Nick Maggiulli: Climbing the Wealth Ladder to $1,000,000 and Beyond

Analyze what you're doing. Like, what is the strategy you're doing? You're working hard doing one thing. Is there a different strategy that offers a better possible future? Like if your strategy is like, I'm just going to work hard at my job and my boss is ignoring everything I'm doing, they're not recognizing my efforts, then maybe that is not the approach to keep following.

Thanks for having me back, Andy. Appreciate it.

Yeah, I think a lot of people focus on effort and say, well, like, I'm working hard at something. Why am I not seeing as much progress? And the truth is that effort is not enough necessarily. Of course, you have to work hard. That's almost a prerequisite to get ahead financially. But I think what happens is if you're working hard at something that doesn't produce enough income for you, you're going to end up kind of spinning your wheels and feeling frustrated. And the simple example I give is even if you work 50 hours a week in a minimum wage job, you're not going to earn all that much money, right? So I think people know that intrinsically. And so I think my idea is like, how should your approach change over time? And maybe there's something else you should be considering. And so that thing may not have a payoff now, but if you keep working on that thing, there's a possibility it will have that payoff in time. And we can talk about those today. But that's where I want you to frame it: is like, if I'm doing the same thing over and over expecting different results, it's not really happening. So maybe I need to do something different. So this is kind of that wakeup call.

Yeah, I think it's both. I think the American work ethic, because Americans work harder than I think any other developed nation. I don't think that's true of every nation, but you know, for developed nations, we work more than most others. And because of that, I think we also expect there's supposed to be some sort of like, well, if I work hard, then I will get results. And that is generally true, but it depends on how you define results. What types of results? Like, yes, if you work more hours, you will make more income, all else equal. However, that doesn't mean that you're going to make it to millionaire status or billionaire status, etc. Right? So, those are very different things. There's obviously luck and a lot of other things involved, but I want to talk about effort alone is not sufficient, unfortunately. And I think if people think it is, I think that's where you can kind of get mixed up.

Yeah. So, the wealth ladder is a new framework for kind of just understanding and building wealth. And I kind of look at it as like a way of thinking about how your financial strategy should change as you build wealth. Right? In my first book, Just Keep Buying, I basically wrote that book assuming I know nothing about you, here's what I would tell you to do: just keep buying, which is like the continual purchase of a diverse set of income-producing assets. We've discussed that on your pod before, but now I said, okay, what if I knew something about you? What if I just knew how much wealth you had, right? Just right now, if I know, oh, I know just some range of your wealth, and that range is your wealth level. We can get into that in a second, but once I know your wealth level, then I can give you a strategy that's a better fit. Now, let me give you an analogy that's going to make this easy. Like a fitness instructor is going to give different advice to someone who's morbidly obese versus someone who's a well-trained athlete. Of course, the principles are going to be the same. There's going to be diet, exercise, sleep, all that stuff. That's all going to be the same, but they're going to give different tactics and strategies to follow based on, you know, their current fitness level. I think the same thing is true when it comes to our financial strategies as well. And so that's what the wealth ladder is trying to do is say, 'Hey, if you're here, here's what you should do.' And so I think that's a different approach and a better approach than saying, 'Hey, just do this.' So Just Keep Buying was like, 'Hey, just do this.' And that's great. And I'm not trying to trash myself, but I think we can get more precise once I know a little bit about you. And that was my goal with this book.

Okay. So, there are six wealth levels. And by the way, wealth level, when I say wealth, I just mean your net worth, which is simply all of your assets. So you can think of that as everything you own, right? Your bank accounts, your car, your house, everything, home equity included, retirement accounts, everything you own minus everything you owe to others. That's all your liabilities. If you have credit card debt, if you have a mortgage, student loans, etc. So everything you own minus everything you owe to others. That number is just your net worth. So once you have your net worth, you can just put yourself into the levels. So level one is less than $10,000 in net worth. Now, I'm going to also give some percentages. That's about 20% of the United States in terms of household. So this is a household wealth level. I know not everyone's married, but just if you're single, then you are that household. If you're in a couple, it's your guys' combined wealth, right? So level one is less than $10,000. That's 20% of the US. Level two is $10,000 to $100,000, right? So it's like kind of a 10x multiplier. That is also 20% of the US. That's like the lower middle class in the United States. Level three, this is where most of the United States is, is $100,000 to a million dollars. That's about 40% of the US. Now level four, which is $1 million to $10 million, that's about 18% of the US households. And then level five is $10 million to $100 million. And then level six is $100 million plus. Those two levels together is about 2% of the United States. Right? So the vast majority, 98% of households are in levels one to four, with the bulk of those being in level three, which is $100,000 to $1 million. Right? That's the middle class for you, right? And I like thinking of it in this way because it's very easy to remember. Once you know one of the levels, you can just multiply by 10 to get all the other levels, right? So it makes it simple and I find it very memorable. So I know like level three, that is like where most of the United States is. That's $100,000 to a million dollars. And that's where I think most of the financial discussion can be around.

So, in general, I don't find that spending, like, oh, people who spend the least are highest on the wealth ladder. That's generally not the case. Actually, people higher on the wealth ladder tend to spend more than people lower on the wealth ladder. The difference though is they spend a smaller percentage of their income. And so you're saying, well, okay, they're spending more but a smaller percentage. It's because what that means is their income is rising faster than their spending, right? So over time, this is what we see in the data. This is just true in general. So as people earn more income, they do spend more and more. However, their spending doesn't go up as much as their income does. And so given this relationship, it's in all the data. I've seen it everywhere. When I'm talking about spending with people, I say, 'Okay, if there's frivolous spending you have, you can cut, please do.' But beyond that, I tell people not to focus all that much on their spending. And I really tell them to focus on, okay, let's focus on your income because that's the thing that seems to be in the data. It's the driver that separates all... like I can go through all the data in there, every single level. Like the median income of each wealth level just jumps up each time, right? To the point where it's like, okay, income is obviously the driver here. And to think it isn't, to think it's like, oh, it's because, you know, that people in level five aren't buying their lattes, like, no, that is not the issue here, right? People in level five have very different income sources than people in level one and level two. And realizing that, and how do you build something like that, that is the bigger question that I think people need to wrap their heads around.

Exactly. And I think one way to think about that too, it is relative to your, you know, your wealth, your income, all these things matter. I think one way I like to think about spending, especially with the wealth ladder, I came up with something and it's in the book. It's called the 0.01% rule, or you could call it the 1/10,000th rule. And all you do is you take your net worth and you divide by 10,000. And that number is how much extra you can spend per day without impacting your wealth. Now let me give you, let's run through just a quick example. Right? So where did I come up with that? So the 0.01%, I assume, like, you know, very conservatively that your wealth is going to grow by 0.01% per day. So over the course of a year, that's going to be about 3.7%. That's a very conservative return. I don't think anyone's going to push back and be like, 'Oh, this is a crazy assumption.' Like, no, you know, the US stock market's average 7%, a diversified portfolio should get you at least five, you know, four to 5%. Right? So given that, if you can spend, you know, 0.01% of your wealth a day, that's kind of the margin when you're thinking about making a spending decision like, hey, how much? So if you have a net worth of $10,000, that means you can spend $1 extra per day above your income, right? If you have a net worth of $100,000, you can spend $10 extra per day above your income. And so when you think about this, each wealth level kind of has what I call spending freedom. So level two is what I call grocery freedom. So by the time you get into level two, when you go to the grocery store, you don't have to think as much about, oh, should I buy this or that. You can kind of just buy what you want. But when you go to a restaurant, if you're in level two, you still got to be kind of cognizant because that difference in like, oh, do I get the burger for 25 bucks or the salmon for 35? That difference can be kind of significant, right? If you're at a sit-down restaurant. And so what this rule does is as you gain wealth, it provides you more freedom to spend more. So it kind of allows for some lifestyle creep without kind of being, you know, just letting you go crazy. And so I like that balance that it provides. And it's literally just mathematical. It's like take your wealth, divide by 10,000. That's like your marginal spend. So if you're deciding, oh, should I do this or should I spend this or should I spend this? You get one of these little extra marginal spends per day you can do based on your wealth, right? So by the time you hit level four, let's say you have a million bucks, that gives you a $100 per day. So it's not as much as I know it sounds like, oh, I have a million dollars, I can do whatever I want. It's like, no, you really only get a $100 per day extra spend once you get there. Like that's kind of my conservative way of looking at it to preserve wealth. So that's another way of thinking about spending. I think it's a new idea. I think it allows for some freedom, flexibility while also kind of being disciplined in general.

Yeah. So, I think investing specifically picks up once you get into like level three where your total net worth is starting to hit into the, you know, 100,000 plus. And the reason why is because it's just math. Like once you have $100,000, let's say you're getting a five or 10% return, you're getting anywhere from 5,000 to $10,000 a year in savings. So, if you're saving right now a thousand bucks a month, that's 12,000 a year. That's a decent amount. If you get to 100K in savings, or sorry, in invested assets, that is now competing with you in some way. Now of course at 100,000 it's not competing as well. But by the time you get 200,000, $300,000, now that sum of money may actually earn you more money than you can earn yourself. And I saw this tweet the other day. I thought it was funny. It was like, if your investment portfolio earns more than you do, is your job a side hustle? And it really gets at this tension within, you know, level three and especially by level four. I think this is even more true. But within level three, once you start investing and that flywheel picks up, and of course I'm not expecting, you know, what we've seen the last few years or the S&P's had multiple 20% years. You know, I'm not expecting stuff like that. But if that happens, you know, when you have $100,000, a 20% year is 20 grand, right? And so, of course, I don't expect you to have all your money in the S&P either. We can get into that. But the idea is just as that stuff starts to compound, you're just going to see your wealth start growing in ways that you can't even compete with your own wealth, right? Which is kind of a weird thing to say, but that's kind of what can happen over time.

So my mantra of Just Keep Buying is the continual purchase of a diverse set of income-producing assets. And it's purposefully vague while still having some specifics to it. Continual purchase just means you're buying over time. Don't stop buying. I mean, that's literally the name of the book. But that idea, that is the core idea here. And so diversification is important there. And then income-producing assets. Does that mean you can own non-income-producing assets? Of course. But I think the bulk of your assets, somewhere between 80 to 85 to 95% of your assets, investable assets should be income-producing, right? So like exclude your home for now, but do everything else you own. It should be 80, 85 to 95% income-producing. Does that mean you can hold gold? Of course. Does that mean you can hold cryptocurrency? Of course. I just don't think that should be the bulk of your portfolio. Now, of course, there's these assets, both of those assets in particular have done well, but there have been other assets that haven't. There have been a lot for every cryptocurrency that, you know, for Bitcoin that's done well, there's been a lot that haven't done as well. And so, you know, there's debates to be had. And that's why I think from a diversification perspective, you can have some of that stuff, but I think most of it should be income-producing. Now, what are income-producing assets? Stocks, bonds, real estate, small business ownership. There's farmland. I mean, there's a lot of stuff out there and we could go through all of them. It's a big discussion and I don't know what's right for every person. Some people love the tangibility of real estate. Some people love just how passive and easy a stock ETF is, right? Like a diversified stock ownership, right? Some people love US stocks, some love international. I own both, right? I don't have any sort of qualms one way or another. Everyone has their preferences. I don't think there's a right way. I think you can build wealth in all of these different things. I do think you need to stay diversified, though. And I do think the majority of your assets should be income-producing. So that's kind of the high-level, not a quick answer, but the mantra is the quick answer that gets at that.