Do you ever wonder what stage you are at in your wealth building journey? Check out this episode of Wealth on the Move, the podcast, where we talk to Nick Maggiulli, author of The Wealth Ladder, and how he talks about every stage of the wealth ladder requires different decisions and different advice. And the biggest risk could be following the wrong advice at the wrong time in your wealth building journey. Check out this episode of Wealth on the Move, the podcast. Your life journey doesn't stand still and neither should your wealth. Welcome to Wealth on the Move, the podcast.
All right, welcome back to another episode of Wealth on the Move, the podcast. I'm your host, Will Hoffman, founder and president of Hoffman Wealth Management. And today, six months in the making, we have our guest to talk to us. I think it's a perfect guest for a podcast titled Wealth on the Move. We have Nick Maggiulli, author of The Wealth Ladder. I know Nico in our office is a disciple of this book. He has cited it in every meeting since he finished reading it. Nick, welcome to Wealth on the Move, the podcast.
I'm excited to talk to you. Where I first recognized your work was an article that you wrote for YCharts a few months ago about a rebalancing strategy. And I'm sure that's going to work into a little bit here, but for our listeners, tell us a little bit about yourself. You're the chief operating officer for Ritholtz Wealth Management, a firm that we have a lot of respect for. You know, two founders and folks doing everything the right way in this profession. So tell us a little bit about yourself and your role with Ritholtz.
Yeah, so I'm the COO at Ritholtz Wealth Management. I started as a data scientist in 2018 and kind of was just in there and like trying to analyze their data, trying to help them make better business decisions. And over time, I just kind of got more responsibility, kept doing more and more stuff, and now I help run the trading team. I do billing and a host of other things. And so it's just been a long road of me, you know, trying to add value where I can. And I do a lot of that through data and through programming and different things of that sort.
And now through your books.
Yeah, that's a separate thing. So me, like, I have a full-time day job where I actually am the COO there. And I was actually, I started blogging in 2017. It was about a year before I joined Ritholtz. And that's actually kind of how they found me was through my blogging. But I was out there just, you know, blogging week after week. And, you know, I've been doing it for almost nine years now. It'll be nine years on December 31st. So we're at basically nine years at this point. And yeah, once a week I write a blog post. And then from that I was able to take a lot of that content, put it into my first book, Just Keep Buying. And then that was in 2022. And then my latest book, The Wealth Ladder, just came out this year.
Yes, and excited to get through it. It's great because, you know, our podcast is titled Wealth on the Move. We're always talking to busy families and active retirees on how to not necessarily just spend their wealth or manage their wealth, but also build their wealth. And The Wealth Ladder kind of touches on different phases, and we're going to get into all these phases, but different phases in someone's wealth building journey from zero up to $10 million. Am I correct?
Yeah. Yeah. I mean, technically it goes beyond 10 million, but let's hope.
For most people, once you get to 10 million, that's like you're definitely set.
Yes. And wealth building, you talk about it's not one strategy. It's a ladder of strategies. You know, you're starting with one and by the time you get to the top of that ladder, these strategies change so drastically that the decisions you were making then kind of become laughable when you get to the top of that ladder. So I guess the biggest question I want to ask and hope we answer in this episode, and I want to give you a chance to answer this now, is when it comes to building wealth, what's one big misconception that folks have when it comes to how wealth is actually built?
I think the biggest misconception, at least in the United States, is that it's based on how much you spend. And of course that's true in the extremes. If you have a very, very high income and you spend an extraordinary, extraordinary amount, like yes, you will not build wealth. But for most people, most of the data shows overwhelmingly spending is not the issue, it's income, right? And income is the issue. And so if I had to pick one belief I could just fix everyone overnight, it would be that, you know, your latte is not the problem, your avocado toast is not the problem, it's you're just not earning enough. And no one wants to talk about that. If you look, and this is not just true in the US. I've looked at data in Taiwan. I've looked at data in other countries and savings rate is positively correlated with, you know, income level. Like the higher someone, the more someone earns, the more they tend to save as a percentage, right? Not just absolute saving. I mean, even as a percentage basis it goes up, which shows the more you make, the easier it is to save, right? I mean, if you think about it logically, you can only eat, you only have one stomach. You know, if your income goes up 10x, you're not going to increase your calories by 10x. I'd hope not, right? But and even, and you're not going to even increase the cost even like, okay, maybe you're going to buy higher quality food, but what are you going to spend 15% more, maybe 20% more? You're not going to go and 10x your spending on food at home just because you make 10 times more, right? And so that's true of basically every spending category. At some point you max out. There's some that you kind of keep spending, like private, you know, flying private, you kind of just spend infinitely there. But besides like a few categories, like you're not going to spend that much more in that category once your needs are met. And so that's the main thing there. And that's why people with more income tend to save more because they just like, they buy the things, maybe they buy slightly nicer things than other people, but not that much nicer. And they have excess and that excess gets saved and then they invest it and then it makes them more money.
Right. And one thing that being on the front lines for the last 23 years in this profession working with these families and active retirees, the one thing that I noticed that your book separates so nicely is what we see and where folks are making mistakes is they're following the wrong advice at the wrong stage in the ladder and they're just getting started and immediately want to get to that top rung. Which listen, that's where we all want to be, right? We all want to hopefully, you know, save and earn and invest to get to that top rung, but we negate some of these very important steps and things that we should be doing at those bottom and middle rungs because CNBC doesn't tell us that. CNBC is talking to the hedge fund manager or the Wall Street Journal is talking to those folks and the folks in those bottom rungs start following the wrong advice at the wrong time.
Yeah. I think the reason for that is just like the advice that's popular is not necessarily the advice you need to be following. And once again, you know, CNBC or any sort of financial media is trying to put out entertainment. They're trying to put out news and information. And so they're trying to get that out for those people that are day trading, that are trying to get information that's trying to, that's if that's based on your career, that makes sense. But for most people, what happened to Nvidia's earnings or Tesla's earnings doesn't matter all that much in the grand scheme of things, right? And so unless you're a shareholder, a large shareholder in one of those companies, those things don't matter that much. And people like to focus on a lot of these things. And so I think the main takeaway for people who are just starting out, it's like, okay, where should you be focusing? And it's not that you can't follow a higher level strategy on a lower level, just there's risks associated with that, right? Like if you just look at the data, like the absolute wealthiest people on the planet are all business owners. Does that mean everyone should go out tomorrow and start a business? Like the answer is no. I mean, for a lot of people, that's not the right choice. They may not have the resources to do it. They may not have the experience, right? There's a whole host. They may not be just personality-wise, that may not be a good fit for them. Like, I don't think I would be a great, you know, business owner to go out and start my own business and do this. I technically have a business, like an LLC, but it's like just owning the blog income and the book income, right? Which is not really a standard business, right? It's like it's something that's kind of very passive. It just sits there as like almost a container for the work I do, you know, writing and blogging. So I think in terms of like an actual business owner, it's a very different skill set and a very different way of looking at the world. And I don't think it's right for everyone. And it may not be, and it may be right for people just not yet. And so that's another thing I try to talk about. And why do I say not yet? Because maybe you haven't built the wealth, the skills, the experience to go out and go out on your own. And that's something I try to emphasize in The Wealth Ladder.
Yeah. And when you say not yet, I want to talk about these early rungs. Talk a little bit about, you know, what you talk about in the book in these pretty early on rungs, folks right out of college, right in the beginning of their career, really starting to really focus on wanting to build wealth. What matters the most at those early stages?
Yeah. So just to give a high level understanding of the framework, The Wealth Ladder breaks wealth into six distinct levels. Level one, and this is your net worth, by the way. This is all your assets minus all your liabilities. So everything you own minus everything you owe to others, you know, so you take your house, your car, include everything, your stock portfolio, that's your assets.
And not just liquid, illiquid as well.
Everything, yeah. I mean, try and you want to evaluate as best you can. Obviously, you don't want to be, you want to be conservative, right? You put all that together, then you subtract out any sort of liabilities, any debt you have, any, you know, whether it's mortgage debt, student loans, etc. And that's your net worth, right? And then based on this, you land somewhere on the wealth ladder. Level one is less than $10,000 in net worth, also includes people in debt. That's about 20% of US households. Level two is $10,000 to $100,000 in net worth. That's also about 20% of US households. Level three is $100,000 to $1 million in net worth. That's about 40% of US households. So the, you know, the bottom 80, you say 80% of US households have less than a million dollars in net worth. Then 18% of households are in 1 million to 10 million. That's what I would call like the upper middle class. And then 10 million plus is, that's like the rich or super rich even. And that's 2% of households, right? And so you can break this out. 10 million, technically it's 10 million to 100 million is level five, and then 100 million plus is level six. But for practical purposes, I like to combine those levels sometimes just because it's the top 2%. And even when you look at level six, like it's like 10,000 households, there's like 10,000 people in the United States that have a net worth over $100 million. It's a very rare feat. It's very difficult to pull off, but it does happen sometimes.
Okay. So in those early rungs, that first and second rung, what are the focus areas where folks need to be spending their time and focus and energy and ignoring the inappropriate advice that's coming in at higher rungs?
Yeah. So in the first rung, specifically level one of less than $10,000, the thing you need to do before anything else is get to some level of financial safety or redundancy, an emergency fund or something like that. I know people say this all the time, but right, what you really need to avoid is you need to avoid getting caught in what I would call a bad luck cycle, right? And so you can just think of like something like, you know, if someone level three or level four is driving to work, their tire blows out, you know, it's an inconvenience, it's annoying, they call AAA, they call a tow truck, whatever. They get it fixed and they move on with their life or they even change it themselves and move on, right? You know, it's an annoyance, right? It costs money, whatever. They just move on. If you're in level one and that happens, you may not have the money to repair it. You can't get to your job. You lose your job. You can just imagine all the domino effects of bad luck. That one little unknown event can then lead your life into a financial tailspin. And so the thing I try to tell people on level one to focus on is get some sort of financial redundancy. Get some sort of safety so that you can get out of level one because once you're out of that, once you have that breathing room, it's like night and day. And I've read a lot of studies on this. I've read anecdotes of people talking about this, especially just look at what happened during COVID when all these COVID stimulus checks came in. They weren't even $10,000. They were much less than that. People who were, you know, paycheck to paycheck for a while, for the first time like, wait, I'm not going out and spending money. I have extra because of the stimulus check. They felt a sense of relief for the first time in maybe their lives. And so you see how important just having a few thousand dollars even is in terms of your stress and your well-being. So try and get to that, you know, as quickly as you can. And of course, you don't want to go too crazy. I mean, I'm not someone that tells people to cut their spending. I think if there's any part where you can do that, just do that a little bit in level one just to get that safety and then you don't have to worry as much. But that's why I say level one. In level two, I think it changes a little bit. I think it's not as much about safety because you already have some assets. I think it's more about getting the right skills and the right education to improve your earnings over time. And I don't just mean getting a degree. As you can see now, even like recent college grads are having like that unemployment rate is almost the same as, you know, just people with a high school education that are unemployed. So for the first time in a long time, like college graduates are now starting to catch up with just high school graduates in terms of the unemployment rate. So things are happening in the labor market due to AI and other technological changes that are making it more difficult for younger individuals to get those entry-level jobs. So it's not just that type of education. Do you have to think more holistically about education and how you can, you know, improve your skills to increase your earnings over time?
Sure. I mean, someone can, they can watch, you know, three hours of YouTube every day and increase their skills at the same trajectory as somebody that's, you know, studying for finals right now. That's well within the capabilities. And I think in being on the front lines with, in working with folks, folks that are in those first two rungs, their first questions are, "How many shares of Nvidia can I buy?" or "How much Apple should I own?" And they're asking the wrong questions at the wrong time. You have to admire their ambition. But there's other things to focus on, the safety or emergency fund and then the skills. In addition to that, once they achieve, let's say, a $15,000 emergency fund, it starts to build the momentum that, okay, this is what success looks like. This is what it feels like to have this wealth. And, you know, maybe you're the first person to accumulate this kind of wealth in your family. And now you know the habits, the things necessary to not just earn or save it, but also keep it.
And changing your tires at the right time so you don't have that blowout and keeping those things progressing and getting that momentum and having that sense of safety and security. So then we get to the middle rungs and that's where you talk about transitioning from saving to investing. Am I right with where you are in those rungs there? And starting to think about risk tolerance and lifestyle inflation and things. What...
I was going to say that lifestyle inflation, we did a whole episode on really early on in the revival of Wealth on the Move where we talked about not allowing that lifestyle creep to have a detrimental effect. And this is where I think that that's a big risk if I understand your book correctly.
Yeah, it definitely can happen, especially with the big ticket items like housing. I think that's where you see it a lot, getting more houses you can afford. And then that just leads to other things down the road. And if you actually look at, you know, asset ownership, asset profiles by wealth level, you see like level two, level three, the biggest asset they tend to own is their primary residence, right? By the time you get to level four, it changes a little bit. It's still for a lot of people their primary residence, but it can be their retirement accounts, it can be stocks in general, and then it goes up from there. So I think it's just understanding that like investing gets, it's not that you shouldn't care about investing when you're in level one or level two. You definitely should, but it's just not as important. It doesn't move the needle as much as your income is, especially early on. And the example I gave in my first book, Just Keep Buying, was, you know, you look at, you know, you're 23 years old, you just graduated, let's say you have $1,000 saved. Even if I get a 10% return, that's a hundred bucks, right? And 10% return is a decent return. That $100, I was going out, partying with friends, going to bars, this, that, with between the Uber, the dinner, the drinks, I could spend $100 in a night very easily. And that's like not an outrageous, I mean, it's a little pricey. I was in a more pricey place. I was in San Francisco at the time. But you have to realize like a hundred, spending $100 going out with friends is not that outrageous in a night. And so that like you could spend your entire year's investment return in one night. You know, you can spend that buying drinks for your friends, right? So I'm not saying you shouldn't go out with your friends. That's not the point of the message. The point is focusing so much on investing when you're, when you don't have any money doesn't really make a lot of sense. And so I think the thing you need to focus on is your income, your career, building that out and then, you know, care even more and more about investing as your asset allocation or as your, I'm sorry, as your net worth increases and you can mess with that asset allocation a bit more.
So how should folks transition or think as they climb to those middle rungs and know that they're ready to invest or ready to take on more risk and what those investments should look like?
I think the thing you have to think about is like, I mean, what investing experience do you have if you haven't invested at all and then you're just starting this out? You got to kind of like know yourself a little bit. Like I think for most people listening to this, they probably had some money invested during COVID. Like how did they react during that time? Did they want to move to cash? Did they want to buy more? Did they? Like understanding how you felt during times of high uncertainty, high stress in your life is going to be very indicative of what you do with your money, right? Because if you're that person that, oh my gosh, soon there's a bad headline, I want to get out, you're probably taking too much risk in your portfolio, right? Or you probably, you know, you need to, you either need to accept that this sometimes happens or you need to take less risk, right? So there's one of two ways to kind of go about that. And so when you're thinking about your allocation, how you want to do that, I don't think there's one perfect allocation because every person's in a different situation. I mean, some people are, if you're single and you're 40 and you have a high paying job, that's a, you have a very different risk profile than if you have, you know, a spouse and many children or you have, you know, aging parents you have to take care of or you have other types of liabilities. Like your risk profile should be more based on your individual circumstances and less so just your age, right? So I think people don't take that into account. Unfortunately, they don't think about what job you're in. Like for example, I work at a wealth management firm. Like I have, I take even less risk in my portfolio because my job, my income from that and my equity in that company, my, the private equity I have in the company that is like very linked to the stock market, right? At the end of the day, if the stock market goes down 50%, like my, you know, the revenue of our firm goes down. Yeah, exactly. Things. So anyone who's a financial advisor, you know, works in wealth management, their revenue, their income and their compensation linked to the stock market and to the bond market and all that through financial markets in general. So you have to think about that given that you probably should have a different risk profile than someone who works in the energy sector, someone who works in tech, etc. And so I think a lot of people don't adjust for that. And that's what you need to do. You need to adjust for those types of factors.
And this is, in my opinion, the stages or the rungs where folks start to get ahead of themselves even more so than those early rungs. And maybe it's just because the dollars are bigger, but to your point about risk tolerance and risk profile, too often I think we worry about our own comfort level when it comes to risk. And quite frankly, who is comfortable with risk? It's like I like it to getting surgery. Who's comfortable getting cut open to have surgery? None of us are. But listen, sometimes it has to happen so we can save our lives. Tying your risk tolerance also to what your goals are to me is something that if you want to achieve financial freedom, and that again is different for everybody, what risk profile is necessary to get there? And I think we get caught up in the risk profile being about comfort of our emotions, not achieving our goals. And I think that's, this is the stage where you have to have those conversations. What ultimately are my goals? How do I want to get to these next rungs? I want to become work optional. I want to be able to invest in businesses rather than developing my career for the sake of my employer. Having those conversations and having those thoughts at this level is where it should and could happen and where it becomes to be more quantifiable. I don't know if that's something you agree with or not, but that's just been my take over my career so far.
Yeah, I think as you kind of move up the wealth ladder, you're going to see that those types of things come up. And I think also, I mean, you said people can get ahead of themselves a little bit. Like it's definitely possible at any stage in the wealth ladder, but by, you know, level three, level four, there's also a certain lifestyle that comes along with that type of wealth. And so if you're like, "Oh, I'm middle class or upper middle class," you want to show off a certain lifestyle, like you're going to end up spending more to maybe fit in and look more like the typical person in that profile rather than prioritizing maybe financial freedom. And so these are all choices people have to make and you have to think about this in kind of a different way. But I agree with you that those are some of the issues that come up there.
Right, because some folks, you know, to talk about spending also, you know, some channels, some programs will chastise folks for spending what is their perception of too much, let's say maybe on a sports car. And to me, and it sounds like you and I are coming from the same page here, if that sports car is a goal that you've saved and invested for, and listen, on a Saturday, I like to rip through the mountains of Western Pennsylvania in a sports car because it's something I enjoy. It's something that allows me to express creativity. It's something that allows me to decompress and enjoy my life. So what? Who cares what the impact is if it's keeping you within your financial goals? And they get chastised by other programs because, well, you're just buying that car because you want to look a certain way or be perceived a certain way. And I think we ignore those trade-offs sometimes of it's kind of hard to enjoy screaming through the back roads in a Honda Accord.
Yeah. Yeah. No, I see what you're saying. And yeah, every once again, I try not to judge people on how they spend their money because everyone's different. I personally like restaurants a lot. I've actually never owned a car. I do have a license, but I've never actually owned a car. So because I've lived in places that have, you know, usually pretty good public transit. Now, between that and Uber, I've never needed a car. I've just rented if I needed one for any sort of stay or something like that. But you see my point, like everyone's different. Like I may never, I don't want to say never, I'll probably own a car at some point, but for me it's like that is very low on my list of things. I've never had to deal with insurance or any of that stuff. And so, you know, but I spend a lot on restaurants. I spend so much money on restaurants in a year that some people would say, "What?" Like, you know, but that's the thing. Everyone has to pick and choose kind of what they like to spend money on, what they get joy from. And so there's no judgment there for me.
And making sure you're still, I mean, at that point, it comes down to how important are your goals? You know, if you want financial freedom, maybe that car has to wait for another decade or something. But that financial freedom, and not necessarily financial freedom, because all through your data and science studies here, I want to kind of get some insight when you get to those high net worth and ultra high net worth rungs. Can you talk a little bit about how those folks think differently about money?
So when you get to, you mean like level four or you mean level five, which...
I would say that level five and six, when you're hitting that 10 million and above stage. How do folks think differently about money?
I think there's a larger responsibility to preserve it in terms of preserving it for the next generation. There seems to be this weight. It's also like maybe even feelings of guilt can come along even though they may not have done anything wrong when they acquired it, but they're like, wait, I have so much, others have so little. Do I have this responsibility to society to give back more? I mean, all these types of questions come up. And then I think another thing that comes up, most people who are, you know, 10 million plus, let's say level five, got it usually through some sort of business ownership. And so as a result of doing that, right, they now, you know, they can see money as a tool, right? Like they can use money to go hire people and change the world in fundamental ways. And especially at the really high end, you think about how Elon Musk viewed money and he took it and he's like, oh, I want to buy Twitter. And he bought a social network and now he runs it and he makes decisions for and he can change the way people interact because of money because he took it and he said, hey, I want it to behave this way, right? So those are all the types of ways that money kind of changes as you kind of build more wealth. It can go from something that's just, you know, something you use to consume for yourself to a tool to buy companies, change people's lives, really, you know, impact history in interesting ways. And so that's just one way to think about it.
Do you think that there's, and this is maybe just some reflection or philosophical, is there a point where our individual money stops improving our lives? And I mean, to me, I think that's when that sense of obligation or sense of guilt comes in where, you know, thinking back to the original Wall Street with how many yachts can you jet ski behind? At a certain point, is it time to, okay, I can't do much more and start fulfilling either obligations of looking towards future generations or towards community service or somewhat.
Yeah, I think I don't know where that limit is and I bet it varies for every person, but it's very easy to justify needing more because once you're like, oh, well, I can already fly first class on any airline anytime, but like, you know, it'd be really cool to fly private, right? And that, and the cost of that just shoots up, right? It's like exponential, right? So to get into that, like the cost of, you know, the more extravagant lifestyles just shoot up exponentially. It's not like, oh, it's a little bit more expensive to do that. I know it's like, it's like two or three or 5x more expensive or 10x or 100x, right? You can just imagine like, you know, owning a yacht is expensive as it is, but you're not realizing, oh, I need to pay for the crew that runs the thing. That's an ongoing expense, right? So there's income, not just wealth issues. Oh, I can just buy this thing. No, it's like you have to buy it and then you have to maintain it. And so there's multiple layers to this where you're like, it's not just you have to have wealth, you have to have income as well, not just being a liquid asset that's paying you enough so you can cover a lot of these costs. So something to think about in terms of overall satisfaction and how you balance that.
