Nick Maggiulli On How To Climb The Wealth Ladder

Thanks for having me back on, Julia. I appreciate it.

So I don't try to follow macro too much, to be honest with you. I feel like the most important thing for an individual to do is focus on the things they're good at and those things are going to pay off more than any sort of macro picture. So, it's not to trash that whole thing.

I know there's a lot of uncertainty and people just don't know the future. I've just seen it over and over. You know, if you looked at all the forecasts at late 2019, they all had very different visions of 2020 and 100% of them were wrong. And not because anyone was stupid or didn't know, like it's just hard to predict certain things, right? And so it's not that I don't care about that. I think there's interesting things going on in the economy. I like to listen to this stuff and hear about what people say. Are we going into a recession? Unemployment numbers, things about, you know, uh, people leaving the labor market. You hear all the, you know, the Gen Z's not getting jobs at the same rate. Like, you hear all these different things and some of them are concerning, but, you know, are they going to heal themselves? Who knows? I don't know. And so it's not to ignore macro, but I'm just like I need to focus on the things where I add the most value and where I can kind of improve myself. And that's I know it's a little bit of a selfish take, but I think that's the thing that most people are going to be better off doing than trying to track where the S&P price target's going to be by the end of the year. So that's kind of my overall take on it. It's very individualistic, but I think it's been very helpful for me to just kind of not tune out the noise, but focus, you know, just keep buying, get that settled, and then go and try and do something that you have an edge in.

So, the post was about how the Amex lounge is overrun. The, you know, hotels, you go to a nice luxury hotel and there's people out at 7:00 a.m. grabbing pool chairs, right? Like, cuz like the pool chairs, there's not enough of them. Uh, house prices haven't come down, especially in like, you know, very expensive areas. And so, it's like, what's going on? And I'm looking at the data and there's just more people in what I call the upper middle class. This is what I call like level four of the wealth ladder, which is like $1 million to $10 million in net worth than ever before. Like in 1989, this is inflation adjusted numbers. In 1989, 7% of US households were in that bucket, level four, so 1 to 10 million. Today, it's 18%. So that has over doubled in the last 30 years. And once again, this is inflation adjusted wealth. And so some will say, okay, well, some of that's home equity, yes, some of that's, you know, retirement accounts and things. So, I agree it's not all liquid net worth, but still there's a lot of people that are in this class that are making more incomes, that have more wealth, and that are willing to spend more, and there's not enough resources to accommodate them. And that's why prices are going up or prices haven't come down, and things are getting very crowded. Like, as I said, the Amex lounge is more packed than outside of the lounge, which is crazy to me, but that's the truth of the matter.

Yes, there's over 20 million millionaire households.

Yeah, I think there's a lot of stuff going on. So, it's funny because I actually wrote a post about like the rise of the millionaire as like a term in in the US and it really started to get popular again in the it actually got popular in the late 1800s with the whole you know robber baron era and gilded age all that and then it kind of lost if you look at like Google Ngrams how often people say the word and then it started to get popular in the early 2000s because there was a famous game show called Who Wants to Be a Millionaire and that kind of the millionaire ideal kind of came back in like that early 2000s late '90s era. And that's when it got popular. From then to now, you know, so if you had a million dollars in let's say, you know, 2000, today you would need about 2 million just on inflation adjusted basis to have the same amount of wealth. But in a on a percentile basis, if I remember correctly, having a million dollars back then was like the top 5% or something. I can't remember exactly. Today, you would need $4 million to be in that top like 5% if I remember correctly. So, it's something like that where like that or maybe it's the top I think it's the top 7%. I apologize. it was the top 7%. Today you would need four million to be in the top 7%. So that's the big change. And so on a percentile basis like even though you know goods have you know doubled right in in terms of or I mean have I guess in terms of value why you need 2 million today in terms of percentile and on a relative basis you would need four times as much. And so that just shows how much wealth has actually been created since early 2000 and how much it's kind of moved around at the same time.

Yeah. I think that's a big piece of the piece. And I know it's like a very trust me I I understand where this is coming from. This is like first world problems, you know, world's tiniest violin. I get all of that. I'm just saying imagine working so hard, doing all this stuff, saving all this money, doing this, and then your experience is, it's kind of ironic that your experience isn't that different from anyone else, right? Like you're not like flying private. Those people are actually have like made it. Those are like that's the elite upper class, which I say is over $10 million in wealth. That is a completely different thing. But that's only the top, you know, 2% of the United States has more than $2 million. Um, and so I'm sorry, more than $10 million in wealth.

Yeah. And so these levels are based on your net worth. So just a reminder to your listeners, you know, that's all your assets minus all your liabilities. So everything you own, cash, stocks, uh your car, your home, all those things, subtract out everything you owe, mortgage debt, credit card debt, student loans, etc. You get that, you net that out. That's hopefully a positive number, and hopefully it's a large positive number. And that's going to put you somewhere on the wealth ladder, right? Level one, less than $10,000 in wealth. Level two, 10,000 to $100,000. Level three, $100,000 to $1 million. Level four, 1 million to $10 million. Level five, 10 million to $100 million. And level six over $100 million. The nice thing about this is if you just memorize level three, which is what I call the middle class, which is, you know, $100,000 to a million dollar in wealth. If you just memorize that, you can back out the rest by multiplying by 10 to go up a level or dividing by 10 to go down. And I came up with that because there's so many of these like different levels of wealth frameworks out there and they're all over the place and they're arbitrary and they didn't really make as much sense to me. And so I actually looked at the data and I said this actually, ironically, it's a very neat, you know, logarithmic 10x scale, but it actually maps on to the US households quite well. So for example, 20% of households in the US are in level one, which is less than 10,000. 20% are in level two, 10,000 to 100,000. 40% which is like your middle class, is in level three, 100,000 to a million. And then 18% are in level four. That's 1 to 10 million. And then the last 2% is just level five and six, which is let's just say over 10 million. Cuz by the time you get to level six, I think in 2025, there's like 11,000 households that have over $100 million. It's a very, you know, it's a very long tale and it's very few households that have extreme wealth like that.

Yeah. So the 0.01% rule is basically just says 0.01% of your net worth is a trivial amount. You can spend that on a daily basis and it's kind of trivial to you. And I can explain where I came up with that. Right? So it's actually funny. Jay-Z had this lyric where he was like, "What's 50?" I'm not going to say the exact lyric cuz he curses. So I'll just not curse and I'll say he says, "What's 50 grand to someone like me? Can you please remind me?" At the time he had a net worth of about 500 million. So 50 grand to him was 0.01% or 1/10,000th of his wealth, right? So he's basically saying, "Hey, this is trivial." It's like, "Oh, that's kind of interesting. What if I spent money based on this?" Like on my on my marginal spend, right? This is not your total spending, daily spending or anything like that. This is like, "Hey, when you're going out to make a spending decision, you're like, "Hey, can I afford this thing?" That's that's always the question, right? It's like, "Can I afford this thing?" My question is if that thing if that marginal spend is less than 0.01% or 1/10,000th of your net worth and the answer is yes. And so in level two which I call grocery freedom that's the net worth of $10,000 to $100,000. When you divide by $10,000 that means the marginal spending decision is $1 to $10, right? So when you're at a grocery store and you're deciding to buy an item you're like, "Oh, do I get the eggs or the cage-free eggs?" the difference in price there is going to be somewhere in that range, probably a few dollars, right? And so that's kind of the thinking like when you're going into a grocery store, you're making these marginal decisions on which item to get based on a certain marginal amount. And so my argument is if you're in level two and as you get deeper into level two, you have more and more grocery freedom. By the time you're in level three, you have complete grocery freedom, right? And then when you're in level three, that corresponds to restaurant freedom, right? So that's a net worth of $100,000 to a million dollars. If we use the .01% rule, that becomes a marginal spend of $10 to about $100. So every time you go to a restaurant, you're like, "Oh, do I want to get the burger and it's like 20 bucks or do I want to get the salmon and it's 30?" Right? There's that marginal $10 difference. And it's just allowing you to kind of justify that purchase. And it keeps going from there. Level four is travel freedom. Level five is what I call house freedom. And then level six is what I call impact freedom. Because by the time you have $100 million, you can just really change people's lives in a big way with money. So I think the whole point of this rule I know there's a lot of numbers and math. The whole point is I want to allow I wanted to solve the problem of how do we allow some lifestyle creep without linking it to income? Cuz I think income people when you lifestyle creep with your income it's a little scary because your income can drop like you could lose your job all sorts of stuff. I think by linking it to wealth it's actually a better metric because your wealth's going to be a little bit more stable than your income over the long run. And so what this allows you to do is spend more money, but only after you've built the wealth. After you've shown financial discipline, then you can start to spend more. So like, hey, I made it to level two, I can start to spend more at the grocery store. Oh, I made it to level three. I can start to spend more at a restaurant, etc. And that's kind of the thinking behind this.

Point I just say 0.01% rule. Technically 0. Yeah, 0.01%. Yeah. I didn't want to be it. I was like, yeah. 0.01% rule. Yeah.

Yeah. I think it's just for for example for high income earners, let's say you're making a really high income. If you lose that job, you can you're going to be able to find another job, but it's not going to be at that income level and at least not initially. If you need to find a role that pays that much, like people really search if you're making like 250K, 300, etc., like a lot of money a year. You're not just going to be like, "Oh, I lost that job. Let me just go get another one." It's not that simple. Those types of roles are hard to come by and it's going to take longer. Could you get a job at 150K? Probably. But like that's the thing is like seeing that large drop in income is something that a lot of people may not be ready for especially at the higher end. The thing I think about income I just like to like let's just use athletes as an example and I know people always trash on athletes for how they spend money. It's not even about that. It's just like an athlete makes most of their money in about 5 years and has to last them like the rest of their life, right? So that's kind of the interesting part because if you really think about that even if they are saving let's say 20% of their income they're like oh that's a great that's good. you're saving a decent amount of money, but what happens in in year six when that income dries up, even though they save 20% a year for 5 years, that means they were spending the other 80%. And that 80% is a lot of money, right? So, and then they have to spend that 80% in year six when their income is zero or close to zero, right? Or maybe they just have a pension from the NFL or whatever it is, wherever uh sports league they're in. So, my my point is income's a little bit fickle, you know, in any given year. And, you know, people lose jobs. It happens and it's been relatively consistent. you know, it changes over time. Obviously, during recessions, it gets a little bit worse, but like there is, you know, job loss that happens. And so, I just want people to to think about the marginal spend and linking it to wealth. Of course, you have to spend based on your income. You can't spend everything based on wealth. You have to spend based on your income. But on the marginal decision, that's the whole that's the whole question. No one no one in level one is saying, "Can I afford a Maserati?" Like, they know they can't afford a Maserati. There's no debate there, right? People in level one are saying, "Oh, can I afford this thing?" Or people in level two are saying, "Can I afford this thing?" That's the moment where this rule kicks in. It's not over every spending you do. It's like on the marginal decision. And that's how I want people to think about it.

Yeah. So, I would say I even though my parents declared bankruptcy twice before I was 18 and they divorced when I was six. It's a kind of a long story, but though that happened, I don't think I've ever been in level one because I do count things like family and network and like intangibles a little bit in how I think about this. Like I've never been in abject poverty. Like yes, money didn't really when you have a lot to go around. I was always eating off the the dollar menu in McDonald's for those that remember that or the value menu. It used to be called the dollar menu then became the value menu and you know so I was used to that type of lifestyle which I would say like lower middle class working class however you want to call it and I was even even after I graduated from college I still consider even though my personal net worth was less than $10,000 I still consider myself like in level two if I have to look back right but going from level two to level three and eventually to level four there were a couple key decision points that had to kind of come up and I didn't know this at the time I didn't have a framework for this I only after the fact did I come up with the wealth ladder as a framework which have been helpful for thinking about this, right? And so like for me like the first thing was like hey I had to get the education I had that that was helpful from getting from level two to three and I think even just that alone I would have got to level four I just it would have taken me a bit longer. I think my my original projections in my 20s. I know this is crazy, but this is how I used to think. I was supposed to reach level four like basically a million sometime by I was like 47 or 48, right? And so that was my guess of like everything and I was making very conservative assumptions on returns and savings and all this different stuff. I got there a bit earlier because I started this side thing I did which I was writing on the internet and I did it and I was posting blogs for you know three years didn't make any money just posting because I loved it and just did it and did it and did it and then monetization came and then I wrote the book the first book just keep buying that did really well and now I have the next book so it's just been a slow process but I've been at this for 9 years and so I know a lot of people are like I say hey you need to raise your income but like it can take years before you start to see real results and like I did this for 3 years and got no payoff from it except like just the praise that people gave me. And there is something to that. But I think a lot of this is thinking through, okay, hey, my job was great. It was paying me well, my old job, but I couldn't see a future in that. So, I had to come up with something else for myself. And that other thing was me writing and putting content out on the internet. And so, not saying that's what you have to do, but there are other options out there. And I kind of talk about some of these options in the book.

Also, like that probably brought you to like Ritholtz wealth management or like connecting with those guys. Josh Brown, Barry Ritholtz, Michael Batnick, like a number of these guys that we've had on this show as well or trying to get on the show. Hello Barry. We definitely want Barry on the show at some point. Um I I'll get I'll get Barry on the show. I'll talk to Barry. I will get Barry on the show. He would love his new book's great so he would love to come on here and talk about how not to invest.

Yeah, so it did open up because of the blog. Josh and Michael, like Michael, it's so funny. Michael Batnick was like an information fiend. He was out there reading everything. Michael Batnick was one of my first 20 followers on Twitter. Think about that. How many people he somehow found my blog before anyone else ever did. I one of my first I had like I didn't have like maybe three or five friends that were on Twitter at the time. I didn't have a ton of friends on Twitter. So I had like five followers and slowly within a few weeks you I'm posting no one knows who I am, right? And within like a few weeks Michael Batnick's one of my followers which was insane, right? So like that to me was huge. And then obviously you know I talked to them about other stuff I can do the data science work and so I kind of do ops there and that's why I'm the COO there now. It's just a long kind of journey but it was this process of just like talking to people on the internet meeting people reading their work, promoting their work. I've I've been promoting people for so long it's crazy.

And like, and people promoted me. So I, it's, it's, it's just how the creator economy is. Like if you like someone's work, you'll promote it, right? It's so crazy. Like I still remember when I, I remember reading Kyla Scanlon's very first article about like, uh, I think it was like ride share, Uber, or something to do with cars, and it was the car economy. It was very good and I promoted it and now she was just on the Daily Show with John Stewart and it's just great. I'm not saying that's because of me. She was amazing before me, obviously. I'm just saying it's cool to see that progression and to see people succeed in such an amazing way and you can, that's the type of opportunities that open up when you just put yourself out there and just keep putting out work consistently and it's just, it's truly incredible to watch.

Yeah. So at Stanford in particular, I think for me it was more eye-opening just, it was the class difference in terms of like, you know, I said I grew up kind of working-class family and now I'm here with people in the middle class and a lot of kids in the upper middle class, right? And so like I remember like in my freshman year, most of the kids in my hall had been to Europe. Remember this, the school's in California, so Europe's obviously like further away, you know, and half the kids are from California at Stanford just like many of the other California schools. So it was one of these things where it was very eye-opening that like there's different levels of wealth and understand, I meant that very colloquially at the time. Now I have an actual levels of wealth framework, but like it was just eye-opening and no one like treated me badly or anything because of that. Everyone was very nice. I'm not saying this is like, oh, upper middle class kid. No, it wasn't that. It was just interesting to kind of see the differences there and like, and a lot of the international students in particular, they aren't need-blind. Like all the US domestic students, they're need-blind. So if like you, if you're poor or not, you can still get in regardless. Internationals not need-blind. So a lot of these people probably had a lot of money and paid full price, right? That's, it's, that's just how they do things. But it was interesting because now you have people where, you know, someone had a 16th birth, or not 16, I'm sorry, a 21st birthday party and they got buses to bus in a bunch of people in and out of, uh, Stanford down to like a local bar in Palo Alto and they paid for all of that, right? You just had to show up and get on the bus, right? So these are things that are like seem insane to me, but like that's what some people had the money to do that, right? And so it was just interesting kind of mingling with those people, but it was very helpful for me because a lot of those people taught me on like how to do certain things. How do you build a resume? Oh, you need to talk to these people or you need to get in these clubs. You need to do this type of stuff and get these internships. And like without that, I wouldn't be here today. So, as much as I'm not, there's no hate there. It's just interesting to kind of see the differences. And it did help me a lot because of those connections. So, that was like one of the biggest things I saw. In terms of the Munger quote, the 100,000, I was just trying to get, I had some arbitrary goal in my head and said, 'Hey, I just really need to get to there and then they say the compounding takes off from there.' It was partially true. I mean, at the end of the day, like, you know, market returns were positive during that time. I started investing in 2012. I had a decent job, was saving good money, but it just progressed from there.

Yeah.