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Podcast Host
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Joel
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Matt
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- [02:09]
Joel
Presented by iHeart welcome to how to Money. I'm Joel and today I'm talking moving up the wealth ladder with Nick Magiulli. Yes, I am glad to have friend of the show and newly married Nick Magi Julie back on how to Money. He's been given the nickname Nicky Numbers because he has a special gift, I would say, for conveying wonky money information in a straightforward and digestible way. It's kind of a tough task. I've been a fan of his blog of dollars and Data for years now. And if you want to grow your net worth while finding more spending freedom, well, that's what we're going to discuss today. So listen up. Nick, thank you so much for coming back on the show, my friend.
- [03:03]
Nick Magiulli
Thanks for having me back on, Joel. Appreciate it.
- [03:05]
Joel
Of course. Okay. We asked you this question three years ago when you came on the podcast, which is what do you like to splurge on? We ask every guest that question. Matt and I spend what some would call or say too much money on craft beer. And we say poppycock. We should spend lots of money on craft beer because it's totally worth it. What? Especially as you've moved up the wealth ladder these past few years, what are you splurging on?
- [03:27]
Nick Magiulli
So previously 3 years ago I said I splurge on restaurants. I still do that. That hasn't changed. But if I have to pick, like, what are the two things I'm spending a lot more on, One is I'm starting. We're going to get into this. When I talk about the wealth ladder, I'm starting to splurge a little bit on travel here and there. So I might upgrade my seat to like a emergency row seat versus like I never. I would always just take whatever was available. I might get more legroom. I still haven't gotten to the upgrade to first class yet. That's I'm gimme a few years and maybe I can afford that, but right now I'm not in that spot yet. So I'm upgrading to like the slightly nicer seat on the airplane splurge. The other thing I'm splurging a lot on is health. And it's just like it's the one thing I'm in my mid-30s now and so I know especially for men after 40, you know, unless you take care of yourself, it can really start to slow down. And so I know biology is working against me eventually, but I'm doing everything I can to and I'm splurging on whatever. Oh, that costs how much I Don't care. Like, health for me is like, I don't even think about the price tag when it comes to this stuff because I think it's one of the few things where if you don't have it, you would give away all your money to have it. And so I think it's that important. I think most people underspend, criminally underspend on health.
- [04:36]
Joel
Unfortunately, I think you're right. And so actually when you talk about spending on health, I think it's a really smart thing. But also there's a lot of things you can do to stay healthy that don't cost that much money. Right. And there's just all these articles about walking 10,000 steps a day or something. And most people can do that and at least hit the bare minimum. But yes, spend money on the health stuff. I think that makes sense. And the exit row seats, I can sympathize with that. As someone who's 6 foot 6, I'm getting to the point where I'm willing to, you know, like, bury my frugality just a touch so I can get an exit row seat. You just got married. I mentioned that at the top. I'm curious how your thoughts about money have changed as you've been in a long term relationship and now you're tying the financial knot. Has that taught you anything about money that maybe you didn't previously know or appreciate?
- [05:23]
Nick Magiulli
Funny enough, I actually wrote about this on the blog. I. My wife and I, or then girlfriend, we actually started officially this year. We started like basically pooling our money even though we weren't technically married yet. And I knew we were going to get married within a few months. And so we kind of created this system which I called the separate plus joint method. And the idea is all of your income goes into one joint account, right? And then all of your expenses, shared expenses, go out of that account. And then over time, hopefully your income is greater than your expenses. So you're saving money, right? And then every, let's say every quarter, we take an equal size distribution out of the account and then we invest that separately so we have no joint investment account. The only joint property we will ever own is going to be a home. Outside of that, if she wants to go buy a rental property with her own assets, she can do it. If I want to go buy something, I'm allowed to do that with my own assets. And so the thinking here is like, I want to provide full autonomy for both partners to invest kind of how they want. Of course we talk about, oh do you think we should be diversified this or that? Like we're very level headed about this and we're very open and we have discussions and I take her input, she takes mine vice versa. But I think the big change here is allowing for autonomy because I know, at least historically, I know this was something, this is especially for women who didn't really have any financial resources. It's controlled by one partner and then they feel like they might be trapped in a relationship or something. And so I'm always like, hey, we should be splitting our assets over time. And like we each have our own assets, but obviously, you know, everything comes into the joint account. And so it's basically pro rata. So if I'm making 70% of the income, I end up paying 70% of the expenses and vice versa. If we're making 50, 50, it goes both ways. And so this is true of regardless of who makes money. So that's, it's a very simple system. And if you want more details, it's on my blog, you can search like probably joint method and you'll find the separate and joint method.
- [07:09]
Joel
Not, not to pry too much, but did you guys sign a prenup? Because I, I had like pre existing conceptions of a prenup and it seemed at least from like my religious upbringing and stuff like why would you, why would you do that? You're going to stay married for life. And so that talking to people about that and then realizing that, well, there are already like there is a prenup in place thanks to the state that you basically signed up for. And it varies state by state. I don't know, maybe you should be able to create your own. I'm curious what route you took.
- [07:38]
Nick Magiulli
Yeah, so we did sign a prenup and because I had a significant amount of assets coming and so did she. But she also, there was another kind of twist. So her father's a famous sculptor in Europe. And so technically all that inheritance, all that stuff, like if we're married and she gets that, that's like, you know, that would technically fall under marital property. I'm like, I don't want any claim on that stuff. That's from your family. Right? Just like I don't want you to have any claim on anything from my parents side, et cetera. And so everything's joint, it's being pooled and everything. So all that money, any money we make from the day we're married, and technically we even backdated it to January 1st of 2025, all that is equally Split, right. And until we ever get. If we ever, God forbid, get a divorce at that point, you know, then things would go back to separate. But the nice thing is, like, over time, we're actually already splitting assets, like, over time. So in theory, if we ever were to get a divorce financially, the only thing we'd have to really worry about is any sort of alimony. And then if we have a home, how do we deal with that? Those are the only real two big questions left. Everything else is going to be split over time. And I just thought it was a better method where she can feel like she has her assets, I have mine, and everyone feels comfortable with that, loves it. And I've had a lot of people reach out and said, this is a great way of doing it. Not everyone does it. Some people love pulling everything. Some like having everything separate where they don't pay for anything. They. Everyone's. But it's up, you know, teach their.
- [08:56]
Joel
Own last question on this. Because some of the data does seem to point to the fact that couples who combine everything seem to be happier, or at least that's what they admit to in surveys. So does any part of you think that the. The siphoning off of finances from each other at least, like, kind of creating some barriers could lead to less intimacy?
- [09:16]
Nick Magiulli
I don't know. Ask me in 10 years. But the thing, though is we track everything as a group. Like, I have a Google sheet that has all of our assets basically flowing into it, like a rough approximation based on the number of shares we own, of different, you know, tickers and all this stuff. So I'm tracking and we review it basically, you know, once a month or once a quarter. At least we're looking through it together. So, like, we're very on the same page. We know about each other's assets. There's nothing that's hidden because when we did the prenup, we had to be very open about everything. So there's no real issue there. I'm not like, oh, I wish everything was combined like, we're working as a unit. This is just like, hey, like, those are your assets, and I want you to know that. So if, God forbid, something happens to your mother, you don't have to come ask me for permission to go spend $10,000 on your mother. And you never should have to do anything of that sort. If you want to use your separate assets, you can use them however you want, basically.
- [10:05]
Joel
I think that working as a unit is key. I think, like outlining that and pointing in the same direction. Even if you do keep something separate, that's what's going to make the difference, I think, in your ability to care for each other over time, including your finances. All right, let's get to some talk about your book. You begin the book, you state that we've assumed that more wealth is better and that it can solve all our problems. And I do think that there is that assumption, maybe particularly in America, more so than other countries. But is more wealth not the answer for a lot of people to a better life?
- [10:42]
Nick Magiulli
So more wealth helps when you don't have a lot of wealth, and we can talk about where that is. I have these different levels I come up with. We can go into that in a moment here. But the main idea is as you move up the wealth ladder and get into these different net worth tiers, or wealth levels, as I call them, money becomes less and less effective for solving your problems, right? So if you're in level one, which I say is, that's less than $10,000 in net worth, most of your problems are likely money problems. Money would literally solve most of your life problems. But by the time you get into, let's say level five, which is 10 million to 100 million or level six, 100 million plus, money is very likely not going to solve most of your problems. Your problems are like with relationships, with people, business partners, et cetera. It's going to be with your health. Maybe you weren't taking care of your health, something we discussed earlier, right? You can think, start thinking through this. And the reason why is because you can't buy those things. You can't write your spouse a check and make her love you like, okay, here's a $10,000 love me forever. It doesn't work that way, right? And the same thing's true with your health. You can't buy a new cardiovascular system, right? So when you start going through the motions of thinking through this, you realize money is very useful until you have a lot of it and then it stops becoming as useful. It works very well to a point. And then everything else you gotta kind of have to work for. There's no shortcut to a great marriage. There's no shortcut to being healthy. And, you know, at least not yet. Maybe one day AI will solve all of this stuff, but I just don't believe we can out engineer biology at this point. We're not at that point we're getting better with a lot of this stuff. But you can't prevent decay and all this type of stuff over time.
- [12:15]
Joel
A good Example of that, I think, is celebrities have the same cell phone that I have, essentially. Maybe mine's a few generations older because I haven't upgraded recently, but we essentially have the same device in our hands that we use fairly regularly. And yeah, maybe they've got a private jet, but I still get to go where I want to go. And so I think here you're talking about gradations of wealth and how, how that can improve your life partly in the wealth ladder. And I'm curious too, like, why did you construct the wealth ladder the way you did? What made you think that? You don't call them rungs, you call them levels. What made you, what made you say these are where I think the lines are that, that separate someone from being level one, level two, level three, and level four, all the way up to level six.
- [12:59]
Nick Magiulli
So I created these levels and I'll walk through them in a second here because they were very easy to memorize. But more importantly, the data fit them very well. And I had thought of this idea years ago, but the data didn't fit them as well. And now they fit a lot better. And so that's what makes it useful. But even if we move the numbers, we can debate, oh, maybe level four stops at 8 million and not 10 million. And level five, we can sit here and if you want to go and hyper analyze it, you can. But at the end of the day, like, it's about the general framework and the general direction of the idea and not the preciseness of the level. And that's the thing I try and get people to think about. When you're in level four, you're gonna think a little differently than when you're in level three, even if the exact number is not there. So let me walk through the levels and I'll also tell you how. What percentage of U.S. households are in each level. So by the way, this is net worth. So take all your assets minus all your liabilities, right? And now that's going to be everything you own. You know, so your car, your house, your cash, your stocks, etc. Your 401k, subtract out everything you owe to others. So any sort of mortgage debt, student loans, credit card debt, etc. That's your net worth, okay? And we're doing household, so includes if you have a spouse, whatever that's called, household net worth. Level one is less than $10,000. That is about 20% of U.S. households. Level two is 10,000 to $100,000. That's also about 20% of US households. Level three is 100,000 to a million dollars. That's about 40% of US households. That's what I would call the middle class in the United States. Level four is 1 million to $10 million. That's what I call the upper middle class in the United States. And that's about 18% of households. And when I say upper middle class, that's supposed to be location agnostic. If you got like 5 million bucks and you're in rural Alabama, you're definitely upper class. So we can get into that a little bit too. Lastly is level 5 and level 6. Level 5 is 10 million to 100 million, and level 6 is 100 million plus. Those two represent just the top 2% of households. And in level 6, there's only about 11,000 of these households in. So they're very. There's a very long tail, very small number of individuals in that bucket. Right. And so from this, you know, just memorize level three. That's like a hundred thousand to a million. That's like the middle class. And also once, you know, level three, you can multiply by 10 to go up a level or divide by 10 to go down a level. And so it's a very simple logarithmic scale. And I came up with it because I was like, hey, this actually fits the data very well. And it's easy to memorize. And like, there's so many people that have done these wealth level ideas before, and none of them are. You can't memorize them. Cause they're so arbitrary. And, oh, this is actually. It's 900,000 to 8 million. And then this one's 8 million to 14 million. It's like, great. That's very precise and nice, but you're splitting hair so much that it's not as spreadable as an idea. And so this is not. I'm gonna admit, this is not perfect. There's no way that it's exactly 10 million. There's no way it's exactly 1 to 10. Right. Everyone knows that. But as a framework, it's a much better way of thinking about the idea and then thinking about, okay, what do I do in level four? And how is that different from what I would do if I were in level three or level five? And that's kind of the idea here.
- [16:00]
Joel
Which to your point there, and I think this is one of the things that you're hitting on in your book, is that maybe personal finance education is two, one size fits all. And the advice that you might give to someone on level One of the wealth ladder. You probably wouldn't give that, that same advice to somebody on level five, like, hey, cut your Netflix subscription back. That could be impactful at level one, right? Level five, sorry, it's not even a drop in the bucket. It doesn't register. So do you see a problem there with the advice that people get and that maybe it is kind of like hammer and nail and it's the same thing over and over. I like to think of our audience as probably being either close to level three in level three or aiming for level four. Those are the kind of people I'm speaking to. So I kind of have an idea of what advice to dish out. Whereas if I knew that most of my audience was level five and level six, I, well, I probably wouldn't accrue that audience because that's not the kind of person I can speak to, you know?
- [16:55]
Nick Magiulli
No, exactly. And that's exactly the point. It's. People get very good, especially personal finance content creators, myself included. I fell victim to this as well. My first book, Just Keep Buying, is a great book for people in level three going to level four or level two going to level three. It doesn't work for people on level one because me telling them, oh, hey, all you need to do is just buy income producing assets like they don't have the income to do that. I do talk about raising your income, but if you know most of the book is about investing, right? So it's like when you think about it in this way, you realize that like, Just Keep Buying wasn't great for people in level one. It wasn't the right solution for people trying to get to level five or level six. So I needed to zoom out and kind of come up with the higher level framework to view this through. And so you're exactly right in the advice needs to change. You need to think about it differently depending on where you are in your life, where your wealth is, etc. And that's, that's the main idea here, is your financial strategy should change over time. And I think a lot of people just get caught in these habits and they just keep doing the same thing for a long time without reevaluating. Does this still make sense?
- [17:55]
Joel
So when you say your financial habits need to change, do you mean that you need to invest differently? Do you? And also it seems like one of the things that you're, you're highlighting is that you need to think, at least think about spending differently. Like as your wealth grows, it's okay. Like that, that term lifestyle Creep that gets beaten to pulp. You know, in most personal finance circles it's okay, like the whole part of growing your net worth is that you can enjoy some of the, some of the fruits of your labor. So how do you think then about what needs to change as you are moving up the ladder?
- [18:24]
Nick Magiulli
Right, yeah, exactly. And so on the spending for. I can talk about that in particular. So in chapter one, which is about spending, right, the intro just tells you what the wealth ladder is. And then chapter one's on spending, Chapter two is on income income. Chapter three is on investment. So kind of these three big buckets. Understanding how the wealth ladder fits with this. And on spending, the thing I really tried to come up with was a rule that allowed people to spend more over time without jeopardizing their long term wealth, right? And so that's basically like, how do you solve the problem of lifestyle creep? And so what I did for this, I created something called the 0.01% rule. And the idea is if you take your net worth and multiply by 0.01%, so that is, you know,.0001. Or divide by 10,000, that could be easier. So if you take your net worth and divide by 10,000, that is approximately how much your net worth is throwing off daily. Like your wealth is just creating this daily. And if you do that over 365 days in a year, that's roughly 3.7%. So it's even more conservative than the 4% rule. Right. And this is an inflation adjusted return, I'm assuming. Right. So if we assume that's true, then periodically you can spend that 0.01% because it's a trivial amount. Right. And where this actually came from, there was a Jay Z lyric. I'm not going to repeat the exact lyrics. He curses, but he says, what's 50 grand to someone like me? Can you please remind me? And at the time, he had a net worth of $500 million. So to Jay Z, when he wrote that lyric, 50 grand was about 0.01% of his net worth. And that's where the idea comes from. And so just apply that to your life. And once you do that on the wealth ladder, you'll realize that, oh wow, there's different spending categories where I create what I call spending freedom, right? So in level two, that's a net worth of 10,000 to $100,000. By the end of level two, your wealth is generating about $10 a day. And so when you go to the grocery store, you know, you Go a few times a week, you will have, you know, extra budget in there, in theory, to just buy what you want at the grocery store. That's the idea as you get deeper into level two. And once you're past level two, you can buy whatever you want at the grocery store. You have grocery freedom. Level three is what I call restaurant freedom. Right? So the marginal spend there is going to be $10 up to $100. Right. On a daily basis. Now, I'm not saying you need to spend that daily. I'm not recommending it. I'm just saying it's like a trivial amount. So when you're at a restaurant, you're like, oh, should I get the burger for 20 bucks or the salmon for 30? That difference is $10. Right. And that's where we're making the decision. That's where the lifestyle creep comes in, is like that marginal decision. So I'm trying to attack that and say, hey, that's only a $10 difference. So if you're in level three, like, who cares? You can spend that $10. No big deal. Right? And then it goes from there. Level four is travel freedom, Level five is house freedom, et cetera. But we can take this idea and apply it across the wealth ladder.
- [21:02]
Joel
So one of the things I got read something recently, an article, and one of the people being interviewed in that article said something along the lines of, like, I'm pretty good about my budget, but I don't hesitate at dropping a thousand bucks on, like a concert I really want to go see, and I'll do that 20 times a year. And so it seems like this person is like, really blowing their budget. They're going into debt for these, for these shows, and maybe they're on the level two of the wealth ladder, but they shouldn't do that until they're level four. So you are big talking. You really think that people should focus more on their income even than on their spending on those lower rungs. But don't we also see a problem? Buy now, pay later is indicative of that of people spending more than they should when they are on those early rungs.
- [21:48]
Nick Magiulli
Yeah, it definitely happens at the end of the day. Like, if the only thing you enjoy in life is going to concerts and you have to drop a thousand dollars, I mean, and you're doing it 20 times a year, like, that's your life. I mean, what can I do? Oh, don't ever do that. Don't enjoy your life at all. I'm not saying that, but I do think if you want to do that, that's fine. But there are consequences to that. And that. Consequences. You probably have to work longer. You may not have as much money in the future. You know, you're not gonna have assets to pass on. It's what you want out of your life. So I'm not telling people not to spend money. I'm just saying this is a framework. I think it's actually more helpful for those that are having trouble spending money than the opposite. And I've heard more people say, oh, my gosh, I don't think about the grocery store anymore. I don't think about the restaurant anymore. So I'm actually getting more people that have trouble spending money. I'm trying to give them the freedom to spend money. Everyone who spends a lot of money, they don't need this rule. They're not gonna. Let's be honest, they're not gonna use it. It's. The people that are having trouble spending money find it really useful to kind of free up that mental bandwidth to not worry and have anxiety about their spending. That's where I found it's been most effective.
- [22:48]
Joel
Do you think part of that anxiety stems from the fire movement? I don't know. I think at times, like, the more content I consumed in that space, the more I was like, but I gotta amass this amount of money so I can, like, at least have full financial freedom within seven or eight years or something like that. And it just felt overwhelming. And then I was like, why am I doing that? Like, what's the point? And sure, I still want full financial freedom, but if it. If it comes at the cost of some of this spending that will bring joy to my life now, then it's just not worth it. But do you. I see that in some. In the how to Money audience, some of the other folks, the personal finance creators around there, it's like, save, save, invest, invest, and then someday you'll get to enjoy your life.
- [23:28]
Nick Magiulli
Yeah, I don't want to blame the fire movement, because the fire movement is very large and very broad and different. Like, there are certain types. I think maybe Lean Fire would fall under that specific thing where it's like, you spend as little as possible. But I think it even started before that you can think of, like, I don't want to name names, but there have been personal finance commentators out there saying, oh, when you drink coffee, you're peeing away a million dollars. You've heard, I don't need. You know who these people are. Right. So I'm not trying to attack them. I just think these ideas are out there. Like, don't buy avocado toast. I don't know who said that. But, like, all these little things of why millennials don't have wealth is because of these small, like, purchases, daily purchases. And I don't think that's true at all. And so I think that is where it started, and I think it's just created this anxiety around money and spending that doesn't need to be there. So I definitely don't want to trash the fire movement, because I think there's a lot of the fire movement that I like, and there's a lot of good things, like telling people, hey, you shouldn't be spending to some crazy amount because that's just more time you have to work later. That's a really good idea, and that should be out there. Of course, you don't want to take that argument to its extreme because it brings up a lot of the issues you've brought up. So I think it's finding that balance. Everything's about balance, right? And so if I have to throw in with one of the fire movements, it's coast fire. It's like, hey, get to a point where your retirement's probably taken care of, and then you can kind of reevaluate your life. And I think that's a far better, far less extreme version of fire that I can get behind and I fully support.
- [24:48]
Joel
So I like the way you discuss moving up the wealth ladder and how that can impact your ability and kind of give you a green light to spend in some areas that you care about. What about investing? Do you feel like the our approach to investing should change as we move up the wealth ladder? I feel like I see people who move up the wealth ladder, and they feel like they need to invest in more sophisticated ways. I've been doing the index fund thing for a while, but maybe I should put on my monocle and invest in, like, a real estate syndication or something like that. Does that make sense?
- [25:18]
Nick Magiulli
I think people do it for a host of different reasons. And we can kind of get into. If you're talking about, like, a real estate syndicate versus, like, oh, a hedge fund investment or a private equity, et cetera. I think the investment stuff does need to change, but it really is based on your goals and where you want to go. And so there's people I've talked to and people that have, you know, I've been on other shows with, like, people at my firm, and they've asked, like, hey, I have $6.5 million in the queues. Right. All in tech stocks, basically. And you know, I feel like I'm great, I'm doing well with everything. I have two kids, all this stuff. And he's like, should I like diversify at all? And it's like, yes, like you need to change. You want to guarantee you're going to probably stay in level four. You probably shouldn't have all your money. Even though yes, that's been a great strategy for the last five to seven years. I don't know the future and we've seen what happens when the queues turn. We saw 2020, 2022 and how bad it was. And I'm not saying that's going to happen again, but if it were to happen, you could see how like it could be pretty disastrous.
- [26:14]
Joel
You know you can protect yourself by taking your foot off the gas pedal.
- [26:18]
Nick Magiulli
Yeah. And it's like you're some that like this person's won the game and they're still like, why are you adding more risk? So I do think it matters where you are in the well fighter to think about risk and kind of your also your lifestyle situation. If you're single, it's very different than if you have a family in terms of how much risk you take, etc. So I really like to think of it more holistically and I don't have any hard or fast rules, but I do think depending on your goals is going to determine how your allocation will change across the wealth ladder.
- [26:45]
Joel
All right. I think net worth is a great helpful metric and but I think there's also a lot of illiquidity when we're talking about our net worth. We're talking about invest, putting money in 401ks and Roth IRAs and stuff like that. Can you tap it? Well, I want to ask some questions about that and potentially falling down the wealth ladder. We'll talk about that with Nick Magiulli right after this.
- [27:09]
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Joel
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Matt
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Joel
Yeah. Policy genius is great.
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Matt
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Joel
Secure your family's future with Policygenius. Head to Policygenius.com to compare free life insurance quotes from top companies and see how much you could save. That's policygenius.com all right, we're back. Still talking with Nick Magi talking about his new book, the Wealth Ladder. And Nick, I just mentioned illiquidity. Like, when you think about your net worth growing, so much of it is inaccessible. Right. So, and, and rightly so. Like, that's how you grow your net worth. The more liquid it is. If you put all your money in high yield savings accounts, your net worth is going to grow a heck of a lot slower than if you've been investing in the market. If you bought a home and you've seen that increase in value. So what's your take then when we're talking about this freedom to spend and someone's like, yeah, my net worth's growing, but it doesn't feel like I'm richer in the here and now. It feels like I'm building for the future.
- [31:22]
Nick Magiulli
Yeah. So this is something I did address in the book, which is for the spending freedoms. I do recommend using liquid net worth to be more conservative because, for example, let's just use an extreme example. Let's say someone has, I don't know, $900,000 in home equity. They have, you know, $200,000 in retirement account and then $10,000 in cash. Based on the wealth ladder, they're in level 4. I still agree with that assumption. However, based on just how much cash they have, they're kind of in like level one or level, basically barely level two. And so they don't Have a lot of spending freedom, like someone who maybe had a very different asset profile. And so it's just something to think about is like I spend based on liquid net worth and I say that. And so even though I'm talking about net worth in general, I think spending based on liquid net worth is a more conservative way of going about this. So what you do is you just take your net worth, you take out, you know, any sort of home equity that you have. Right. So you net that out and then you also subtract retirement accounts because that is kind of future spending that's going to be used at a future point in time.
- [32:24]
Joel
Okay, I looked this up before our conversation. Turns out there are 500,000 ladder related injuries each and every year. So don't clean your own gutters is what I learned from that. It's shocking to think that. But what about the wealth ladder? Are there injuries? Are there people falling down off the rungs and what typically leads to someone going from a higher rung to or level to a lower level?
- [32:51]
Nick Magiulli
So I think it depends on which level you start at. So for example, if someone was in level two and went to level one or level three and went to level two, my guess, based on what I've seen in terms of data, is the most likely cause of that is job loss. Right. Or a health condition that creates job loss. It's interrelated to one of these things. Either you're spending, especially United States, you're spending a lot on health, maybe you lose a job, you lose your health care, and then, then you have to spend a lot on health. Something like that is like the, the perfect storm for, you know, drawing down on wealth much earlier than you anticipated.
- [33:24]
Joel
And that can be a perpetual cycle for a lot of people too. And then, hey, you lose that, that solid job and you're bouncing around from inferior job to inferior job after that.
- [33:34]
Nick Magiulli
Yeah. So it's, that's my guess of where that's going to happen. As you move up the wealth ladder though, it changes completely. And of course, can a job loss still harm you? Yes, but it's more likely going to be your investment choices. And you can think especially like level four, level five. Like this is where if someone got into level four through like concentration or a level five, let's say you have your own business and, and you sold the business or even you still own it and it's worth a lot on paper if something happens to that business, most of your net worth is probably in that single business. If you know a Covid type event happens and it adversely impacts your business. Let's say you own a restaurant group. Right now you are being, you know, you can fall down the wealth ladder because of this concentration you have in your portfolio. So if I had to pick what's the thing that caused someone to fall down from level four to three or five to four, it's going to be concentration bias. Right. And actually, if you look at, I actually have a mobility matrix which kind of shows, hey, if you started on this level, what's the probability you'd be in this other level, like in 10 years or 20 years? And you see in level five, there actually is a higher probability of falling down the ladder than in, like, level four, for example. Because I think it's the concentration issue that people overlook. They have most of their wealth in that they can't imagine anything going wrong because they obviously have built all their wealth, so they feel pretty successful. They are successful. At the same time, they don't hedge that risk. And then if something happens, they could fall down the ladder.
- [34:53]
Joel
Yeah. They're not taking those protectionary measures to say, like, let's not screw the pooch here and fall down and let's protect what we've got. And that's where what you're talking about is changing the way you think about investing. It does need to change as you move up the wealth ladder and as you're getting older, too. Right. You do need to de risk. I'm curious, too. You talk about the things that we spend our time doing. Not only should moving up the wealth ladder change how we think about spending, change how we think about investing, but it also should also, hey, what opportunities come our way? And whether we say yes or no to those opportunities, that should change as our net worth increases. So what's your advice there? And like, side hustles. That's like, you know, if I'm going to go drive for Uber on the side to make some extra money. Well, it doesn't really make sense if you're on level five of the wealth ladder, does it?
- [35:44]
Nick Magiulli
Yeah. So it really has to do with. You have to think about, okay, where am I on the wealth ladder? And I. So instead of using the 0.01% rule that was for spending for income, I say use the 1% rule. And of course, everything's based on, you know, how much time it takes to do something. But let's just do this approximately, if something's not going to move your NET Worth by 1%, if the whole project's not really going to lead to something like that, then you maybe shouldn't even be considering it. And once again, of course, how much time if I said clap your hands for $100, everyone would do it, even if you're in level five, because at the time relative to the number of seconds takes you to clap your hands is very small. But you get the point. And so it's not a perfect rule. It's just an idea of like, okay, this is just another way of evaluating something. So if something's like, hey, someone wants to pay me X dollars to do this, or I'm going to work on this side hustle, and it might be able to get to this one day, like, is that going to move your net worth enough? And if not, then you have to really reevaluate. And so it's just another tool in your toolkit when you're thinking about taking on different income opportunities, taking on a new client, etc. And so if it's not going to move the needle, you're like, yeah, I actually shouldn't spend a lot of time and resources on that. And just another way of thinking through that decision.
- [36:48]
Joel
And I think that's like when. When we're talking to listeners who are typically probably in roughly that level three area and we're talking about side hustles, for most people, we think it's a bad idea. Like, it's not a good use of your time and it's a better idea to increase your skills to up your income at your day job, or it's a better use of your time to use those hours towards starting a business that can ultimately progress into something far more meaningful than trading your time for money right now. So do you have similar thoughts about education, increasing income, and not wasting your time maybe on side hustles for trading your time for money in the moment?
- [37:25]
Nick Magiulli
I think it depends the side hustle and depends where you are on the wealth ladder. I mean, if you're in level three, the side hustle has to get pretty large to start competing with your day job. I'm guessing, right, if you're in level two or something. And that may not necessarily be true, but it really depends on, like, what are your current skills? How much are you currently making if you're already at a job where, like, you're making a decent income and you're like, even if I work my tail off this year, I may get a, you know, a 10% raise into a 5% raise, okay, how much is that 5% difference? And then calculate relative to that difference, how much could I possibly make starting a side hustle or doing something? And so, so I recommend that everyone just has a project of their own that even if it's not for money, just something that they like to do because it's very valuable. I personally like writing about personal finance and investing and doing data stuff, and I did that for three years, didn't get paid anything on it when I was blogging. And now it's become something that is a side hustle that was monetized, but that took a very long time. I've been writing for almost nine years online, so I've seen it's a very long journey and I didn't do it for money, though. And so that's another thing too. I think a lot of people, you just gotta follow your interest and if you start doing that, it can really lead to. To a lot of great things.
- [38:27]
Joel
Yeah. What about real estate investing?
- [38:31]
Nick Magiulli
How.
- [38:31]
Joel
How does that impact people's ability to move up the wealth ladder? And did you find any correlation between people who. You've talked about, people who own a business? Let's say that can be one of those things, especially if it's. That brings you up to level four, level five, more quickly. But then again, a lot of small businesses fail, so there's risk and reward in that. But what about investing in real estate? Has that. Do you find any correlation between higher rungs of the. The wealth ladder and real estate ownership?
- [38:57]
Nick Magiulli
So not as much as I would have thought. I would have thought we would have seen more. And so if you actually look at percentage of assets, like within each wealth level, like, it does increase slightly going into like, level four, level five, level six, but it didn't like, see a massive increase. Most of the increase I saw was in business interest, which is, it's roughly defined as like owning some sort of private business that you own. And that's kind of how you make your wealth. And so people in level six overwhelmingly have way more business interest as a percentage of their total assets compared to level five. And then level five is more than level four, etc. Right. And so in the book, in chapter three, when I talk about investments, I go through all these different assets, cash vehicles, your primary residence, real estate stocks, your retirement accounts, et cetera. And I show across the wealth ladder how much percentage is in each wealth level. And the thing with real estate, I didn't see as much of an increase as I thought I was going to see. But what someone said, I show. I had this. I tweeted this out and someone said it's very possible that someone owns like a real estate, like LLC and they hold all the real estate in the llc and so that's being counted as business interest even though it's real estate. I did not, I haven't looked into that and that's something I need to look into eventually. So I think there's probably a little more real estate at the higher end. Not just obviously an amount that's obviously true, but even on percentage wise, but I didn't see as much as I thought I would. So that was the thing that was a little bit surprising, I think.
- [40:20]
Joel
And real estate usually almost most of the time to make sense as an investment involves leverage. Do you see leverage as a tool that people use to move up the wealth ladder? And how risky is that? Because leverage can cut both ways.
- [40:37]
Nick Magiulli
Of course, if you've been levered up in the past, let's say five, six years, it depends how levered up you were obviously. But in general asset prices have gone up, so anyone with leverage has, has, has benefited from that. But as soon as it turns like that can, you know, it's the double edged sword and it comes and gets you and Right. So I think 2022 is a great example of that. I'm just at least in equity markets where anyone who was levered up in 21 was absolutely crushing it. And then you just saw this dry up so quickly and it just turned so fast and it was really bad. You know, there was a lot of individual names down, 80, 90% like stuff that you, you saw in like the dot com bubble, you know, exploding. And so, so I'm not saying that that's going to happen now, I don't know. But that's the risk of leverage and I don't have as much data on, okay, who's using leverage, how much leverage they're using today, and then following them ten years from now and seeing how they are. So some people just get lucky and then guess what, they take their chips off the table at the right time and the thing collapses at oh well, I got lucky and I know people that have done that too. So I've seen kind of all sides of that type of stuff over time.
- [41:40]
Joel
Let's say someone's listening and they're earlier on in their financial journey. When you talk about level one, you talk about people who are on level one of the wealth ladder, you typically refer to those people as being unlucky. Wouldn't you suggest though that some of those people are also just starting their Journey off. Right. They just graduated. They've got maybe a super low net worth because they haven't started accumulating assets yet. And they've probably got student loan debt that they're paying off. Something like that. And then what would you say to that person who's just starting off if they're like, yeah, I don't want to necessarily get to level six of the wealth ladder, but I want to move up and I want to do it in a really efficient way. What would your suggestions be?
- [42:14]
Nick Magiulli
Yeah, so you bring up a great point. Which age is very correlated with all. With all the wealth levels. And so in chapter 10 of the book, I walk through, like, what's the median age in each level? For example, in level four, which is 1 to 10 million, the median age is 62. So it is a much older cohort. You start looking through the data. The age stuff definitely matters. I'm not, you know, downplaying that whatsoever. So you're right. There are people in level one, level two, right now. They're like, I just graduated, I'm in level one. Or, I just graduated, I'm in level two. Like, you know, what's the issue? You just need time. A lot of these people just need time to move the needle. And obviously, if you have a decent income that helps, you can start saving, investing, et cetera. For some people, though, they need to build skills and they need. So in level one, I say, hey, just get to safety, get to some. Whether that means having an emergency fund, that's something we've all heard before, or just having a network of friends, family, whoever that you can rely on in case something were to happen. Because the last thing we want is for you to get stuck in level one just perpetually. Because you're just. You feel like you're treading water because, like, oh, I. This bad thing happened, and then I got into credit card debt and then I lost my job. Like, whatever it is, like, you can imagine just like this financial tailspin happening because you just got a little bit unlucky early on. And that's. That's where I think a lot of people in level one are in, unfortunately. And I'm saying older people in level one, they just got unlucky early and maybe they couldn't get themselves out of it.
- [43:33]
Joel
Yeah. All right, I've got a few more questions I want to get to with you, Nick, including the how important is the wealth ladder? Are we using it to compare ourselves to the people around us too much? We'll get to that. And more right after this. Here's a stat that stops people in their tracks. Nearly half of American adults say they would suffer financial hardship within six months if they lost their primary income earner. If that stat hits close to home, you're not alone and you're not out of options. Policygenius makes finding and buying life insurance simple, ensuring that your loved ones have a financial safety net they can use in case something happens to you, whether to cover debts and routine expenses or even to invest the money and earn interest over time. With Policygenius, you can find life insurance policies starting at just $276 a year for $1 million in coverage. It's an easy way to protect the people you love and feel good about the future.
- [44:27]
Matt
That's right.
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Joel
Yeah.
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Matt
Policygenius is great. You know, with anything in life, the best way to get the best product or service is to shop around. That's what we talk about all the time here on the show.
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Nick Magiulli
Joel.
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Matt
And that's exactly what PolicyGenius does. They help you to compare your options by getting quotes from America's top insurers in just a few clicks. To find your lowest price, policygenius lays out all of your options clearly. The coverage amounts, the prices, the terms. There is no guesswork, just clarity.
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Joel
Secure your family's future with Policygenius. Head to Policygenius.com to compare free life insurance quotes from top companies and see how much you could save. That's policygenius.com Every business has an ambition.
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That's guardianbikes.com built in the USA, made specifically for kids. Guardianbikes.com okay, back with Nick Magiulli, talking about the wealth ladder. And I think it's such a helpful framework for understanding a bunch of things about your financial journey, about how you're growing your net worth and then what that means to you in the here and now as you are accruing wealth, which is an important part of getting your finances straight. But, and we're just talking, Nick, about how, you know, in level four, the average person with that, that one to $10 million net worth, they're in their 60s. And so I think sometimes though, people listening to this show or other personal finance content, they're like that million dollar. I think I'm supposed to hit that in my 30s. And maybe the pressure feels really great. So do you think that the, the comparison that we're doing, maybe as we're looking at these different levels of the wealth ladder that we're, we're trying to achieve, can have any negative side effects?
- [47:25]
Nick Magiulli
Yeah, it definitely can. I mean, we don't want people to. I think as bad as looking at data is, I think social media is actually much worse. So I'm trying, I'm not trying to defend the data, but like, if you just look at social media, everyone's crushing and has this and that and all this type of stuff, you can't see someone's entire balance sheet. If someone buys a home, you don't know how much they put down, the debt, any of that stuff. Right. You have no clue about any of that. I think the data is very helpful because you get to see, oh, actually less than 1% of individuals in their 20s make it into level four. Right. And it's only 5% of individuals in their 30s make it into level four or higher. Right. So it's like once you know that you're like, oh, actually like only 1 in 20 households in the United States are going to make it into level four. Right. And so you start looking through that and that's on page 150 in chapter 10 in the book. Right.
- [48:13]
Joel
And so you feel a little more normal.
- [48:14]
Nick Magiulli
Yeah, yeah, you sort. And I actually think it's helpful to see this because then you realize, oh, it's actually not as people aren't as wealthy as I originally thought, even when you control for age. And so that's a big piece of this too. Even in the 40s, only 15% of households in their 40s make it into level four or higher. So. So this is not like you'd say, oh, it's 5% in the 30s, but by the 40s, got to be what, 30%? Like no, it's only 15. It's, you know, it's still increased quite a bit, but it's still, you know, a small one. In six households are in level four or higher. So keeping that in mind is incredibly important while you're doing this stuff and as you're on your journey. So it's like it takes time. It does take a lot of time to do that.
- [48:53]
Joel
Yeah. So give yourself time. How do you think about the quest for moving up the wealth ladder? And in particular like level five and six we're talking about, those are really small percentages of people that ever achieve those levels of wealth. Is it even a good goal to have? And maybe for some people it is, but I'm curious to hear your take and maybe even your goals. Like, is that something you want to achieve?
- [49:21]
Nick Magiulli
Yeah. So in terms of whether it's a good goal, I think it's a bit much. I think you don't need it to live a great life, especially in the United States. And I think in if you're not living in the US because the US is so expensive, I think you can get get by in Level 3 in a much better situation. So it really depends on where you live, your cost of living, amongst other things. In terms of my goals, I have no inclination to ever get to level five. Right. I think I will get there nominally one day, but in terms of real dollars, I don't think I will ever reach that. By the time my net worth is 10 million, it won't be what 10 million is worth today, I'll say that. So that's my thinking on it. Right. It's going to take many decades before that happens and by then the real purchasing power won't be there. So in terms of actual level 5 inflation adjusted wealth, I don't think I'm ever going to get there because I just don't have the inclination to go and start my own business and do all that. Like, I have a day job. I do the books and stuff. And even if I sold, even if the Wealth Ladder sells a million copies right after, you know, tax and everything, I'm not going to make enough money to even. It's going to help me, don't get me wrong. But I'm still going to be in level four. I'm going to be in level four for a very long time. Right. So it is going to take a very. And what's going to happen, I'm telling you already, is I'm going to get to a point where I'm like, okay, do I need to keep doing all this stuff or can I take my foot off the gas a little bit and, like, enjoy more time with my kids, spend more time with my family, traveling, all this other stuff. I'm going to now start spending down my wealth a little bit and it won't be growing. And so I think that is what's going to happen at some point. I just don't know when. And I need to kind of approach that within the next probably decade or so. I'm hoping all. All else equal, right? No, no. Crazy, you know, worldwide depression or something. That's what I would expect.
- [51:01]
Joel
And you have to count the cost ahead of time. Like, my. My uncle tells my daughter all the time she's 12, that he wants her to be President of the United States someday. And we've talked about it, like, at length now, because he tells her that all the time. And she's like, dad, I don't know. Is that a good goal? And I'm like, I mean, if that's what you really want, but you have to count the cost ahead of time. Because if you want to be President of the United States, you are going to have to dedicate so much of your life to getting that goal. And even if you do, there's, like, the chances of actually succeeding in getting that one job. It's unlikely. So, yeah, it might be the goal that you have someday, but. But it also, you might realize that it's not even worth pursuing. But you got to think about that stuff ahead of time because you. I think you can get stuck on this treadmill of, okay, wealth ladder, next level. Let's go up. I got to keep moving and realize that you're playing the wrong game. You've maybe won the wrong game at the end of the day.
- [51:54]
Nick Magiulli
Yeah. And that's. And that is one of the. And there's three parts of the book. The first part is just kind of telling you about the wealth ladder. The second part, I talk about each level and kind of different strategies to move up, to prevent from falling down, etc. And then in the third part, I talk about kind of that bigger picture, like, why are you climbing? Should you be climbing? I kind of get into all these issues because you're right, like, most people are never going to make it to level five or six, myself included. And so when you think about that, like, what are the things that really matter? And I really try and address that in a. In a very different way so that it's not just keep climbing. That's not the, that's not the goal of the book.
- [52:27]
Joel
Well, and you even, you even talk about the downsides of having mega wealth, and you hear from some, some people in that rarefied air who say, yeah, most of the people I know that are the unhappiest are some of these folks in these upper echelons of the wealth ladder. So for people, I think, in level one and two who aspire to have greater levels of wealth, it kind of doesn't compute. How, how is it that having more money leads to less happiness? But it's possible it does, right?
- [52:55]
Nick Magiulli
Yeah. And so actually, there's a whole chapter in the book where I talk about money and happiness. And so in general. So if I would say if you're in level one or two, more money will probably make you happier. Beyond that, I can't make any guarantees. But what the research shows is if you're already happy, more money is going to make you happier. Right. So if you're in level three or four, you're enjoying life. You're not even asking yourself, will more money make me happier? You're probably going to be happier if you had more money, which is kind of an ironic thing if you're in level three or four and you're like, oh, I don't. I just don't feel as happy. If I had more money, then I'd be happy. It's not the money. The money's actually not going to do it. And the data shows that. So I think that's kind of the big take. I mean, the big, like, summer. How I summarize it in the book is if you're happy, more money will make you happier. If you're poor, more money will make you happier. But if you're not poor and you're not happy, more money's not going to do a thing.
- [53:41]
Joel
Yep.
- [53:42]
Nick Magiulli
So that's kind of the Big takeaway from what the research shows. And this is the newest research, trust me. They looked at that. Everyone's heard that study about, well, I heard, I thought happiness doesn't increase beyond $75,000 in income. I look at that research, someone else addressed it, they got together, looked at all the data, and there's a very different conclusion out there now. So it's been updated and I discuss it in the book.
- [54:00]
Joel
It's an amplifier, right? Exactly. So, yeah, it can amplify that happiness and offer you more freedom and the ability to live the life you want, but it can also drag you down and it really can feel like more money, more problems. Nick, where can our listeners find out more about you and more about your new book, the Wealth Ladder?
- [54:21]
Nick Magiulli
So my websites ofdollars and data dot com. I blog there once a week. You can find me on LinkedIn @nickmajulli x Twitter @ Dollars in Data, or on Instagram @nickmajuli. And I answer every DM. So please send me a DM. As long as it's not unhinged spam. Like, I swear I answer every dm, lady, she's married.
- [54:39]
Joel
So not those kinds either. Right?
- [54:40]
Nick Magiulli
Not that type of dm. But no, Any sort of. No, seriously, any sort of financial question, I will try my best to answer it. And if not, I've probably written about or I know someone's written about, I can just send you you a blog post you can read and that hopefully can help you in some way.
- [54:51]
Joel
Love it. Awesome. Nick, thanks so much for joining us today. Appreciate it.
- [54:54]
Nick Magiulli
Thanks for having me back on, Joel. Appreciate it.
- [54:56]
Joel
Okay, that was. That was a fun conversation with Nick Magiulli. I appreciate the way he thinks and writes about money. And I do think that this concept of the wealth ladder can help you as an individual, as you are trying to grow your wealth and trying to think about preserving your wealth, but also how you can change your life as your net worth increases. I think Nick's framework is super helpful for that. You'll notice, by the way, that my co host and best friend Matt was not on this episode with me and just trying something new. Especially when it comes to the interview episodes. Do two people need to be asking questions? I don't know. We figured we'd give it a shot at least on this one and see if maybe it was better with a singular host. But of course he will be back with me on Friday. I wanted to give my big takeaway for this episode and I think what Nick is saying essentially is it's different strokes for different folks. And it takes different attributes and attitudes to succeed at different levels of the wealth ladder. And so what serves you well in rung one and rung two doesn't serve you nearly as well once you move up to further. And so, for instance, like Charlie Munger said at one point, who is Warren Buffett's sidekick who recently passed away, he said basically to walk everywhere you can and to use coupons every time you go out to eat in order to reach your first hundred thousand dollars. So he was saying, do whatever it takes to get to that point where you've amassed your first hundred K. And he basically makes it sound like that's the hardest $100,000 to get in your life, that the second, third, and fourth, they get subsequently easier. And I think that's true. I think that's very true, given my experience, is that the first 100k is so much harder to amass. And then really, time and the markets, like compounding returns, start to work in your favor. So should you stop walking and stop using coupons? I don't know. I'm the kind of guy who's still prone to doing those things. And maybe it's just because I want to be efficient with what's been placed into my life. But do I do it less than I used to? And have I opened the purse strings more than I did when I was in my early mid-20s, really just trying to get past rung one and two? Yes. Yes, I have. And so my life does look different. I think about even just Nick's concept of being grocery store, being able to spend what you want at the grocery store and then being able to spend what you want at a restaurant. Those are just different levels of financial freedom. And I think about staying at hostels. Would I not stay? I used to stay at hostels. Would I stay at a hostel again? Maybe. But I'm not inclined to nearly as much these days. But there are also things I could learn from this book about being willing to spend on the things that matter to me and maybe, maybe as I continue to move up, being more generous with what I've been given to. So I just appreciate Nick's take and I hope it was helpful for you. And unlike Nick, I don't see level five or six in my future. But I'm a okay avoiding those upper rungs and living a mostly normal life where I still have a lot of financial freedom and choice over what my days look like. But that's going to do it for this episode. You can Always find more money saving information up on our website@howtomoney.com and you can sign up for the how to money newsletter@howtomoney.com Newsletter I guess I can't really do best friends out since my best friend is not here with me. But I will say thanks for listening.
- [58:58]
Podcast Host
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- [59:29]
Sports Announcer
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- [60:00]
Podcast Host
Oh, what you eating?
- [60:01]
Nick Magiulli
The new banana split cookie from AM pm. Oh, freshly baked with real butter with banana, chocolate and strawberry flavors.
- [60:07]
Podcast Host
That sounds amazing. Can I have a bite?
- [60:09]
Nick Magiulli
I'm sorry but no but you can't split the banana split.
- [60:13]
Joel
Not even a little.
- [60:13]
Nick Magiulli
Not even a crumb.
- [60:15]
Podcast Host
What if?
- [60:15]
Nick Magiulli
No, please.
- [60:17]
Sports Announcer
Mine when it's too legit to split. That's cravinience. Get a 3 pack for 99 cents with our app amp too much good stuff plus tax where applicable. Prices and participation may vary. Terms and conditions apply.
- [60:28]
Podcast Host
This is an iHeart podcast.