You’ve heard the advice that to build wealth, you need to earn more, spend less, and invest consistently. But what if there was a clearer way to understand exactly where you stand financially — and what steps you should take to reach the next level?
My guest, Nick Maggiulli, offers just such a framework. Nick is the creator of the Of Dollars And Data blog, the Chief Operating Officer at Ritholtz Wealth Management, and the author of The Wealth Ladder. Today on the show, he unpacks the Wealth Ladder concept, taking the complex, often overwhelming concept of personal finance and distilling it into six easy-to-understand wealth levels, each tied to specific net-worth milestones and financial freedoms.
Nick walks us through each rung of the Wealth Ladder, from getting out of financial instability to achieving restaurant and travel freedom, and eventually reaching upper levels of significant financial independence. We discuss the distinct strategies you should utilize on each rung to make the most of that level and move on to the next. And we get into why your spending decisions should be based on your net worth rather than your income, how wealth allocation changes dramatically as you climb the ladder, and why increasing your earning potential becomes more important than penny-pinching as you progress.
Whether you’re just getting started or well on your financial journey, this episode provides actionable insights and practical wisdom for climbing the Wealth Ladder and securing a life of greater freedom and fulfillment.
Resources Related to the Podcast
- Nick‘s previous appearance on the AoM podcast: Episode #836 — Data-Backed Answers to Personal Finance Controversies
- Nick‘s previous book: Just Keep Buying: Proven Ways to Save Money and Build Your Wealth
- Nick‘s article: What is Coast FIRE? The Ultimate Guide to Semi-Retirement
- The Missing Billionaires: A Guide to Better Financial Decisions
Connect With Nick Maggiulli
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Subscribe to the podcast in the media player of your choice.
Read the Transcript
Brett McKay: Brett McKay here. And welcome to another edition of the Art of Manliness podcast. You’ve heard the advice that to build wealth, you need to earn more, spend less, and invest consistently. But what if there was a clear way to understand exactly where you stand financially and what steps you should take to reach the next level? My guest, Nick Magiulli, offers just such a framework. Nick is the creator of the Of Dollars and Data blog, the chief operating officer at Ritholtz Wealth Management, and author of the Wealth Ladder. Today on the show, he unpacks his wealth ladder concept, taking the complex, often overwhelming realm of personal finance and distilling it into six easy to understand wealth levels, each tied to specific net worth, milestones and financial freedoms. Nick walks us through each rung of the wealth ladder, from getting out of financial instability to achieving restaurant and travel freedom and eventually reaching upper levels of significant financial independence. We discuss the distinct strategies you should utilize in each rung to make the most of that level and move on to the next. And we get into why your spending decisions should be based on your net worth rather than your income, how wealth allocation changes dramatically as you climb the ladder, and why increasing your earning potential becomes more important than penny pinching as you progress.
Whether you’re just getting started or well on your financial journey, this episode provides actionable insights and practical wisdom for climbing the wealth ladder and securing a life of greater freedom and fulfillment. After the show is over, check out our shownotes at AOM/Wealthlad. All right, Nick Magiulli, welcome back to the show.
Nick Magiulli: Thanks for having me on, Brett. Appreciate it.
Brett McKay: So I had you on last time to talk about your book, Just Keep Buying, which is all about, you just got to keep buying and investing in the stock market. Don’t stop. You got a new book out called The Wealth Ladder, Proven Strategies for Every Step of Your Financial Life. Really good book. I really enjoyed it. Your book is based on this idea of the wealth ladder that you’ve created. What is the wealth ladder and how and why did you come up with it?
Nick Magiulli: Yeah, so Stuart Butterfield, who’s the founder of Slack, had this three levels of wealth framework. Level one was, I don’t stress about debt. Level two was, I don’t stress about how much things cost at restaurants. And level three was, I don’t stress about how much vacations cost. And so I heard about this, oh, that’s a cool idea. At the same time, Jay-Z, you know, that he had this lyric in one of these songs. I’m not going to say the full lyric because it curses and stuff, but he just basically said, what’s 50 grand to someone like me? Can you please remind me? At the time, he had a net worth of $500 million. And so, you know, 50,000 over 500 million is 0.01% of his wealth. And so I realized, hey, that’s like a trivial amount of money to someone. So given that, I kind of came up with this levels framework, which is based on Butterfield’s three levels, but I made six levels and I actually put net worth values to them. So I’ll just walk through those just briefly. So, and just for the record, your net worth, that’s all your assets, everything you own, your cash, your stocks, your house, et cetera, minus all your liabilities. That’s everything you owe to others.
So your mortgage debt, student loans, credit card debt, et cetera. And so once you know your net worth, you’re somewhere on the wealth ladder. Level one is a net worth of less than $10,000. Level two is a net worth of 10,000 to $100,000. Level three is 100,000 to $1 million. Level four is 1 million to $10 million. Level five is 10 million to $100 million. And then level six is over 100 million. Now, once you have these levels, it’s actually funny. It actually maps up with the data and for United States household wealth, it actually maps up decently. About 20% of households are level one. So that’s less than 10,000. 20% are level two. That’s 10,000 to 100,000 in wealth. 40% of households are level three. That’s 100,000 to a million. That’s what I would call your typical middle class. And 18% of households are level four. That’s one to 10 million. That’s like upper middle class. And then over 10 million, that’s like the top 2% of households. That’s level five and six. And the nice thing about these levels, I’ve heard a lot of people do levels of wealth and do all this before.
I like this because it’s a log scale. You know, you divide by 10 or multiply by 10 to move up and down the levels. So if you know one of the levels, you can figure out the rest. So I just tell everyone, memorize level three. That’s the middle, middle class. That’s 100,000 to a million. If you know that, you can back out all the rest. And then even within that, going back to Stuart Butterfield’s three levels framework, level one was not stressing about debt, et cetera. I’ve applied spending freedoms to each level. So in my case, I said, hey, I don’t worry about what it costs at the grocery store. That’s called grocery freedom. That’s level two. So level two is grocery freedom. Level three is restaurant freedom. You don’t worry about what it costs at a restaurant, which is 100,000 to a million dollars in net worth is level three, et cetera.
Brett McKay: You can get the appetizer. You can get the Southwest egg rolls at Chili’s.
Nick Magiulli: Yeah, exactly. You don’t have to worry about any of that stuff, right? And then by the time you get to one to 10 million, you can start to have travel freedom. That’s where you can like sit in the nicer seat on the airplane. You can, stay at a nicer hotel, et cetera. You can’t really fly private yet because that’s a little too expensive. Maybe if you got to the very end of level four, I think private or travel is really reserved for people in level five. But, putting this all together is a very long answer. But putting this all together, you get the wealth ladder, which is just a new framework for thinking about money and how you make various money decisions. You can help with spending decisions, income decisions, investment decisions and more.
Brett McKay: One of the interesting things you do with the wealth ladder is you argue that this is a better way to think about how you spend money. So I think typically when people think about how they spend money, they think about their income. Well, if I’m making more money this year, I can spend more money. You argue that we shouldn’t be doing that. Instead of spending money based on our income, you say we should spend based on our net worth, which you call wealth. Why is that? Why should we base our spending decisions on our net worth slash wealth?
Nick Magiulli: Well, I think the issue is that wealth is generally less fickle than income. I mean, you can lose your job at any moment. And now, okay, I’m assuming that’s how most people earn their income. So if you lose your job, your income basically goes to zero. It’s unlikely your wealth is just going to go to zero out of nowhere. Even during the financial crisis, as bad as it was, people were seeing their homes drop by 25%, their stock portfolio get cut by 50%, which is still bad at the worst moment, but it didn’t go to zero. So it’s a little bit more stable. As a result, I think your marginal spending decision should be based on your wealth, not your income. And then what we talked about, like just the example you gave, oh, I’m at Chili’s, I want to get these egg rolls. They’re going to cost me an extra 15 bucks. Can I buy those? And I say, yeah, if you’re in level three, which is anywhere from $100,000 to $1 million in net worth, you can afford that, quote, splurge or that marginal choice to spend the $15 on egg rolls.
I don’t think it’s a big deal. And so where does that come from? It comes from what I call the 0.01% rule. And that’s kind of comes from that Jay-Z thing where it’s like Jay-Z could drop 50 grand like nothing. Well, if you have a net worth of $100,000, you can drop 10 bucks like nothing. That’s the equivalent difference, right? Obviously, we’re not Jay-Z, so we can’t drop 50K, but he also had 500 million at the time. So that’s where I start thinking about this. Like, hey, how much can I just drop as like a, you know, this is trivial to me. And so that number goes up over time. And so I think a lot of personal finance experts tell you, oh, you can’t spend more money, you know, don’t allow lifestyle creep. And I don’t think that’s accurate. I think you should have some lifestyle creep, but it should be based on your wealth, not your income. Because you’re right, your income could go up. And if you start spending more of it, you’re not necessarily saving anything else. You’re not building wealth. So my whole idea with this rule, the 0.01% rule, which is 0.01% of your net worth, or take your net worth and divide by 10,000, it’s the same thing.
That’s how much you can spend every day and your wealth will stay stagnant, at least on that amount. And so I think thinking about that is very helpful because that’s where you can start to realize, oh, hey, I can spend more over time, but only after I’ve built the wealth. The wealth ladder framework plus the 0.01% rule allows you to spend more over time after you’ve demonstrated financial discipline. And I think that is very important because I want people to be able to spend more money. I want people to be able to enjoy their lives more. And this is a slower way of doing that. And it’s a much better framework, in my opinion.
Brett McKay: Yeah, I love the 0.01% rule. It completely changed how I think about how I spend my money.
Nick Magiulli: That’s great.
Brett McKay: Yeah. So when you say this 0.01% rule, you spend 0.01% of your net worth, you mentioned earlier net worth is your assets minus liabilities. But some assets, like your home, is not liquid. It’s not tied up in cash. So should you spend the 0.01% rule, like including the value of your home, or should it just be like liquid assets?
Nick Magiulli: Yeah, so I think in general it should be liquid assets. I just use, you know, when I talk about the wealth ladder in general, I use total net worth. But you’re right when we’re talking about spending decisions, like you can’t eat your home equity necessarily. Like, yes, you can get something called a HELOC, a home equity line of credit, and you can borrow against your home and do all that stuff. So technically you can pull some of that money out, but I don’t recommend it necessarily. So I think the thinking is, yeah, what’s my liquid net worth? That’s the more conservative thing. So if like, oh, if my liquid net worth, if I have like, let’s say, I don’t know, $100,000 on a brokerage account, then you’re in the beginning of level three. That doesn’t mean you can go and splurge everything at a restaurant, but you can start to spend a little bit more at a restaurant. And where that 0.01% comes from, it’s just, obviously I just came up with this as a trivial amount, but if we assume your wealth is earning 0.01% per day, over the course of a year, if you do that, 365 times, that’s 3.7% a year, which is a conservative return.
That’s basically the assumption. I’m assuming all wealth is growing at 3.7% after inflation, like on average. I don’t think it’s a crazy assumption. And because of that, I’m just assuming your wealth can throw that off just indefinitely.
Brett McKay: Yeah, what I love about the 0.01 rule about spending on your wealth is that it’s actually kind of encouraged me to spend a little bit more. I tend to be tight-fisted and very frugal. I still think I’m a law student, broke. And it’s a good paradigm for helping me loosen up a bit. So you have a chapter about how you earn your way up the wealth ladder. So in order to accumulate wealth, you have to make money. So what does that look like? I mean, what I love about your work too is on your blog, Dollars in Data, within your other books you’ve done as well, is you’re very data-intensive. So you’re looking at all these obscure economic reports. When you look at the data, how do people on the different rungs of the wealth ladder earn money to get to that point?
Nick Magiulli: Yeah, so in general, across the wealth ladder, people in levels one to three, so that’s anywhere from less than $10,000 all the way up to $100,000 to a million, they basically earn all of their money through work. That’s how most people earn their money, right? It’s through their labor. It’s once you start to get into level four, and that’s $1 million to $10 million, and obviously you have some money invested, but we start to see a shift where assets are producing more of their income. And then by levels five and six, it’s even higher and higher. People in levels five and six get most of their income from some sort of business or assets they own, not necessarily their actual labor that they do, like the work they do. And so I think that’s the big mindset shift, and it takes time too, by the way. Like, I’m going to, we can talk about this a little bit, but the median age of a household in level four, once again, level four is one to 10 million, the median age is 62. So if we put every household in America in a room that had one to 10 million, and we just took like the middle age, basically, they’d be 62 years old.
So this is not something that’s going to happen overnight. It takes a lot of time in general or a lot of work. You know, there’s a lot of other ways you can do it, but, less than 1% of households in level four or above are under 30. So that is not the case. That’s a very, very rare thing. So when you look at how people earn money, for most people, it’s just, you know, they work and they earn money and that’s it. But as you kind of move up the wealth ladder, you start to see that those people are earning money off of their assets and not just their labor. And so that’s the big kind of mindset shift I think you need to have. And it’s what I wrote about in Just Keep Buying, right? It’s the continual purchase of a diverse set of income producing assets. That’s the mantra, Just Keep Buying, and that’s kind of what I push for. But it gets even more extreme at the higher levels of wealth.
Brett McKay: Yeah, I think that’s a good point to make. Most people don’t make it to millionaire status until their 60s. I mean, I think the problem with social media is that bias, that recency bias where you see, oh, these people who are in their 30s and 40s, just tons of money. And like, well, that’s not me. And what’s wrong with me? It’s like, well, nothing’s wrong with you, actually. You’re probably doing just fine.
Nick Magiulli: Exactly. Yeah. I think the media does a really bad job of hiding. But then again, that’s the point, I guess, is they want to show exceptional stories. They don’t want to show the ordinary things. Like, oh, yeah, I worked for 30 years and saved my 401k and now I’m a millionaire. That’s not as exciting for people, even though that’s more realistic.
Brett McKay: Another point you make in this earning up the wealth ladder is, okay, we talked about wealth is more important than income, but you show the data that income is pretty correlated to wealth. You had that really interesting chart there. Can you walk us through that?
Nick Magiulli: Yeah, so basically the idea is that within each wealth level, the median income is just increasing across each wealth level to the point where it’s the strongest relationship in personal finance. And if you really think about it, it’s like a flywheel. Your income creates wealth, and then if you obviously save and invest that, that can create more income, and then it just keeps happening over and over. It’s like the snowball. And so if you just look at the median income within each wealth level, it just goes up. So in level four, $1 to $10 million in wealth, the median income is almost $200,000. And so that’s a big piece of this, right? And then by level five, I think it’s like $750,000 or something like that, something close to that. So it’s just like it goes up, and then level six is $4.3 million. So the people in level six that have $100 million in wealth, it’s just their incomes are just super high because they’re earning so much off their assets.
Brett McKay: Yeah, I think that’s an important point because I think oftentimes personal finance advice that you see out there, popular personal finance advice, it’s geared more towards reining in spending as opposed to increasing income. And we’ll talk about this later. I think we’re going to talk about each individual rung on the wealth ladder and your different strategies to take towards it. Early on, if your net worth is less than $10,000, then yeah, you need to be concerned about how much you spend. But once you reach a certain point, it’s not so much your frugality that’s going to get you to the next level. It’s just you got to increase the amount of money you’ve got coming in.
Nick Magiulli: Exactly. I think cutting spending is a short-term decision. It can help, but the long-term solution is to raise your income, and that’s what all of the data has shown me.
Brett McKay: Yeah, I often fall back to when I’m feeling like, oh, I need to do something. It’s like I want to cut spending. I think people fall back to that because it’s easy. It’s like I can do something right away. I can stop the streaming service. I can stop going out to eat. Trying to figure out how to make money, that can be intimidating for a lot of people.
Nick Magiulli: I agree. It’s much tougher. I mean, it’s a much longer-term process. You’re thinking about, oh, do I need to learn new skills? Do I need to start a side hustle? Do I need to get some sort of credentials or education? And those are much bigger lifestyle decisions than just, yeah, I cannot go out tonight or I can kill my Netflix.
Brett McKay: Okay, so to go up the wealth ladder, you need to earn more money, and there’s different ways you can do that. We’ll get into the specifics here in a bit. At a certain point in your wealth journey, hopefully you’ll be starting to save money. That’s how you build wealth, and you’re going to put that savings into assets that make money, like investments and stocks and things like that. Talk to us about the research that you did. That was really interesting. How asset allocation changes as you move up and down the wealth ladder. What does the research say there?
Nick Magiulli: Yeah, so the data suggests that those lower on the wealth ladder, so those in like let’s say levels one to three, tend to have more of their assets in cash, their vehicle, and their home. And those higher on the wealth ladder, so that’s like those in let’s say levels four to six, tend to have more of their total assets in income-producing assets, so that’s things like stocks, bonds, real estate, and their own businesses. And so, in other words, like those lower on the wealth ladder own fewer income-producing assets than those higher on the wealth ladder. And on average, it’s like, if I remember correctly, those in levels one to three have less than 25% of their assets in income-producing assets, but those in levels four to six have over half of their assets in income-producing assets. So that’s like the main difference between those lower and higher on the wealth ladder. Obviously like, there’s other factors that can be correlated with that, but once you have wealth, the people that have wealth tend to invest that in assets that produce more income for them, which allows them to have even more wealth, et cetera.
Brett McKay: Yeah, we can talk about your story a little bit. I mean, I know you grew up, I think like middle class, lower middle class, and you had kind of a rough childhood, but my experience dealing with people who, you know, are in that level one rung of the wealth ladder, you’d see that their assets are tied up in like physical stuff, like car, house, and in extreme cases, you see like a lot of hoarding. Like, why do you got like this like junker car, in your backyard? Like, just get rid of that. That’s what I would think. But like to them, it makes sense because it’s like, well, I don’t have cash. I don’t have any income-producing assets. I can use that junker car one day to pull a part off so I can fix my car. And you see this, they’ve done studies about this, about individuals who grew up during the Great Depression. They tend to hoard more stuff because like they grew up in a time of scarcity. I guess they couldn’t really shake that mentality, even though, they’re 80 years old and they might have a pretty substantial net worth. Like they still can’t shake that scarcity mindset.
Nick Magiulli: No, yeah, I completely get that.
Brett McKay: All right, so as you move up the wealth ladder, your assets typically should shift to income-producing assets, such as stocks, could be a business, et cetera. Let’s talk about the different, like the individual levels and talk about the strategies for it and then some of the pitfalls of these different rungs and then what you can do to, get up the next rung. Let’s start off with level one. Let’s say you’re on level one of the wealth ladder. What should be your focus in order to climb to the next rung?
Nick Magiulli: Yeah, I think you have to get to some form of safety. If we’re talking about financial safety, that either means an emergency fund. There’s other types of financial safety, like you could find people you can trust and rely on to help you get out of level one, whether that’s friends or family. So like wealth is not just financial. I think especially in level one, I think you’ve got to think about the other types of wealth you have and how you can use those to get out of level one. And the reason I say this is because, something’s amplified on every level of the wealth ladder. And I think in level one, the thing that’s amplified is bad luck. Like take someone who gets a flat tire, like for someone in level three or four, like that’s an annoyance. Oh, I have to go get my tire repaired. But for someone in level one, it could send them into a financial tailspin. If they don’t have, a way of getting to work, they could lose their job, then they have to take out debt, et cetera. Like all sorts of bad things can happen just from that one flat tire.
I mean, it’s funny you brought up the junker car. That junker car could actually be that emergency lifeline. Oh, my car broke down. I have a junker I can take for a week while that one gets repaired or while I have to wait to save money so that one could get repaired. So I actually, I understand the hoarding a little bit because it is a form of safety if you really think about it, right? And so I think if you actually look at the data, like just not getting into a financial tailspin, a hole, whatever you want to call it, is like the most important thing in level one. Because over, if you look at the data, over half of the financial distress events, like bankruptcies, delinquencies, et cetera, is committed by just 10% of the U.S. Households. So it’s a very small percentage of households that are getting caught up in the same financial problems over and over again, and it’s very difficult to get out once you’re in there. So the whole point is to avoid that as much as possible. So once again, goal in level one is to get to safety.
Brett McKay: Yeah, I’ve seen that play out in my church congregation. There’s a lot of individuals who’ve just got a hard time financially, and you see like a messed up car, it just disrupts their life completely because they can’t get to work, and then they end up getting fired. And then in order to fix the car, they got to take out a payday loan because they don’t have the emergency fund to pay for the repair. And so they’ve got this crazy loan with this insane interest rate that just puts them more and more into a hole. And you got this great quote about poverty from William Volman. It says, “Poverty is wretched subnormality of opportunity and circumstances. Like, man, that’s true.
Nick Magiulli: Exactly. No, I love that quote from him, and I just think, you know, I didn’t grow up in level one, I would say. Even though my parents declared bankruptcy like twice before I was 18, I think I was in level two. I mean, just from, we had family, we had people we could rely on and stuff, so I’ve never been in true poverty. But like, yeah, we just never had a lot of money going around. So I kind of know what it’s like to grow up like lower middle class to middle class depending on what time in my life.
Brett McKay: Okay, so level one, this also sounds like where you should think more about your spending. This is when cutting spending would be the most useful strategy if you’re in level one.
Nick Magiulli: Yeah, if you can’t, obviously, raise your income is the long-term solution. But like, when you’re in a, you know, I think the tagline for that chapter in the book is, atypical results require atypical actions. And when you’re in level one, that is not normal. And so you need to get out of that. Of course, everyone’s quote, default level. And if you have an education and you’re like, oh, I just graduated college, I’m making good money, you’re going to be out of level one before you know it. It’s just a matter of like time. So that’s what happens for most people. And I would argue you’re not even in level one if you already have a good education and everything. That’s why I said I’ve never been in level one, though my net worth obviously was zero dollars when I graduated college. So yeah, I think that’s the thing to think about there.
Brett McKay: All right. So I like that. When you’re level one, your mental framework, atypical results require atypical actions. You have to cut spending and then think about ways you can boost your income. I’m curious, like, what do you do? Let’s say you’re fine financially. Say you’re level three, level two, but you got friends and family members from that level one, you see them struggling. In your experience, what can other people, what can we do to help people get out of level one?
Nick Magiulli: I think you have to first make sure that the person wants to get out of that level, like they have a real desire. Because of course, like everyone wants more money. Like everyone like, oh, of course I’d want that. But like, if they’re not going to take any steps or actions to try and move in that direction, whether that’s like, oh, I’m trying to raise my income, I’m trying to learn, get an education, I’m trying to, if they’re not doing a lot of that stuff, then like what you can do to help is be supportive and say, “Hey, is there anything I can do to help you?” And of course, if they just, you know, oh, just give me a bunch of money, that’s not going to really solve the problem. Because if they don’t have the means to help themselves at all, they’re going to end up back in that spot eventually, right? You can give someone, you know, here’s five grand or 10 grand even, get them there. And if their income is not enough to support themselves, they’re just going to draw down on that 10 grand until they’re back at level one again, right?
So you have to, I think it’s more about thinking about finding ways to help them help themselves. But at the end of the day, they have to help themselves. You can’t force someone to try and better themselves. They have to want to do it for themselves. And so you’ll notice, I guess, when I, you know, I’ve, you know, family members, friends and stuff like this who have been in this position, and there’s a big difference between someone just asking for money and someone who’s like, I need money, but I need it because I’m trying to do all these things to try and improve my life. And you’ll know, it’s more of, you’ll know it through the relationship. So I think that’s the kind of the big thing there is to strike that balance as best you can.
Brett McKay: Yeah. All right. Let’s talk about level two. So this is, you’re making, your net worth is 10,000 to 100,000. This is grocery freedom. You can buy the Dunkaroos without worrying about it. What are the big challenges when you reach level two?
Nick Magiulli: Yeah, I think the thing to think about in level two is the trajectory you’re on and what level that’s going to get you to. Because there’s two groups of people in level two. There’s people in level two who are going to probably be there most of their life, or they might barely get into level three by the, you know, later in their life. And then there’s people in level two who are just there temporarily. They’re making good money and they’re kind of on their way to deep into level three or level four. And I think the big difference there is education and what skills you have. This is, you know, level two is the level where getting those skills can really kind of change that. You can imagine your trajectory is like a slope on a line, and that slope can be pushed upward and change your income, your career, et cetera, based on that. So it doesn’t always have to be a college degree, but I think you need something that allows you to grow your income in a big way, whether that’s, a skill that’s very useful. I think, for example, sales. If you’re a good sales person, you can make very good money, easily six
Figures and, you know, there’s some sales people out there that make seven figures or more at the higher end, you know, they’re selling a luxury good, like high-end real estate, things like that. And so you can make really a lot of money in sales. And that’s something that AI is not going to be able to replace. I don’t think we’re going to have robot realtors or anything like that. So there are still skills out there that you can learn and you can make a lot of money that don’t necessarily require a degree, but they definitely require a lot of work.
Brett McKay: We’re going to take a quick break for a word from our sponsors. And now back to the show. Okay, so level two, your goal is just like figure out the education, the training, the skill acquisition you need in order to make more money so that you can accumulate more wealth. That’s the key there. All right, let’s talk about level three. So this is when you move to 100,000 to 1 million in your net worth. What are the big stressors there when you reach level three?
Nick Magiulli: I think the stressors are more about if you’re overspending. And the reason I say that because if you look at people and I did, there’s some data from the University of Michigan has something called the Panel Study of Income Dynamics, which just looks at the same set of households over time. So we can follow people’s career trajectory, their income, all their spending over time, we can follow it. And in that data, I said, okay, let’s look at people in level three today and look at those that made it to level four and compare it to the people that are in level three today that stayed in level three. And so what are the differences between those two groups? Like the people that went from three to four and the people that stayed in level three, let’s say over a decade. And so if you look at that information, the difference is income. That’s a big piece of it. So those that made it to level four generally earned more. But I think the bigger thing I noticed was the spending. The people that stayed in level three over time spent almost as much money as the people that made it to level four from level three.
So the people that made it to level four from level three did spend a little bit more, but not that much more than the people that stayed in level three over time and those people that made it to level four at a much higher income. So it’s like, I think the issue, the stressor in level three is that people are trying to do the keep up with the Joneses thing. They’re overspending on housing, cars, whatever to portray a certain lifestyle when they don’t necessarily have the money for it. And so they don’t have the income for it. So I think that’s the thing to focus on is like, hey, make sure I’m not overspending in this level. And then once again, I don’t think cutting spending is the way to build long-term wealth. I do think it can be something, especially on the big ticket items like housing in particular, I think is very important. You have to think about your spending there. And then in terms of what to focus on in level three, I think it’s really about your income and specifically your income from investments. That’s where as you start to invest, by the time you have a portfolio in the six figure range, that’s throwing off real money.
You know, if you have $10,000 invested and you get a 10% return, that’s a thousand bucks. That’s not really going to change your life. But by the time, you know, you have 100,000 invested or more, now it throws off that same 10% return throws off $10,000 is a much more significant change in wealth. And so I think that’s where you start to see, hey, the flywheel really starts to grow in level three and by level four, it gets even bigger. But I think that’s where you should focus, spend more time focusing on is investing in income producing assets in level three.
Brett McKay: In your research, what’s the average age for someone who’s in level three?
Nick Magiulli: So yeah, the median age in level three in the United States is 54 years old. So it’s still like, I say that’s middle class, but it’s also people who’ve been spending their life, buying their home, saving their retirement account, et cetera. It doesn’t happen overnight. And just for reference, the 25th percentile age is 40. So that means one in four households in level three are 40 or younger. So a lot of people can get to level three before 40, but it’s still rare. It’s only one in four people that get into that level are younger than 40. So something to keep in mind.
Brett McKay: Yeah. And so the tactic there is when you reach level three, your focus should start being spent towards how can I have more of my income come from income producing assets. So that’s investments. And the mental framework there is just keep buying. That’s from your first book, like just start socking away as much money as you can in your investments, because that’s going to add up over time.
Nick Magiulli: Yeah, exactly. And that’s why it’s the perfect book for someone in level three going to level four, or even kind of level two going into level three. But it’s really made to shift your mindset from just, oh, I go and I save money. I work and save money to, oh, I go and I save the money. I invest it in assets that then pay me money. And then that money can be reinvested. And it just goes from there.
Brett McKay: All right. So let’s move to level four. This is when you get to 1 million to 10 million. That’s a big range. But the point you made, though, is once you go higher and higher up the wealth ladder, an increase of just one isn’t going to be that big of a difference. If you have a million dollars and then you increase your net worth by another million, that’s a lot of money. But in the grand scheme of things, it’s not that big of a jump, really. One of the things you talk about in level four, this is the place where a lot of people, this is where they stop. This is where they stop the trek up the wealth ladder. And to remind people, meeting age for this is like 62. So this is like you’re end of your working career. And, you know, if you get to this range, like you’re probably, you’re good for retirement. Why do people get stuck on level four, though? Why don’t they continue to go up the wealth ladder?
Nick Magiulli: They get stuck in level four because the actions that get you into level four aren’t the ones that get you out of level four. There’s this Marshall Goldsmith book called What Got You Here Won’t Get You There. It’s a career book. It’s about career strategy. Now you have to change your career strategy over time to get promoted and stuff. But I think it’s the same idea. You need to change your strategy if you want to keep climbing the wealth ladder. And once again, getting stuck in level four is not a problem necessarily. I think there’s a lot of people that like, great, I’m never going to get out of level four. It’s not a problem. Realize that, accept it, be happy. The simplest way I can say it. But if you do have aspirations to go beyond that, you really are in why we can get into the psychology of that. But if you do, then you have to kind of change your strategy. And for most people that get into level four, you can get into level four with a few things. You have a decent job making a good money, you’re saving that money, you’re investing it and reinvesting all that income, and enough time.
So like job, good job plus investing plus time, and you get to level four in the United States. But to get to level five, which is 10 million plus, it’s a whole nother thing. You’re going to basically have to either start a company and basically own all the equity and sell it for a decent amount of money. Or you join a startup early, get a good amount of equity, and that company sells for a lot of money, right? You either own a small piece of something that’s very big or a big piece of something that’s decently sized, let’s say. So that’s where I think the difference is. And we can even run the math on this. I do this in the book where I’m like, hey, let’s say today you made it to a million dollars. And let’s just say you have a portfolio, just to keep it very simple. You have a million dollar brokerage account that’s earning 5% a year, and you’re saving $100,000 a year after tax. That’s a considerable amount of money. Assuming that’s all true, how long would it take you to get to 10 million?
The answer is 28 years. It’s crazy. So if you imagine the typical person gets there, let’s say it’s in their mid-50s or early 60s, do you want to grind it out for three more decades just to get to 10 million? No, you don’t want to. You’re not going to do that. No rational person would do that. They would say, hey, I’ve done enough, and they stop. Even if you’re saving $300,000 a year, which means you’re probably making close to a million bucks pre-tax and everything, you’re saving $300,000 a year earning 5%, you start with a million, it still takes you 17 years to get to 10 million. So the math is not friendly to you once you get into level four. That’s why I call it the no man’s land on the wealth ladder. Because once you get in there, it’s hard to get out. And then succession has that joke, five to 10, five to 10 is a nightmare, right? Because it’s true. There’s no real incentive to keep working because your income is not going to really move the needle anymore.
Your wealth is throwing off so much wealth on its own. So you’re in this weird spot where you’re like, hey, I don’t know what to do here. And I think for most people, the rational response is, hey, take your foot off the gas, enjoy life more, do like a type of coast fire thing, find work you just find enjoyable and not just for money and go from there and stop worrying about getting to level four.
Brett McKay: Yeah, be okay with level four. Level four sounds pretty awesome. You mentioned coast fire. What is that? You wrote an article about that. What is coast fire for those who aren’t familiar with that phrase?
Nick Magiulli: Yeah, sorry. I try not to use so much semantics, but coast fire, I’m assuming most of your audience heard of fire, which financial independence, retire early. Coast fire, the idea there is you save up just enough for your retirement. We’re like, hey, I have enough money now where if we assume it grows at a conservative rate, let’s say you assume it grows at 4% a year. So you say between now and when I retire, let’s say you retire at 65. So I’m 35 now, I’ll just use myself as an example. So let’s say I have enough money now where if I assume it grows at 4% a year between now and when I’m 65, 30 years from now, I’m going to have X dollars. And then at that point, I can then pull from that money and use that money to live off in retirement. That means you’ve hit coast fire once you don’t need to save any more money for retirement. That’s the point where coast fire lives. And so does that mean you don’t have to work anymore? No, because you still need to cover your current consumption.
You’re not supposed to use your assets to cover your current consumption. You’re supposed to use any income you have to cover your current consumption, but it means you don’t have to save more for your future. That’s kind of the big difference in thinking here. And so I think coast fire is actually the exact place for it is level four, because people will get there and say, hey, and especially if you get there like relatively younger, like let’s say in your 40s or something, you might be like, hey, this is a time for me to like, I can take my foot off the gas, I can chill out a little, and I can work on something that’s maybe more meaningful to you or maybe doesn’t make you as much money. And you don’t have to worry about saving as much. You just need to cover your current expenses. And the rest will take care of itself, basically.
Brett McKay: Yeah, or I mean, even if you get there when you’re in your 60s, so you have a long, productive working life, you save for retirement, and you don’t have to work full-time anymore. But you could still get a part-time job if you wanted in your 60s. My dad, he did that. He had a government job, forced retirement in his early 50s because he was in law enforcement. And he’s got a pension. He didn’t have to work, but he kept working. He took contract work, and he’s still working. He’s like 70. I think he’s like 75. Still works, and he enjoys it. But I think it covers my parents’ consumptive costs.
Nick Magiulli: Yeah, that’s great. That’s how I think a lot of people should do it. And I think we always look at work as like, oh, wouldn’t it be great if I never had to work again? People idealize that. At the same time, I think a life without any work or any… Work doesn’t necessarily have to mean paid work, by the way. But a life without any work, I think, is a difficult life if you do it for a very long time. I think it’s very tough mentally to do that. Of course, you may reach a point in your life where you’re like, you know what, I’m happy to do that, and some people are okay with it. But I think a lot of people want to have some sort of purpose or something they’re working on. And so I’ve looked at all the research and the data on this, and overwhelmingly, people do find a lot of positive benefits from work. Now, of course, if you’re in a job you hate, you want to get out of that as quickly as you can. But for most people, you want to do something you enjoy working on, whether that’s a creative endeavor, whether that’s volunteering. The options are very numerous.
And so it’s just figuring out what you want and then building your life backwards from that.
Brett McKay: Okay, and so level four, again, this is the 1 million to 10 million range. This is achievable through increasing your income, through acquiring new skills, increasing your education, asking for raises, investing, and then just time, like the time factor.
Nick Magiulli: Time’s a big piece of this. Once again, the median age is 62.
Brett McKay: Yeah, I think that’s an important thing. If you’re in your 30s or 40s right now, you’re like, I’m not in level four. It’s like, okay, you’re fine. You’ve got 20 years to make that happen.
Nick Magiulli: Yeah, just for the record, less than 1% of households in their 20s are in level four. Less than 5% of households in the 30s are in level four. So only like 1 in 20 people in their 30s are in level four. 15% of people in their 40s are in level four, and et cetera. And this is in the book. It breaks down by age cohort, by decade, 2029, 3039, et cetera. It shows the percentage of people within that cohort that are in each wealth level.
Brett McKay: What are the biggest risks or stressors once you reach level four, you think?
Nick Magiulli: I think the money stressors in level four are similar to level five, and I think the stress is usually from a lack of diversification. It’s like concentration, that’s the issue. As really the only way to lose wealth quickly. Obviously, there’s divorce and other things, outside factors, but if we’re just talking pure monetary factors, it’s really going to be concentration. So it’s like, how is your wealth allocated, and how concentrated are you? Because the more concentrated you are, the more likely you could lose wealth quickly. Of course, that’s also how you can build wealth quickly, but it’s a double-edged sword. And I think realizing that it’s a double-edged sword is what’s important here.
Brett McKay: All right, so diversify
Nick Magiulli: Yeah. Yeah.
Brett McKay: Is the key there. And then, yeah, move to level five. Like you said, what got you to level four is not going to get you to level five. You’re going to have to do something radically different. And for a lot of people, that might not be rational. What causes people to, like, they reach level four, they’ve got the vacation money, they can just take a nice vacation whenever they want, life’s good. Why would someone want to make that leap to level five based on your experience interacting with people who’ve made that leap?
Nick Magiulli: There could be a lot of different reasons. One, some people want to create really big generational wealth for their families. Some people want to fly private. Some like the ego boost of being like, oh, I’m not just upper middle class, I’m upper class, right? I’m really wealthy. I can go and buy supercars and all these other things that you see the stereotypically rich people do, which, funny enough, most rich people don’t even own supercars, right? People with that level of wealth, they don’t spend money like that. So it’s only really the media’s depiction of it that makes it look like that. So why do people do it? I mean, in the book, I say, the most expensive thing some people own is their ego. So if the most expensive thing some people own is their ego, that’s why. You know, that’s the answer, the short answer for you.
Brett McKay: Yeah. So we talked about rungs one through five on the wealth ladder. Rung six is $100 million plus. And that’s going to apply to just a very small amount of people. There’s only 11,000 households in the U.S. Who are on rung six. And these are basically people who’ve sold their businesses for huge amounts of money or, you know, like athletes or entertainers. But even very few of those people reach that level. Let’s talk about mobility up and down the wealth ladder. Let’s talk about how often people fall down the wealth ladder. Let’s say someone gets to level four. How often do they stay there?
Nick Magiulli: It’s usually pretty rare how people fall down. So for example, over a 10-year period, 11% of households fell down one wealth level and 2% of households fell down two wealth levels. This is based on the historical data where I’m following the same set of households over time. We can actually control for by level, and it’s actually a little bit more interesting because you can say, okay, hey, if I started in this wealth level, what’s the probability I’m going to be in another wealth level in the future? So for example, going to what you just asked, if you start in level four, after 10 years, there’s a 23% chance you’ll be in level three and there’s less than a 1% chance you’ll be in level two or one. So it’s very unlikely. 72% of households that start in level four are still in level four after 10 years. And that’s like the highest out there. And we can look over 20 years and it’s roughly the same. That’s why after 20 years, if you start in level four, there’s a 64% of those households are still in level four after 20 years. Only 8% make it up the wealth ladder to level five.
So it’s very rare to see that kind of mobility switching, but it does happen.
Brett McKay: What about mobility going up on those lower rungs, like from one to two to threes? That’s still happening? You hear all this talk about like the American dream is dead. There’s no income mobility or wealth mobility. What does the research say about that?
Nick Magiulli: So this research is historical. So it’s going backward looking from like, 1980s when we first had the wealth data through 2021. So the question is, is it still happening now? And will it happen in the future remains to be seen. But in general, like there is mobility. So for example, let’s just look over 10 years. If you start in level one, after 10 years, there’s a 54% chance you will be out of level one. There’s a 30% chance you’re going to be in level two. There’s a 22% chance you’ll be in level three, et cetera. So there’s a decent chance that you can kind of get out of level one and get higher on the wealth ladder. 46% of households stay in level one after 10 years, but the rest don’t. So there is mobility and there’s some healthy mobility. And it’s just, I think a lot of it’s time as well, because people get older and so they save money and they age out.
Brett McKay: Let’s talk about mobility across generations. There’s that phrase, shirt sleeves to shirt sleeves in three generations. So there’s a generation that got a lot of wealth. And then by the third generation, that generation, like the money’s just gone. There’s actually, I think there was a book that came out a couple of years ago, like where are all the billionaires?
These guys looked at the Vanderbilt family. So like Vanderbilt, he left an inheritance, I think it was like $100 million. It’s almost like $3 billion in today’s money. But if you look at the descendants, like there’s like no more billionaires in the Vanderbilt family. What goes on there? Like why is it so hard to maintain a family on a rung in the wealth ladder?
Nick Magiulli: Well, I think there’s a lot of reasons why this is, I mean, I can talk about the Vanderbilt specifically or just like level six wealth, let’s just call it, and then compare it to other wealth levels. But in level six, so most people that have that much wealth, it’s usually concentrated. And so unless they diversify, it’s very unlikely that that’s going to last. This is why I think Bill Gates and Warren Buffett are so smart because of all the billionaires out there, they may not be the richest on the list, but they’re the most diversified. They’re the ones that are least likely to see their wealth just, disappear or see a massive change in their wealth because they’re very diversified. Like Bill Gates is the largest private landowner in the United States. He owns more US land than any other individual. So he owns a lot of different assets and things that are going to allow him to have wealth for multiple generations. And I think if you’re like an Elon Musk, even though he’s richer on paper, if something happens to Tesla, that’s like the majority of his wealth. So he could easily fall below Gates at any moment.
And so that’s a piece of it. I think if you look at like the growth of families, like they’re growing faster than the wealth is. So like, let’s say you have two kids. Now they have two spouses. That’s now four people. And then each of them have two kids, right? And so now four people is now eight people. And then those kids get spouses and they have kids, right? You can just see how it’s growing at such a fast pace and your wealth is not keeping up. So it makes sense why the Vanderbilts couldn’t do it. At just some point, like the math doesn’t make sense, So that’s another piece of it. But I think just if we’re talking about lower wealth levels, like I think succeeding generations can find it difficult to stay in the same wealth levels or parents because like economic conditions change. They may not want to work as hard. Like, oh, I don’t want to work like my parents did to get to that level. I may just realize, I don’t need to work as hard because I know I’m gonna get an inheritance so I can just chill a little bit more.
They may have different feelings about money. Like all these are very case specific, but just a few reasons that make sense to me.
Brett McKay: So we’ve talked about the different rungs of the wealth ladder. They all have their opportunities and their risks. How do you figure out like where you’re fine at? What other things should you consider besides your net worth in deciding that, I’m okay where I am at financially? What are things you consider in order to figure out if you have a rich life or not?
Nick Magiulli: I think it really depends what you want out of life. I mean, this is the most difficult part of being a human in modern civilization is like, we’ve been debating this idea since the time of the ancient Greeks. You know, it’s like why, you know, know thyself is such an important concept. And it’s because you need to know what you really want. And so once you can solve for that, then it’s much easier to figure out, okay, well, how much wealth do I need to support that? Oh, I want to, I can imagine your dream life or whatever it is, like how much wealth do you need to support that? Because once you know what you want, then you can figure out all those things. And for most people, I think it’s lower than they think. I mean, it’s always easy to justify needing more, but yeah, you have to kind of get past that or figure out what’s the things that really matter. So it’s like your time, how much free time do you have or time you can use, time wealth is what we would call it. You can think of mental wealth. You can think of physical wealth. You can think of social wealth.
All these different things, right? Sahil Bloom has a book called The Five Types of Wealth where he talks about all these. And I use that as a framework in the wealth ladder to think about these types of, you know, a rich life and what does that mean? And it also depends where you live too. Like I said, you know, 1 million to 10 million is upper middle class. Well, it kind of depends where you live. You know, if you’ve got 8 million bucks and you’re in a low cost of living area, you’re upper class. You’re actually very upper class. But if you’re in New York City, maybe not So it really depends where you live, the type of lifestyle you want, et cetera. So those are the things I would say to take into account.
Brett McKay: Yeah. Whenever I go to San Francisco, like, man, this place is beautiful. I could see myself living here. And then you look at the cost of housing. You’re like, no, I can see why housing is so expensive because it’s so beautiful. But I’ll stay in Tulsa next to the Arkansas River and take the sunsets, I guess, in Oklahoma. Well, Nick, this has been a great conversation. Where can people go to learn more about the book and your work?
Nick Magiulli: Yeah, so you can find the book everywhere books are sold, Amazon, Barnes & Noble, bookshop.org, et cetera. And you can find out more about me. I write every week at ofdollarsanddata.com. You can also find me on Twitter/X at dollarsanddata. I’m on Instagram at Nick Magiulli, and then I’m on LinkedIn at Nick Magiulli. I answer every DM. So if you have any questions or anything, feel free to DM me.
Brett McKay: Yeah, and of dollars and data, plug for that. It’s one of my favorite financial blogs out there. It’s a lot of fun to read. Well, Nick, thanks so much for your time. It’s been a pleasure.
Nick Magiulli: Thanks for having me on again. Appreciate it, Brett.
Brett McKay: My guest here is Nick Magiulli. He’s the author of the book, The Wealth Ladder. It’s available on amazon.com and bookstores everywhere. You can find more information about his work at his website ofdollarsanddata.com. Also check out our show notes at aom.is slash wealth ladder. You can find links to resources and we delve deeper into this topic. Well, that wraps up another edition of the AOM Podcast. Make sure to check out our website at artofmanliness.com where you can find our podcast archives. And while you’re there, sign up for our newsletter. We got a free newsletter on Art of Manliness. There’s a daily and weekly version. It’s the best way to stay on top of what’s going on at AOM. And if you haven’t done so already, I’d appreciate it if you’d take one minute to give us a review on Apple Podcasts or Spotify. It helps out a lot. And if you’ve done that already, thank you. Please consider sharing the show with a friend or family member you think of something out of it. As always, thank you for the continued support. Until next time, it’s Brett McKay. Remind you not to listen to the AM1 Podcast, but put what you’ve heard into action.
