← BiggerPockets Money Podcast
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- [00:00]
Mindy Jensen
We talk a lot about financial independence being for everyone, no matter when or where you're starting. But how do you know you're taking the right steps to build wealth in a meaningful way to achieve fi and avoid getting off track or even getting stuck in the middle class trap? That's what we'll be talking about today. Hello, hello, hello and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me, as always, is my Climbed the Wealth Ladder co host, Scott Trench.
- [00:29]
Scott Trench
Thanks Mindy. Great to be here. Taking our audience to new heights on their financial journey. We are so excited to have Nick Magiulli back on the podcast. He's brought a blueprint of wealth that goes far beyond any traditional fire advice in his new book, the Wealth Ladder, which I am about 3/4 of the way through and really enjoying. He is the creator and financial writer of Dollars and Data and a two time author again with his new book that is just coming out today. We'll be talking about his latest book, the Wealth Ladder, where he reveals the six levels of wealth that most investors never learn about and how mastering them can fast track your journey to fire. Nick, thanks so much for joining us again here on BiggerPockets Money.
- [01:04]
Nick Magiulli
Thank you guys for having me on once again.
- [01:05]
Scott Trench
Awesome. Well, let's start off with the good stuff. What is this concept of the wealth ladder and what are the six steps of it?
- [01:11]
Nick Magiulli
So the wealth ladder is the idea that your financial strategy should change over time and more specifically, as you build wealth. And so to do this, I created six individual wealth levels which are based on your net worth. And so as your listeners probably know, know, net worth is assets minus liabilities. So everything you own, your car, bank account, home, cash, etc. Minus everything you owe to others. Take off your mortgage, debt, student loans, credit card, you net those out, you get a number. Hopefully it's a positive number and hopefully it's a large positive number. From there we can put you in one of the six levels. Level one is less than $10,000 in wealth. Level two is 10,000 to $100,000 in wealth. Level three is 100,000 to a million dollars. Level four is 1 million to $10 million. Level five is 10 million to 100 million DOL A level six is over $100 million. And the nice thing about this is these actually map onto the US economic classes pretty well. So 20% of households are in level one. That's less than 10,000. 20% are in level two, which is 10,000 to 100,000 about 40% are in level three. That's 100,000 to a million. That's like your middle class. Basically 18% are in level four, 1 to 10 million. And then the top 2% is, you know, over $10 million in wealth. And so the easy thing, if you want to, like, how do I memorize these levels? Just remember level three. That's like where most people are anyways, you know, in the United States as a, that's 100,000 to a million. And then you can just divide by 10 to go down a level, multiply by 10 to go up a level. And so it makes it very simple to kind of remember which levels, which.
- [02:37]
Mindy Jensen
Okay, you just said something that I didn't realize before, but now I do. You said your financial strategy should change over time. And when you say it so succinctly, it sounds like, well, yeah, of course it should. But I think that this is where a lot of people, especially in the financial independence community, are struggling. They're like, well, I was frugal and that's what got me here. So I should just continue to be frugal. And as a community, we have a hard time spending money.
- [03:05]
Scott Trench
I'll just piggyback on Mindy's comment here and observe that, you know, we talk about the four levers most people can pull, excluding things like marrying rich or inheriting money or those kinds of things to get wealthy, which include spending less, earning more, investing, or creating. And we come back to this theme of there's a right tool for the right stage of your journey all the time here. And that is, I think, a theme that is prevalent throughout your book. You use different words to describe that concept. But the lever that's most important when you're at level one is going to be very different from the one at level three or level four, or certainly level six by that point.
- [03:38]
Nick Magiulli
Exactly. And I think whether you call them lever strategies, whatever, there's a lot of different words, but we're all saying the same thing, which is like, over time, like, you need to shift where you focus. Right. I think someone with, you know, in level one, for example, me telling them my first book was called Just Keep Buying. For me to say, hey, all you need to do is just keep buying income producing assets. That's not what they need to hear. That's good advice later, but not yet. Right. And so sometimes we're talking over each other because we're talking to different people on the, on different levels on the wealth ladder. And so realizing that, hey, maybe the advice should Change based on where you are. And so that, that was my big insight with this book, is like, hey, I realize, you know, maybe this is the lever you need to pull at this point. And then when you get to that other point, then you can pull that other lever.
- [04:17]
Mindy Jensen
Okay, I want to talk about that. What are the levers that they should be pulling in each level? Which is going to get confusing, but level one is less than $10,000 worth of income. What lever should they be pulling? What should they be focusing on in that specific place?
- [04:34]
Nick Magiulli
So I think that's about getting to safety. And that means, like, building up some sort of buffer of emergency savings. And I know that's. And it doesn't just have to be safety in a financial, purely financial sense. Like, yes, having a few thousand dollars for a rainy day is one thing, but having a network of people you could rely on, friends, family, etc. There's something amplified in each level of the wealth ladder. And in level one, what's amplified is bad luck. Like a simple annoyance for someone in level three or level four, like, let's say your tire blows out on your car, that's an annoyance. Like, oh, gosh, I have to go call AAA or take it to the shop, whatever. Someone in level three or four would just do it and move on with their life. Someone in level one, as a result of that, could lose their job. And then if they don't have a job, they can go into credit card debt and then they just start spiraling. And this explains why over half of the financial distress events in the United States are experienced by only 10% of households. It's a very small number of people that are just getting caught in these financial tailspins. And my whole goal is like, hey, don't get into a bad spot. If you are there, do whatever you can to get out. So that might mean cutting spending. I'm usually not a fan of, like, oh, cut your spending all the time. But if you're in a, you know, a drastic situation, you may need to take drastic action and sacrifice to get out.
- [05:41]
Mindy Jensen
Great. Level two is 10,000 to $100,000 in net worth. What are we focusing on here?
- [05:48]
Nick Magiulli
I think the thing to focus on there is going to be education and skill building. And that doesn't just necessarily mean, oh, getting a degree. I think if you can build a skill set that's useful, you can really change the trajectory of your life. Now, for those people that, like, oh, you just graduated college and like, okay, you're just starting to save money, you're kind of like level one, level two. I think those people have those skills. They just need time to get out of level two. That's how a lot of people are. But for some people, they don't have those skills yet. So time is a big factor here and we can get into that in terms of like ages and levels. But the one thing I want to keep in mind here is like, getting those skills is important and there's a lot of different skills you can get. Like, you know, credentialism, getting a professional degree, lawyer, doctor, et cetera, getting sales skills. Like people are talking about, AI is going to take over everything. It's not going to take over sales. I promise you they're not. We're not going to have a robot realtor selling a house. Right? Like, if you can sell stuff very well, you're going to make money doing that. Technical skills, I know people are saying that's all going to be by AI and a lot of it probably will be, but there's still going to be value to having some sort of technical skills. So I think these are just a couple of different areas you can focus on to try and get those skills so you can earn more in the future.
- [06:51]
Mindy Jensen
Okay. I love it. What is amplified in level two?
- [06:55]
Nick Magiulli
I think it's the educational choices you make because eventually that is, it's like your trajectory. You can imagine like a slope of a line, and the higher that slope because of that educational resource or skill you build, that's going to impact everything much later on. Right. And so I think there's a lot of people that like, well, hey, I just graduated. I'm in like level two. You know, it's like, okay, well, you just haven't had time to get to level three or level four. It's just it. That's a lot of it is just waiting, earning money, investing it, etc.
- [07:20]
Mindy Jensen
I think our audience mainly comes in at level three and level four, and it's 40% of households in level three. So what are we focusing on in level three?
- [07:31]
Nick Magiulli
In level three, I think it's all about investing, because that's the point where if you just think about your portfolio, like, okay, now let's say I have $100,000 portfolio that's like on the cusp of level three. That's the part where your portfolio can now earn you as much wealth as maybe you can. I don't know. I'm making a lot of assumptions about how much you can save in a year. But let's say you could save $10,000 in a year, Like a little less than a thousand a month. Right. Your portfolio, if you have $100,000 portfolio, you get a 10% return. And I'm not assuming that every year. But now your portfolio is competing with you in terms of how much it adds wealth. And as you get deeper and deeper into level three, it may even surpass you. And by the time you're in level four, unless you have a very, very high income, your portfolio is going to more likely generate more wealth than you can. Right. And so it's like you're almost in like this race against yourself. And so early on, when you're in level one, your portfolio can't do anything. By level two, it's starting to build a little bit. By level three, it's starting to compete with you. And then deep into level four, you can't even compete with it. Right. Unless you have an insane income. Right. Which is a whole separate story.
- [08:28]
Mindy Jensen
And what's amplified in level three, it's.
- [08:31]
Nick Magiulli
Your investment choices, really. Level three and into four, both of them kind of. It's like the amplification is like what investment choices you make, because those things are going to impact how quickly your wealth grows over time and how you could lose wealth as well. If you're very concentrated and things go well, you can move up a wealth level, but at the same time, if you stay concentrated and things go badly, you can just fall back down. So there's a lot of, like, your investment choices, I think, matter a lot more there and a little bit with your spending. I don't try to demonize spending too much, but one thing I found in the data, I compared households that were in level three today to those that got into level four versus those that were in level three today and stayed in level three over the course of a decade. So there's the three to fours versus the three to threes over a decade. There were two big differences. The ones that made it to four had a higher starting income. So income definitely matters. There's no debate there. But the second thing I noticed was those that stayed from three to three spent almost as much as those that made it to level four. So like, everyone in level three was like spending basically the same amount, but those that made it to level four just had a much higher income. And so I think overspending on big ticket items, housing, cars, etcetera, can hold you back a little bit. But I try not to focus too much on like cutting spending. But it does matter for sure.
- [09:39]
Mindy Jensen
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- [09:45]
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- [10:45]
Mindy Jensen
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- [11:22]
Scott Trench
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- [11:25]
Mindy Jensen
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- [11:28]
Scott Trench
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- [11:29]
Mindy Jensen
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- [11:31]
Nick Magiulli
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- [11:32]
Scott Trench
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- [11:33]
Nick Magiulli
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- [11:39]
Scott Trench
All right, now it's time to step up on your FI journey.
- [11:42]
Mindy Jensen
Okay, moving on to level four. One million to $10 million in net worth. Again, I think that a lot of our audience is in level three, but moving to level four, what are we focusing on in this level?
- [11:55]
Nick Magiulli
I think the big decision point here is do you want to get to level five? Does that matter to you at all? There's like A lot of motivational and kind of, you know, self reflection you have to do. And if you have to completely change your strategy, like the strategy to get into level four is not easy, but it's relatively simple, right? It's like get a decent income, have your spending under control so you can have some savings, invest that money and then just give it time, right? So it's really like savings, you know, decent income, returns and time, right? Those four things put together get you into level four. To get out of level four, to get into level five, which is 10 million plus, you have to do something completely different. You have to have some sort of business that you sell for tens of millions of dollars. And I can just prove this with simple math, right? If you get to a million buc bucks, let's say you're saving $100,000 a year, that's a lot of money to save, right? And you're earning 5% a year. Guess how long it takes you to get to 10 million? 28 years. And this is after you already made it to a million. So this is after like you've done all this work to get to a million dollars and then you still have to wait another three decades of just non stop grinding to get there. It's bonkers. Even if you're saving 300,000 a year, an insane amount of money, right? 300,000 after tax, it still takes you 17 years to get to level five. So. So I think the big decision point in level four is like, hey, do I want to get to level 5? How much do I care about that? I probably don't. So you can kind of take your foot off the gas and chill out. And I think that's where this idea of coast fire, like hey, I don't necessarily need to keep working as hard. I can kind of do different things and I can kind of take my foot off the gas and chill out a little in my career by the time you're in level four. And I fundamentally believe that is the choice because you either say, hey, I'm going to start a business and try and sell it for a lot of money to get into level five, or I say, hey, I'm kind of done climbing the wealth ladder and I'm cool just coasting in level four. Basically those are the two options you have.
- [13:38]
Scott Trench
Awesome. Well touch it briefly on level five and six. I think that those will be of curiosity, interest, but not the main goal for most people listening to this. But I'd be interested. What you hear is amplified in those two categories. And also, what's the percentage of people in level six?
- [13:52]
Nick Magiulli
In level six, it's like incredibly small. I mean it's in the book. I can't even remember the number right now, but it's. There's only like 11,000 as of 2025. I just looked at the updated data. There's only 11,000 households in the United States that are in level six.
- [14:03]
Scott Trench
That's 100 million plus network worth.
- [14:05]
Nick Magiulli
Yeah, 100 million plus. Very few households make that those that are in level five, which are 10 to 100 million. There's probably about maybe a million, maybe to 2 million households. I'm not exactly sure how accurate that is, but there's quite a few households in the plus over 10 million. Over 100 is a completely different game though. And so that that number drops off very quickly. What are the things that get amplified there, ironically? And so when even when I was writing the book, I'm like, most people aren't going to ever be in level five or six, myself included. So like why, why do I care about this? Why do I read it? Because I think the things that are actually amplified in levels 5 and 6 are non financial financial things. Because those are the things you can't buy anymore. At that point. You can buy almost everything that can be sold, right? Almost everything. Not everything, but almost everything. Yet you can't buy true friendship. You can't make your spouse love you. You can't just buy a new cardiovascular system, right? Like all the other parts of your life. That's what gets amplified. Of course those things matter regardless of where you are in the wealth ladder. But I think people in levels 5 and 6 especially are probably not paying enough attention to those things because they're so focused on like, oh, well, I got to get to, you know, if I have 10 million, I get to 20, if I got 20, I got to get to 50. Etc, right? And so I think that thinking can blind you so much that you overlook just very obvious life wins, which is like, hey, you should probably exercise more. Hey, you should pay attention to your kids. All these types of things are way, way more important once you're in level five, because the money can't buy them at the end of the day, right? Most people in level one, most of their problems are money problems. By the time you get to level 5 and 6, money is not your problem. It's something else in your life. And so that's why it's quote, amplified in that way.
- [15:38]
Scott Trench
Another concept that I think was really great in your book was this concept of the. I think it was the 0.1% rule. Could you describe that for us and what that means in the context of these levels?
- [15:48]
Nick Magiulli
The 0.01% rule is this idea that your spending can go up over time, but it's. It's got to be based on your wealth and not your income, right? And so where the.01% rule comes from, it's like I'm assuming that 0.01% of your wealth or 1 10,000 of your wealth is a trivial amount of money, right? So this actually came from a Jay Z lyric. I'm not going to say the actual lyrics. He curses, so I'm not going to curse on the podcast. But he says, what's 50 grand to someone like me? Can you please remind me? At the time, his net worth was like roughly $500 million. So 50 grand to him was, you know, 1 basis point 0.01% or 1 10,000th of his wealth. It was trivial to him. And I said, oh, that's kind of interesting. And I kind of started thinking about this a little bit more. And I was like, that's actually true for everybody. Like, that number's relatively trivial. So if you have a $10,000 net worth, you're basically on the cusp of level two. One doll is nothing, right? You can lose that and you'd be okay. Right? And so I think how this works is your marginal spending decision should be based on this type of, like this rule. So what I call level two, I call that grocery freedom. Because any from $10,000 to $100,000, that means your marginal spending decision is going to be from 1 to $10, right? If you divide by both of those numbers by 10,000, right? So you have this one to $10 decision. So you're at the grocery store, you're like, oh, do I buy eggs or cage free eggs? Like, oh, the cage free eggs are like a dollar more. I can afford that. Not a big deal, right? And so that's where that thinking comes from. And this scales up the wealth ladder. So in level three, I call that restaurant freedom, right? So now your marginal decision is between $10 and $100. And so when you're at a restaurant, you can go buy a more expensive entree or, you know, get a few glasses of wine, whatever that pushes you up into. Like, hey, I can pay that without having to worry about it, right? And then level four is what I call travel freedom. That's where the marginal decision is between 100 and $1,000. And by the way, this is assumed to be on a daily basis. And the underlying assumption is that your growing by 0.01% per day, which on an annual basis is 3.7% per year. So that's kind of where it comes from.
- [17:43]
Mindy Jensen
Hold on. You said I'm spending how much every day?
- [17:47]
Nick Magiulli
In level four, you can spend up from 100 to $1,000 a day on the marginal decision. This is not, oh, I can only spend $100 a day for my whole life. Like, no, that's not it. Because you obviously have income coming in. This is your marginal spending decision. Because everyone makes spending decisions on the margin. No One in Level 1 is saying, oh, should I buy a Maserati? No, they know they can't afford that. Right. They are saying, oh, can I buy this latte? Can I buy this thing at the grocery store? Can I buy this thing in a restaurant? It's that little marginal decision is where you're making the spending decision. And my argument is that marginal decision should increase as your wealth increases. Right. And so once you're in level two, you can go to the grocery store without worrying about it. Right. Once you're in level three, you can eat at a restaurant more regularly without worrying about it and get what you want at the restaurant and then. And it goes up from there. That's the point of this rule and the thinking behind it. It's not that you can only spend $100 a day as a millionaire. Of course not. But your wealth is generating that. If you have a million dollars, your wealth is generating that every single day.
- [18:45]
Mindy Jensen
If I have a million dollars in net worth, I can spend $100 a day and not worry about it. Okay. Times 365 is I could spend $36,500 in a year and not worry about it.
- [18:57]
Nick Magiulli
That assumes your wealth is generating that every year. That's just the underlying assumption. It's like less than the 4% rule. It's like three point. It's like a. Even less than the 4% rule is kind of what this is. If you really think about it.
- [19:09]
Mindy Jensen
Let's say I have $1 million in net worth. Per the 4% rule, I can spend 40,000. Are you saying I can spend an additional 36, 500?
- [19:19]
Nick Magiulli
No, no, no, no. I'm not saying that. This doesn't work for retirees.
- [19:22]
Mindy Jensen
Oh, okay. So if I have income.
- [19:24]
Nick Magiulli
Yeah, if you have income, you can spend, in theory, all of your income and then you can spend the 0.01%. Now, if your income is being Derived from your wealth, that's a different story, right? If you're like working and this is like the additional spend, that's just an assumption that's built into it, right? So this would not work for a retiree because then you're like kind of, you're double dipping, right? You're like using the 4% and then you're assuming it's growing on top of that. That's not true in this case. So apologies to clarify.
- [19:50]
Mindy Jensen
I just want to clarify because I can see here somebody saying, you know, oh, I can spend 76,500 now, okay? So I do have income. I'm a real estate agent. Therefore I am not living off of my portfolio. So I can take, take my portfolio times 0001%.
- [20:05]
Nick Magiulli
Or divide by 10,000.
- [20:06]
Mindy Jensen
Yeah, or divide by 10,000 per day. I can spend that number per day and be okay. I am so uncomfortable.
- [20:14]
Nick Magiulli
Your wealth would be stagnant. It would not grow. That's the, that's the assumption. It doesn't grow anymore at that point. And so I'm not suggesting that you do this. I'm saying you could in theory do this. And I'm not expecting someone to do this every single day. But this is just kind of a rough guideline for how you're doing your spending decisions. Like, people in level three aren't going to a restauran every single day, right? So they're not making that 10 to $100 decision daily. But it's just like, hey, I'm at the point now, if I go to a restaurant once a week, I can enjoy my meal. That's kind of the thinking there. And so on average, if you aggregate it out, that's it. But in theory, you should be spending less than your income, so you should be saving money. But if you want to, you can spend this little bit amount and you'll be okay. That's, it's. I'm trying to find a solution that allows people to spend more money over time that's not linked to income income, because income is fickle and it changes too much.
- [21:01]
Scott Trench
It's a triviality point, right? Like then this is like, this is something that, you know, like for example, my time as CEO at BiggerPockets, right? There was decisions that needed my full attention at one point in that journey. And then by the time it was over, it was like, well, that if I'm spending any time doing that decision, that's a trivial decision for this business at this point. And this is just like your life. And I think that, you know, a dollar is a lot of money for somebody who has less than 10,000 bucks. Like, that's a big. That's an important item. It's not for somebody with a million. It's so trivial an amount for someone with 10 million that they'd be foolish to spend much time at all thinking about it. And that's all you're saying with this concept of the 0.01% rule. And I think a lot of people miss that. And I also think this goes into an investing concept here where. And this is a problem that real estate investors or dabblers get into. If you're in this level four, and you're worth in the two and a half to 10 million range, and you're putting 25 grand down for investments one at a time, then you're going to have a very sprawling portfolio with tons of little pieces to it as well. You might want to think about buying in bigger chunks. You know, if something's not more than 5 to 10% of the portfolio and it's occupying a significant percentage of your time, you got to think about that in here. And I think that this concept is just you just breaking it down into a very ridiculously small increment to show people that, hey, as your wealth grows, some things that you used to be really concerned with really need to go away. You need to reframe your brain and think about the things that are actually meaningful to you.
- [22:24]
Mindy Jensen
I think this is a real problem for people in the FI community is that they just don't grow with their wealth.
- [22:31]
Nick Magiulli
I think you have to. That's once again, the point of the wealth ladder is your strategy needs to be reevaluated and probably change over time because things you used to do made sense in that context. But now you've grown a lot, your wealth's grown, things have changed. What used to make sense in a moment of time doesn't make sense now. And so the whole purpose of this rule is a lot of, you know, financial people just demonize lifestyle creep. And I'm saying I allow lifestyle creep, but only after you've built wealth. I don't care about your income at all. That's the most important thing. Because income changes can go up, down. I don't care. I care about your wealth. And once you've shown financial discipline, you've built wealth, then I allow the purse strings to loosen a little bit. That's kind of the thinking here.
- [23:08]
Mindy Jensen
Yeah, it's not lifestyle inflation, it's life inflation. How can you make your life better. What's the point of having all this money? You said something about you can't buy a new cardiovascular system. I can't, but I can go and buy a really great gym membership that's actually going to get me into the gym. Not going to the gym. It doesn't matter how cheap it is. That's a waste of money.
- [23:27]
Nick Magiulli
Money.
- [23:27]
Mindy Jensen
And let me tell you, I wasted money for a lot of years not going to a gym.
- [23:30]
Nick Magiulli
All right.
- [23:31]
Scott Trench
Did you know that we've got a new website after this episode? Check out biggerpocketsmoney.com and we'll begin building out resources so you can climb the wealth ladder and retire early.
- [23:41]
Mindy Jensen
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- [24:42]
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- [25:43]
Mindy Jensen
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- [26:34]
Nick Magiulli
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- [27:34]
Mindy Jensen
Thanks for sticking with us.
- [27:35]
Scott Trench
Walk us through you know, some of your journey here. You don't have to tell us exactly where you are on the wealth ladder unless you'd like to, but tell us about some of the shifts that you've gone through personally. Personally in where you focused, maybe where you were too slow or too early to transition from the levers that are important in each of these stages.
- [27:53]
Nick Magiulli
Yeah, so I do discuss which wealth level I'm in in the book. Which you can get out. Which is now out there. Yeah, which is now out there. It's. No, it's, it's near the end, so if you want to skip ahead, you definitely can't. I had someone tell me, like, they read the, they read that, that part of the book first and then came back and read it after. So in terms of like, what's happened, I don't think I've ever been in Level one. Even though my parents declared bankruptcy twice before I was 18, that would technically put us in level one. I, I, you know, we had family and they owned property at times. So I would say we were in level two, just like the lower edge of level two for a long time. And so, and I also think by the time I graduated college, I had an education. And even though that's not a physical asset, it's like an intangible that I think is worth something. And so I would never say I've been in Level one. So I basically started in Level two, and I wasn't there for too long because I was saving money. Within a few years, I got into level three, and then it's just progressed from there. And so, so the big changes, I noticed the first thing was like, okay, how do I make sure I get that first job out of college? That was like one of the first things. Now I went into resume building mode and that allowed me to kind of make sure I got out of level two within, you know, I think it was like five or six years it took me to get out of level two. And then from there I said, hey, I'm doing this. I'm, I had a great job, I was getting paid well, but I didn't see a future at that first job because my raises were, were capped out. I would have to go back and get an MBA or a PhD or something to kind of really earn more at this company that I was at as a consulting firm. And so I basically said, hey, I don't really want to do that. I don't want to go back to school and do all that, so I need to come up with something else. And I eventually said, hey, I'm just gonna start writing on the Internet and we'll just see where it takes me. I didn't know anything about monetization. I didn't make any money for three years. I just wrote my blog and just did it for fun. And then over time, I found, you know, ad partnerships and all these things and that was kind of like having a second job that I kind of just did on the weekends. And that really helped a lot because it's like having, you know, two jobs at once. So imagine having two incomes. And it did. It didn't start with that. It's not like right away I was making my income again, but over time it has grown. And so that's kind of been the biggest surprise. Was just working on something I love and, and getting a lot of positive response from people and it going from there.
- [29:51]
Scott Trench
Yeah. You talk about these four amplifiers or leverage points through the part that I'm in the book that there was like content code. Can you describe those four for us? And it sounds like the lever that you pulled in level 3 is this content lever.
- [30:05]
Nick Magiulli
Yeah. And so this is from Naval Ravikant. It's like these four types of leverage. One of them is labor. And so if you start a business and you hire people and the house. Do business owners make money because they have to hire people to create more value than they're paying them? Right. There's that just that wedge there. And that doesn't have. There's a lot of different ways this happens. That's one of them. Labor is probably the oldest form of leverage there is. Right after labor, there's capital, like literally using your money to invest in assets or buy properties, like buy real estate, etc. You're using your money or other people's money if you're borrowing money to kind of lever up your return. Right. That's another type of leverage. The third type of leverage is what I call code, which is just like programming software. It's something where you can write a piece of software or code and then that can be be leveraged to the entire Internet. Right. I think the Internet's probably the, you know, the fastest growing economy in the world. And the fact that you can take something and if it goes viral and send it to a lot of people. Very similar thing with content. The hard part about code and content though, is that these two types of leverage, there's tons of competition. There's a lot of other content out there. There's other podcasts, there's other blogs, there's other books, et cetera. Right. Because of that, you have to really, really have a high quality thing to stand out. And so that's kind of the difficulty. I don't think think code or content by itself is going to get you to level five. I think you can use these ones to get into like level 4, but you usually have to Pair them with another type of leverage so either labor or capital of some sort to really get and juice your returns to get into like level five and beyond. But that's a whole separate discussion. And I think the, the main thing to focus on is there are these leverage points. And like these things do work to build wealth. They can take a long time. As I said, I spent three years writing, writing, you know, making basically zero dollars and then I turned on web ads and started making some money and then ad partnerships, et cetera, and it's gone from there.
- [31:45]
Scott Trench
Awesome. I'll also call out that content and code in particular are rapidly depreciating assets. Right. These are, these are things that, you know, people think software lasts forever. Oh no, no. Neither does content. This, this stuff, you know, is, is in and out and it's gone in most cases pretty quickly. Right. And, and, and you can see that with, with, with probably the stuff on your blog and the stuff on our, our podcast. Right. I mean people still, that came out in the early days, but very few people are listening to episode 30 of the BiggerPockets Money podcast. Almost all of the folks that are engaging with stuff that we talk about here are going to be listening to this episode or the ones that recently came out or the ones that will come out in the next few weeks. And so that's something to consider in all of these, is that these are lifetime or very long term commitments to these types of leverage. The coding content piece, whereas capital and labor perhaps are more durable.
- [32:33]
Nick Magiulli
Yeah, I mean you can try and make a more evergreen. I guess that that's the point of like writing a book is like, hey, you know, you wrote Set for Life. You want to make this thing like, hey, I can consume this product 20, 30 years from now and it's still going to provide value. Right. I wrote just keep buying or the wealth ladder, et cetera. It's the same type of stuff. Right. I think that's one of the few areas where we are trying to make. If you really think. I can't remember who said this, I think it was Nataliasson. He's like, what business out there does someone put out a product and it can still sell 50 years later completely unchanged? And the only answer is like a book, basically. That's one of the few businesses where you do it once. That thing is that product is basically unchanged unless you do it like an updated edition until the end times, basically. Which is kind of cool when you think about it.
- [33:13]
Scott Trench
Or a movie. Right? Like so stuff like that.
- [33:14]
Nick Magiulli
Yeah, exactly.
- [33:15]
Scott Trench
The Last question here for me would be what percentage of the time do people in these levels go down a level? Imagine that's rare. But I think that's the fear, the pit of fear in people's stomach that keeps them going back to personal finance over and over and over again, you know, for, for decades, even long after they've won the game.
- [33:34]
Nick Magiulli
So I do have data on this. This is from the panel study of Income dynamics from the University of Michigan. They followed the same set of households over time. So instead of just looking at like aggregate wealth data of the US they said let's follow the same people. And so over a 10 year basis there's an, you know, 11% of households were down one wealth level. 2% of households were down two wealth levels. Over a 20 year basis, about 10% of households were down one wealth Level. 2% of households were down 2 wealth levels. So it's roughly, let's just say 10 to 12%. Right. That's the probability that you're going to be down a wealth level within the next few decades. And that's not always just from like bad luck or something happening. Some people like, hey, let's say you retire with $1.1 million and you know, you start drawing down on those assets and you're down below a million. Right. These are arbitrary cutoffs. But that's where that happens.
- [34:21]
Scott Trench
Let's make some people mad here for fun and go into some, some other data that I know that that is not popular data here. You, you talked about the, this incredible surge in the upper middle class. Right. And how it's so hefty in a recent LinkedIn post that these mil multimillionaires can't get access to fairly upscale but not elite end resorts, for example, for their vacation to the beach and they're sitting, they're having to go and race against other DECA millionaires to find beach chairs at these resorts or whatever. Can you, can you observe this concept? Because people, it congruent with how people feel about wealth in America today. And that goes by the way, I have a couple other data points that I want to discuss as the bottom and the middle of that of the American wealth ladder that may surprise people.
- [35:05]
Nick Magiulli
I'm defining this in the book. The upper middle class in the United states is level four, 1 to 10 million. I know what you're saying. Well, Nick, 8 million or 9 million dollars is not upper middle class. Well, if you're in New York City, yes. If you're in a rural area in the United States, no, you're definitely upper class. So it really depends on your cost of living. But I'm trying to be broad here and say, hey, this is the upper middle class. And what I talked about. The name of this post was called the Death of the Amex Lounge because I got a, you know, I got my platinum card like everyone else. And I, and I, the first year I went, it was fine, but then I started to notice by the end of the year, like, these lines are getting longer. Like the line for the Amex Lounge is worse in the Amex Lounge than it was outside the lounge. Like, what's going on here? Right? And then I, you know, I go to a resort and people are getting up at 7am to go out and grab a pool chair. And I'm like, what is going on? Like, and I know these, these are not cheap resorts, right? And I'm like. And I started looking into it and there's articles about this and like the New York Times and stuff. And I'm like, there's something happening to the upper middle class where there is not enough of these. More luxury or, you know, maybe not elite level as you said, Scott, but like luxury resources. And that's the same thing with homes. They're not building as many new homes in these nicer areas. So like, these prices are still staying high. And I think that explains a lot of what we're seeing, seeing. And, and there's data behind this. In 1989, this is inflation adjusted wealth. In 1989, just 7% of households were in level four. And this is after adjusting for inflation. Today it's about 18%. So that is a incredible increase in the number of people that have wealth. And a lot of that's from home equity. It can be in retirement accounts that could be, you know, you know, employees with stock, tech employees that got a bunch of stock in Facebook, Nvidia, Apple, etc. That's a lot of this cohort, but that's what's happening. And once you see that in the data and then you see the anecdotes, all these people having issues, and I'm like, I think the upper middle class is going through an existential crisis right now. And I know it's like a first world problems, world's smallest violin, I get that. But I think it's actually kind of a bigger lesson, which is like, you know, money can't buy as much as you think. And so people are striving to be like, oh, I want to have two to three million dollars. And it's like the experience is not that much better. I mean, we're, we're dealing with all the same crap in level four as you're dealing with anywhere else. And so I think that's just ironic and kind of funny. And so something that I just saw in the data and you're starting to see this kind of, maybe, I don't want to say unraveling, but there's, there's something going on here that I'm picking up on.
- [37:17]
Scott Trench
What's happened to the percentage of people in level one and two over that same time period?
- [37:21]
Nick Magiulli
In level one, it looks like it used to be 25% of people in 1989 and then by now it's only 20%. So that's kind of decreased quite a bit. And then level two was about 25% and it's about, maybe even smaller, maybe like 15%. So both level one and level two, there are fewer people in those levels. And this is in an inflation adjusted dollars to 20, $22. So those ones have gotten smaller. Level three has gotten slightly bigger, but level four has gotten the biggest right of those four levels. So that's what we're generally seeing in the data.
- [37:51]
Scott Trench
Yeah, and this is something that I think is really important to call out here. And again, it angers folks for some reason on the Internet because you're not allowed to say it, but, but American wealth has dramatically increased for people at all levels along this journey, with people shifting out of the lowest levels of wealth on an inflation adjusted basis and into higher levels of adjusted wealth. Furthermore, real median inflation adjusted hourly weekly earnings for individuals in this country have grown for the past 30 years pretty much nonstop with a few, with a few blips here and there around the Great Recession in Covid throughout multiple Democratic and Republican presidencies. And that just marches steadily onward and upward. And the standard of living is unquestionably improving for this cohort in a large number of ways from every data point that we can tell. And yet that is not what you see in the discussion boards and all these other things around the Internet. These statistics are also at play if you want to read more about this, if you're listening in a book called Factfulness, which shows the extraordinary improvements in quality of life in every measurable way that we can detect across most nations in the world, and especially here in America, with length of life, with child mortality rates, with health outcomes and those types of things. And this is a trend to understand and to bet on in a general sense, even as it is very unpopular to voice over. And I'm sure I'll get beat up in some comments here on the YouTube channel.
- [39:13]
Nick Magiulli
I think the reason some of this shows up. SCOTT and so what you're saying is to going correct. I think there's a couple visible things though that are tougher, like housing prices are higher, right. And because interest rates are so high, they weren't as low as they've been in like, let's say the last few decades now that's made them a little bit less accessible. So that's actually a thing that's happening. That's, that's why like I'm still a renter. Even though I'm, I'm doing well with my wealth and everything, I'm still a renter because I'm looking at the math and I'm like, I can rent the same place for basically half the price here in Jersey City that I would buy. And so I'm running the math and it doesn't make sense. The other thing too is people tend to just focus on the things they don't have and ignore all the things they do have. So like, obviously technology's gotten better. That's one thing. Travel. People are traveling more than ever. Like, go talk to your parents. How many times when they were younger, in their 20s, were they getting on planes and flying to Europe and doing stuff like that or flying around the country? They're going to say almost never. I'm telling you because unless you came from a very wealthy family, it just didn't happen. Today people are flying all the time. My sister went to Japan before I did. You know, like there's, and she's younger than me and she doesn't make as much and all this stuff. So it's like people are traveling, they're seeing the world, they're doing a lot of other things. They have a, they have this new basket of goods that are very different than the old basket. So I think the American dream in that sense has changed a little bit. I do think the housing piece is a problem. I'm not sure how it's going to get solved, but I think it's going to have to be some more housing. And I don't know how that plays out over the next few decades.
- [40:29]
Scott Trench
Well, that's another debate how to solve housing. We could do health care for sure. We'll have a lively one. Let's talk about fire for a second here. So walk me through your views are of the fire community and feel free to bash or whatever on there. I'd Love to hear how that fits in with this wealth ladder concept.
- [40:44]
Nick Magiulli
I have nothing against the fire community as a whole. I do think certain members of the community can focus a little bit too much on money. And money is the problem. I don't have enough money to just be financially independent. So my solution is just get money. And it's not like, live my life. It's just my life becomes getting the money so I can reach fire. And I think, like, my whole argument is, like, you don't necessarily need to be financially independent. You just need to get to a spot where then you can live the life you want. And I think those are different amounts. Fire is very easy because you can quantify exactly what it is. Oh, I spend 100,000 a year. Let's use the 4% rule, or multiply by 25. That means I need $2.5 million to hit fire, right? Very simple. We could do the math here and there. How much do you need for financial freedom? If you spend 100,000 a year, maybe you need half a million dollars and then a job you enjoy that covers 80% of your spending. Like, that's a much more comple. Right? So my issue with the fire movement is just the people that just focus on money completely, and they overlook the other parts of their lives. And I think not all of them, but many of them can come to regret that. So I think it's thinking more holistically about the process. That's more what I'm about. And so, and I don't really agree with, like, oh, you should just cut your spending all the way to the bone. I think you should live a little and enjoy life. So the real route I promote is increasing your income, because that's the. You know, if you look at the data, the higher your income, the higher your savings rate. It's the most positively correlated thing in all personal finance. And the data, I put this in the book as well.
- [42:07]
Scott Trench
I think that there's a component here where I think the fire community was heavily associated with this extraordinary or extreme frugality mindset for a long time, and that the community has started to grow up here. But that perception has not lost its attachment. And for what it's worth, I think that that extreme frugality component is absolutely essential in level one and level two, too. And it is essential for income production as well. And my argument for that is when I was 23, 24, because I spent so little and was pretty hardcore on the expense front for the most part, especially with my housing and transportation, that Enabled me to take a job at a startup that had lower base pay than the other opportunities that I had in the market, which had significant upside for me long term. And that's the interrelation. If that was still going on, that's extreme frugality that was needed to get the assets snowball and the opportunities spiraling, then that would be extremely unhealthy. But I believe that it's the obvious lever for the first levels to use your language of the financial journey. And it must be applied to the maximum or it should be applied to the maximum for a period of time to get on the other side of this. And then once that 0.1% of your wealth becomes a trivial amount in the context of decisions, then you need to move on to the management of the portfolio. Managing a $10 million portfolio, making good decisions there is so much more important than putting really fine tuned controls every $10 of spending that it would be silly to do that. But there's no portfolio to manage at level one or two. And so it's so important to tightly control every dollar of expense at that point in time. So that would be my argument for the fire journey inside of the context of this. But I think that that perception of that extreme frugality that gets people going st sticks with the community and is not really the reality of many people I meet in the community. Although there are some that definitely have a trouble letting go.
- [43:56]
Nick Magiulli
Yeah, no, I agree with that. I think that makes complete sense and I can completely. Yeah. When you're in especially level one, I completely agree with that. You know, and I can see going into level two as well the, some of the frugality stuff. Like you need to get started and go in one direction. I just think about like what are you sacrificing and what are you giving up? And just think about those things. Because you can only be in your 20s ones, you can only do certain experiences at certain points in time. And so I, I just like to think about that a little bit because you know, I, you see stuff like on Twitter like, oh man, wait till you're in your 40s to settle down. You can just focus on yourself. It's like you need to kind of live your life a little in your 20s. That's my, my counter take to that.
- [44:30]
Scott Trench
So there's this hustle culture as well. And it's just like grind harder, work harder, make more calls. And again, I, I think there's a time and place for that. Right? There's a time and place for this extreme Frugality in level one and two, and it's gotta stop at some point along the journey because you gotta learn, live life later on. And in level three, level two, level three, that's where your income production comes in. You need to kind of embrace a little bit of this. Read those extra books, learn this mentality, put in those extra hours to bump that up and get that income going, which is the most important element of it. But if that continues forever as well, that's super unhealthy. There's tools that apply to each stage in the journey. And I think that's what I loved about so much about your framework, is it gives you all of those. And at some point, if you're using the same tool for two decades in a row row, and that's your, that's your crutch, something's wrong and you're not, you're not maximizing what's there for you.
- [45:17]
Nick Magiulli
I hear that. Thanks. Thanks so much, Scott. I agree with that.
- [45:19]
Mindy Jensen
All right, Nick, where can people find you online and where can people find your book?
- [45:24]
Nick Magiulli
You can find me at of dollarsanddata.com, you can find me on Twitter xollarsanddata or on Instagram Nick Magi, LinkedIn, Nick Magi. And you can find my book the Wealth Ladder, wherever books are sold. So Amazon, Barnes and Noble, bookshop.comorg etc.
- [45:39]
Mindy Jensen
Awesome, Nick. Thank you so much. This was a super fun conversation. I am going to take your math problem and try really hard to apply it to my life a little bit more. No promises that I'll actually be successful, but that's a me problem, not a you problem. All right, Scott, that was Nick Maggiuli and that was an awesome conversation. What did you think about his Wealth Ladder?
- [46:01]
Nick Magiulli
I love it.
- [46:01]
Scott Trench
I think it's a great framework and I think it just maps perfectly to this other framework that I've been applying it. You know, that's, that's all we do on these Finance Fridays or over time when we look at, at folks financial positions. It's like, where are you? And what's the biggest lever to pull? And a lot of times that's so hard for individuals to do with their own position because you're stuck in this mindset of like, I'm a frugal person, I control my expenses. And this goes on for 10 years. And all of a sudden you look up and you're like, well, that's not an important lever anymore in my journey. That's a great problem. Right this. You we've graduated to something else needing to be the primary concern. And I think that this framework is a super powerful way to apply that. Is it perfect? No, but it's good. It's useful. There's a big range in wealth between 100,000 and a million and a huge one between a million and 10 million. We don't have to get into 10 million and 100 million. Someone with $8 million is so different, and it's such a different set of circumstances than someone with 1 million, for example, that there's a completely different playbook. But this framework is a helpful starting point to understanding that if you're in this level of for and you're still really struggling with day to day expenses or really, really afraid to spend even a meaningful amount of money, something's wrong. That's a wake up call that your mindset needs to shift and we need to be much more focused on how we think about our investment portfolio, income generation, or maybe even moving into the world of starting a business. Those are gonna be just much more powerful than continuing to obsess over the spending controls in your life.
- [47:26]
Mindy Jensen
The thing that I got the most out of is his.01% framework for spending. I think this is really super helpful to people me who are having a bit of difficulty using their wealth to better their life. That was so helpful just hearing him give me permission to do this. I love the different wealth levels and I think that just rethinking about your net worth will help you have a more healthy relationship with money no matter what level you're on.
- [47:54]
Scott Trench
Awesome. Well, should we get out of here, Mindy?
- [47:56]
Mindy Jensen
We should. That wraps up this episode of the Bigger Pockets money podcast. He is Scott Trench. I am Mindy Jensen. Saying gotta dash, mustache.