there's a lot of money things we can talk about in level five and level six. That's where it's like, you need to hire teams of people. You need to have a tax team, estate team planning. There's so many things we can get into. And like I work at a wealth management firm. That's kind of some of the stuff we do for some of our multifamily office clients. But that's not the thing I tell people to focus on because I'm like, that's probably not your problem. Your problem probably isn't a money issue. Your problem is probably something else in your life that you're currently overlooking that's going to cause you more problems in the future. And all your money's not going to help you solve that problem. It's true anywhere divorce is devastating regardless of your wealth ladder. Falling out of love sucks regardless. But it's even worse in those Levels because money is not going to fix it at all. And so it's overlooked. And I think it's easily overlooked.
- [62:34]
B
It sounds as though those are lessons from levels five and six that you can incorporate into your life. Even at level three and four, of
- [62:40]
C
course, very few people are going to ever make it to level 5 and 6. Very few probably even want to. Like, I have no interest in saying, oh, I'm just going to grind away for the next 30 years just so I can make it to $10 million. I don't. I could see myself coast firing at some point in the future when, who knows? I think that the time will be right when that eventually happens. I don't see the point in doing that. And a lot of the people I know that have done relatively well and have said, hey, you know, I'm taking a step back, they seem a lot happier than the people that just keep the gas pedal down, so to speak.
- [63:08]
B
Is there any data about the number of people who are in levels 5 or 6 who fall back down?
- [63:13]
C
So we don't have Data on level 6 because the data set I use, which was from the University of Michigan, called the Panel Study of income dynamics PSID, there just weren't any level 6 households in the data. They exist, but they're so rare. I mean, I just think the issue is that there's just not enough data in Level 6. Most recent estimates show that there's like 10,000 households that have over $100 million in net worth. The data set I had, the PSID, just didn't have any households in there, but there were some level five households. And even then, of the level five households in the data, there's not a lot of them. Right? There's like a dozen of them. And once again, it's following the same households over time. So there were level 5 households, and for the most part, a lot of them, actually a good portion fell down the wealth ladder. So once again, this is a small sample size. So this is maybe not indicative of all of Level 5, but in the data after 20 years, about half of Level 5 households were in Level 4. I don't know if that's because they spent their wealth down, if they had a. Some sort of business, you know, they had a business that was doing well. Today they're level five. And then 20 years later, maybe, you know, the economics of that industry have changed. They've seen a decline and they've lost some of that wealth. So that's roughly half of those households, but still 40% stayed within level five. And then over a 10 year period, 41% of households in level five ended up going down to level four. So I think it is because of that concentration bias and concentration risk which we discussed earlier. Also at the same time, the caveat is this is not a massive data set, but it's the best data I have that's following households of that wealth level over a long period of time.
- [64:46]
B
You know, that is particularly interesting to me because it shows, you know, oftentimes when we talk about wealth, we talk about it in a linear fashion in which there is only progress. There's progress and it is linear. And I think the example of people in level five going from double digit millions back down to single digit millions shows that fortunes can reverse. Is there also data on and fortunes reversing as you go further down the ladder? People in level four going to level three, level three going to level two?
- [65:16]
C
Yeah, it's like a matrix which has along the rows, so on the left side it says here's your starting wealth level and then along the columns, this here's your ending wealth level. So you can just look, the diagonal would be like how many people are started in level one, state in level one or start in level two, stayed in level two, etc. And so we can show these visuals I think on YouTube and you can show, hey, over 10 years, here's what the data looks like. Then here, over 20 years I wanted to find this data. I want to be like, how often does this happen? How often are people moving and why? I use these wealth levels because I really care about large changes in wealth. And I think the levels provide that more than like, oh, someone gained $10,000. Yeah, $10,000 matters if you're in like level one, but by the time you're in level four, it doesn't. I think people know that intrinsically and so by structuring it in this way, you can really see large changes and lifestyle changes through wealth.
- [66:05]
B
YouTube.com afford anything. We will show this matrix so that you can see how wealth moves bidirectionally, which I think is an important part of the conversation that we often don't talk about. We talk about compounding, we talk about growth, we talk about everything as though it's going to be only upside.
- [66:20]
C
Yeah, and I think one of the other things to keep in mind is they were following the same households over time. So someone quote losing wealth. There's a lot of different ways this can happen, right? Let's say you're in level five, you have, let's say $12 million, you and your partner get divorced. Let's say you cut everything in half. Now you're two people in level four, so no wealth was actually lost, but your household unit would have been reduced. There's a lot of different ways this can happen, a lot of different ways that people can lose wealth. It doesn't mean that there was like this catastrophic event necessarily, but it's just something to keep in mind. And of course the data is limited, but it's the best thing I can find. And so I'm trying to do my best to get those answers to people.
- [66:57]
B
The big takeaways that I'm hearing so far are that, number one, your income matters. Particularly to anyone who has less than a million dollars in net worth. Your income is probably the single biggest determinant of your ability to advance. Number two, owning income producing assets is what's going to move you up the wealth chain. And number three, that making big, big, big moves, meaning level two at a minimum. But at least three, being secure, being financially secure, and then moving from security to abundance may require some degree of business ownership.
- [67:32]
C
Yeah, I'd agree with all of those, Some amount of each one of those. And depends how you define business ownership. It could be as, as simple as like I technically own an index fund which is like some form of business ownership. You're talking about private business ownership. That would be like a level 5 plus type of thing where you have to have your own business that ends up growing quite large and then you sell it. Those are kind of the only caveats I put on that, but I agree completely. I think income's the clearest thing in the data. And we've had guests on this podcast that have talked about this. Rachel Rogers talked about this. She's like, my income just exploded. It went from being paid 30 something thousand, then one year I made $300,000. That type of income explosion is what allows people to more quickly move up the wealth ladder. I think it's pretty clear in the data most of the people that have done it kind of have seen that. And then just taking that money and investing it either in your own business or in some sort of income producing assets is the ways you keep moving up the ladder.
- [68:25]
B
Well, thank you for spending this time with us and thank you for laying out the wealth ladder as a concept and also for the 0.01% rule as well as the 1% rule as well as the 2x rule. All of these heuristics that we can use as we make decisions about how we spend our time and our money. Where can people find you if they would like to learn more?
- [68:44]
C
My blog is of dollarsanddata.com, but you can also find me on Twitter x Instagram LinkedIn. My name is Nick Magiulli. You can find me everywhere. By the way, I do try to answer every single dm. So if you send me a dm, I will respond to you.
- [68:57]
B
Wow. That's a lot of work.
- [68:59]
C
Yeah. Ramit actually responds to all of his emails as well, but I know his fan base is bigger so he is truly the champion of DM responding. Wow.
- [69:12]
A
Thank you Nick.
- [69:13]
B
What are three key takeaways that we
- [69:15]
A
got from this conversation? Key Takeaway Number one Income is more important than frugality when it comes to building wealth. And you know, in the world of personal finance, there's often a big debate between the save more camp versus the earn more camp. But the data shows a clear relationship between how much you earn and how much wealth you can build.
- [69:37]
B
A lot of people like to focus
- [69:38]
A
on cutting expenses, and I've often heard
- [69:41]
B
in personal finance circles people can be
- [69:44]
A
a little bit flippant about increasing your income because people can be like, well, if you earn more, then you're just going to spend more. So really your focus needs to be on how to save. The reality is your earning power determines which level of wealth you can realistically reach. The median household income in level one is 32,000, and in level four, the median household income is 197,000. And the difference between making 32,000 a year. I mean, like, call me Captain Obvious, but the difference between making 32,000 a year versus making nearly 200,000 a year, some people don't have spending problems. Some people have earning problems. And so Nick shows this with data in order to challenge that popular personal finance narrative that anyone can get rich if you're just frugal enough.
- [70:37]
C
I'm just so tired of the spending argument, I wanted to put it to bed forever. I showed some data in my first book which was decent. I think now this data is so concrete that I'm like, this is the way to look at it. I haven't found a better data set on this, and if I do, I will change my tune. But until then, I will stick with what I have.
- [70:54]
A
And so to anybody who's listening to this, who doesn't make a ton of money, take note. Don't feel bad about yourself. The Internet will sometimes make you feel bad about yourself because especially in personal finance circles with this narrative that anyone can be rich if you are just frugal enough. And all you got to do is frugal down and shop at Costco and ride a bike and soon you'll be a millionaire.
- [71:17]
B
Right?
- [71:18]
A
That works if you're making 200,000 a year. It doesn't work if you're making 40,000 a year. And I think there are a lot of lower income people who feel guilty about the fact that they aren't further ahead. And so I want this in part to be a message to anybody who's in that boat. You're not an overspender, you don't have a spending problem, you have an income problem. And that's fixable. Now we're going to find ways for
- [71:43]
B
you to fix that. There are a lot of ways for you to fix that.
- [71:45]
A
Focus on solving the right problem, because that's how you're going to actually solve your way out of this. And so that is key takeaway number one. Key takeaway number two. As you build wealth, your asset mix should change and more and more of your assets should be income producing. People at different wealth levels own completely different types of assets. And in the early stages, in the very early stages, your car is likely your biggest asset. And then as you climb up the wealth ladder, your home turns into your big biggest asset and it dominates your net worth. But your home, if it's a primary residence, then unless you have a roommate, your home is not income producing. In order to ascend the wealth ladder, you'll want as much of your net worth as possible to be in income producing assets. That means rental, real estate, stocks, bonds, businesses that you own. Income producing assets is where your net
- [72:48]
B
worth ought to be.
- [72:50]
C
By the time you get to level six, over 80% of their assets are income producing compared to someone in level one who has on average 5% of their assets are income producing. The reason why is someone in level one doesn't have a lot of money, right? So it makes sense why that's the case. And so they can't afford to go and buy a second property. I can't even get my first property.
- [73:09]
A
But let's get creative about how you can do that if you are on the lower end of the wealth ladder. Because let's say that your car is your biggest asset. There are websites like Turo where you can rent out your car, right? And you can turn that car into an income producing asset. Even if you don't own your home, even if you're a renter, I mean, taking in a roommate or if Your landlord will allow it. Airbnb when you're out of town, right? There are plenty of ways that you can turn the place you live into an income producing asset as well. Now, not every opportunity is necessarily worth pursuing. We go over later in the interview the heuristic about whether or not something is going to improve your net worth by at least 1%, using that as a litmus test for whether or not you should follow through with some type of an income producing idea. Income generating idea, right? So if you've got a net worth of 300,000 and you crunch the numbers and figure out that by renting out your car on Turo, you can make an extra $3,000 this year, which would be 1% of your net worth. All right, that's actually worth pursuing. But if you have a net worth of 800,000, that same opportunity with that same car in that same neighborhood might not be worthwhile, depending on what else you're doing with your time.
- [74:27]
B
So all of that is to say
- [74:28]
A
your net worth should be in income producing assets to the greatest extent possible. And as you climb up the wealth ladder in higher and higher levels, you'll see a bigger and bigger percentage of net worth being held in assets that make an income. Let your money work for you so
- [74:47]
B
you don't have to.
- [74:48]
A
That is key takeaway number two. Finally, key takeaway number three. Getting super rich, like really, really rich, requires business ownership. The math shows that saving your way and investing your way from being a millionaire to a multimillionaire takes decades and decades of extreme discipline. So even if, after taxes, you were to save $100,000 per year, assuming a 5% return, it would take you 23 years to get from $1 million to $10 million. And that's if you're saving $100,000 a year. Right? So most people who make it to the $10 million mark do so through business ownership, either direct or through equity stakes. They typically don't do it through traditional employment coupled with public markets investing.
- [75:39]
C
If you hit a million dollars and you save $100,000 a year, how long will it take you to get to $10 million? So basically, how long does it take you? You just hit the cusp of level 4. How long does it take you to get to level 5? Assuming your wealth's growing at 5% a year, you're saving 100k a year. It takes 23 years to get there. 23 years of working hard, saving 100k after tax, investing that money, and your world has to grow at 5% a year, every year. And this is all inflation adjusted. That's not easy to do.
- [76:07]
A
And by the way, I know some
- [76:08]
B
people are going to say, well, a
- [76:08]
A
5% return, that's super conservative. Yes, absolutely it is. Remember, number one, this is the return of your entire portfolio, including stocks, bonds, the portion of your net worth that you have tied up in non income producing assets like your primary residence. And you know what, if you still think that's too conservative, all right, notch it up to 7% or 8%. It's still going to take a very, very long time. And so if you want to reach some of these upper levels, business ownership
- [76:40]
B
is the way to do so.
- [76:41]
A
Now you don't necessarily have to reach any of these upper levels. You can be, as Nick points out, perfectly happy by choosing the level that
- [76:52]
B
you want to peace out at.
- [76:54]
A
And everybody's different. Some people are going to say, what's the point? In an endless quest for more, I'd rather relax and travel and enjoy my life. Some people are going to feel that way and other people are going to say, you know what? I enjoy a good challenge and I like playing the game and I want to see how far I can get. And maybe at different phases of your life, you'll feel each of those two ways, right? Maybe you'll toggle between those two viewpoints in different eras of life. That's all fine. The point here is simply that to get to those upper levels, you need business ownership. Those are three key takeaways from this conversation with Nick Magiulli, the author of the Wealth Ladder. Thank you so much for being part of the Afforder community. If you enjoyed this episode, please open up your favorite podcast playing app.
- [77:40]
B
Leave us up to a five star
- [77:42]
A
review, write a few words, tell us what you love about the show. Head to our YouTube channel, YouTube.com affordanything and hit the subscribe button. Because the more subscribers we have on YouTube, the bigger of guests that we're able to bring on and remember that newsletter affordanything.com newsletter thank you so much for tuning in. This is the Afford Anything podcast. I'm Paula Pant and I'll meet you in the next episode.