The Long View: Nick Maggiulli - Climbing the Wealth Ladder

Thanks for having me on. I appreciate it.

In some ways yes and some ways no. The only part that was easier was that I had obviously written a book before, so I didn't have that existential dread of like, will I finish it? What's going to happen? I knew I would get through it eventually. I think the part that was actually harder, it was a harder book to write, all else equal, because my writing process was just very different. When I wrote Just Keep Buying, I had so much prior material from my blog that I was just using again. So, like, I would say 70% of Just Keep Buying was like old blog posts that I kind of, you know, repolished and restructured to create Just Keep Buying. But with The Wealth Ladder, I had to just focus exclusively on one idea. So, I ended up writing so much more new stuff. I'd say 80% of The Wealth Ladder is new material. Like the idea I've talked about previously on one blog post, but it was a very like, hey, here's this blog post, whatever. And then I'm like, hey, I actually have to think about this much more deeply and really kind of do a lot more research to bring this idea to life. And so it's much newer, and that's why it was harder.

I think you just have to write about what you want to write about. I think that's the big thing. Like, I, you know, I think if you guys remember back to grade school and stuff, it's like, okay, you need to write a 1,000-word essay on The Scarlet Letter. And as maybe you guys love that book or you didn't or whatever, you have to write a 1,000-word essay on Catcher in the Rye, whatever it is. You have to write about stuff that someone else wants you to write about. And I think that makes it very difficult to be passionate about writing when you're writing about something else that you don't necessarily care for. So once it's like, hey, here's a topic I really like writing about, personal finance, investing, etc., I find it's much easier to kind of keep writing and do something that, you know, I used to hate it because I wasn't writing about what I wanted to. Now that I get to write about what I want to, I enjoy it.

Yeah, I think, I mean, I didn't realize it at the time, but like looking back it's very obvious now. Like in my first job out of college, I was working in consulting and it was a good job. I was getting paid well and everything, but after a few years I was hitting like kind of an upper limit. I was like, hey, okay, now I know that I'm like, okay, I can see my 5% annual raises. I'm going to get this, let's say, indefinitely. I'm just pretending to project out my career. I could see what my bonuses would be and everything. And I'm like, this is capping out. Like, you know, early on this was great. When I didn't have any money, all this stuff was nice. I was very fortunate early in my career, but after a while, you're like, hey, like, there's no real long-term potential here. Like, yes, I could just keep getting these nice raises or whatever, but I realized I had to change something up and I needed to do something I was more passionate about and it had more upside potential. And so for me that was like, hey, maybe I should really like start talking about personal finance, investing, and maybe I should eventually move my career into that space, which is kind of what happened. But it took me a few years to get there. But that was kind of the big catalyst for me, was like my old strategy of like, okay, just work, you know, get your bonus, reinvest it. Like that's fine. It would have still worked. It just would have taken a lot longer for me. I started to realize like I had to change my strategy up. I had to start this quote side hustle, which is blogging and writing and all that stuff. So that was the big kind of turning point for me. But, you know, people feel this all the time. You'll see, hey, this strategy that used to work doesn't work anymore. You know, another example I give in the book is like I used to, when I was a little kid, I helped my dad, we'd get cans and all the cans we'd drink, we put them in, you know, garbage bags. We'd take them down to get the CRV value. So, you get like 20 bucks for a bag, 40 bucks for a few bags, whatever. And like that made sense, you know, at the time. But now it's like my dad has his whole insurance business. He doesn't have time to do that anymore. Like it doesn't make sense for him to go and collect cans, right? The wage is not worth it, so to speak. So, it's all those types of things.

Yeah, of course. So, the wealth ladder is just a new framework for thinking about building wealth. And that framework is based on six distinct levels of wealth. And when I say wealth, I just mean your net worth. So that's all of your assets, everything you own, minus all of your liabilities. So everything you owe. So for example, take all the cash in your checking account, that's an asset. Your home value, that's an asset, etc. That's all in the asset category. Subtract out everything that you owe to others. So if you have a mortgage, student loan debt, credit card debt, etc., that's all your liabilities. You net those two numbers and you get to a number. That's your net worth, right? And you don't need to have it down to the penny. You just have to know the range because that range determines what wealth level you're in. So level one, I say, is less than $10,000 in net worth. Level two is $10,000 to $100,000. Level three is $100,000 to a million. Level four is 1 million to 10 million. Level five is 10 million to 100 million. And finally, level six is 100 million plus. The thing that makes the framework very easy is once you know one of the levels, because they're all just factors of 10 off of each other, you can kind of figure out the rest. So if you just remember, hey, level three is $100,000 to a million in wealth or net worth, then you can figure out, okay, level four must be 1 to 10 million. Level two is 10,000 to 100,000, etc. Right? So I find that this is very helpful for a host of reasons because I think it maps onto economic classes in the United States. We can get into that. It maps onto spending behavior, investment behavior, a whole bunch of stuff. And that's what the first part of The Wealth Ladder, the book, is about. It's about just understanding this concept and why it's very useful as a framework for thinking about how you spend money, income decisions, career decisions, and then also how you invest your money.

Yeah. So, once again, I'm going to just give you the rough percentages. The exact percentages are in the book. It's just easier to give you like, so roughly 20%, and remember this is household wealth. So, if you, you know, this is your household. So, if you have a partner, obviously, you include their wealth, right? 20% are in level one. That's less than $10,000. Roughly 20% are in level two, which is 10,000 to $100,000 in wealth. And that would probably be like, you know, lower middle class, working class. That's what level two is. Level three, that's 100,000 to a million. That's about 40% of the US. So, that's your, that's middle class, right? That's like where most Americans are, 40% of the US. And then level four, which is 1 million to 10 million, that's millionaires. That's going to be about 16% of the US, right? So I'm not saying 20 because you'll see why in a second. So roughly, you know, 16% in the US, actually, let's just say 18% to make the math a little bit easier. 18% of the US is 1 to 10 million. And then the last two, like level five and level six, that's the last 2% of the United States, more or less. So that's an approximation of where everyone is. So it's 20% level one, 20% level two, 40% in level three, and then roughly 20% in everyone above level four. And most of that is obviously in level four, which is 1 million to 10 million. And this is actually a big change because level four, that 1 to 10 million bucket has grown significantly, especially since COVID. Like, you look at the snapshot data and in 2019, it was not as large as it is now. So that cohort is getting bigger and bigger and that's what I call the upper middle class. I know you're saying $10 million, upper middle class? Like, no, most of the US, it's definitely not, it's definitely upper class. But in parts of the US, if you have like $6 million, like you're probably upper middle class in a very high cost of living city. I know that's shocking to some people, but I think that's the truth of it.

Yep. The 2022, it uses some 2023 data as well. A quarter of the surveys are in '23, but yeah, it's the SCF. So, the Federal Reserve runs this data, the snapshot, every three years. I'm very interested in the 2025 data, which will be released next year in 2026, but we have to wait for it. It's like every three years we get this treasure trove of information, and it's very interesting to see kind of how it plays out.

Yeah. So, I'll just say in general, I mean, I don't have all the numbers like memorized off the top of my head, but I will say in general, those in the lower half of the wealth ladder, so let's say level one, level two, level three, you see a lot more assets in cash, in vehicles, and in your primary residence, so your home. And then those in the upper half of the wealth ladder, level four, five, and six, you see most of their assets are in, you know, retirement accounts, individual stocks, stock holdings, and some sort of equities. And then individual businesses, so like personal business investing, right? And so like those in level six with the $100 million plus in wealth, over half on average, if you took all the people in that bucket, I mean there's not too many in the data, but what they have, they do their best to sample them, over half of their wealth is in individual businesses. And which makes sense, like you think of all the billionaires out there, like almost all of their wealth is going to be concentrated in like one big business, right? Like, you know, Jeff Bezos has Amazon, you know, Bill Gates for the longest time had Microsoft, he's now very diversified, so that's a whole separate discussion. But like if you're trying to figure out like what's the difference in the assets between those lower on the wealth ladder and those higher on the wealth ladder, it's really just a shift into income-producing assets. If you look at the assets held by those lower on the wealth ladder, those assets don't produce income. Cash, vehicles, your primary residence, none of that is kicking off an income stream to you. Then you compare that to those in level four, which is 1 million to 10 million, etc., or above. All those people in levels four and up, most of their assets are in income-producing assets, things like stocks, you know, things in your retirement account, bonds, in businesses, etc. So, it's just, that's the big shift I see. And so, like, it's even kind of ironic because in my first book, Just Keep Buying, you know, the mantra is the continual purchase of a diverse set of income-producing assets. And that still holds, like now that I've looked through the data across the spectrum, that is still the case. I still believe that. It's just interesting that you can kind of see that type of pattern happening as individuals acquire wealth.

I mean, oh, for sure. I think it brings me back to that quote from Rockefeller, was asked by a journalist, how much money is enough? And he answered, just a little bit more. And so I think that's always the case. Like we're always kicking the can down the road. Like people have their FIRE number. Oh, once I hit $3 million then I'll have enough income to never have to worry again. But then, oh, well, inflation went up, so maybe I need four million, or oh, this happened, maybe I need this, and oh, like it's easy to keep, and some of these are justified. Like, you know, prices change, things change. Like it's fine to change your mind over time, but I think it's very easy to kind of keep playing that relative game and keep, you know, kicking the can down the road in terms of what's enough. I think it's a tough thing. It's not easy to come up with what's enough. Or, yeah, is it better, if you had 2 million, would you probably feel more comfortable with 8 million? Yes, probably. You know, and that's why I said someone with 8 million is probably closer to the lifestyle of someone in level five than someone with 2 million is, but they're more similar in a lot of ways than meets the eye. So, in terms of just thinking about that, yeah, I agree. Like people obviously feel like they need more. At the same time, I think the big shocking thing is like, you know, once you get to that level of wealth, once you're in level four, like even a significant amount of money to most Americans is not going to fundamentally change your lifestyle. You know, if you have 5 million bucks, an extra $100,000 is going to basically do nothing for you. Even though like you could go on a bunch of vacations with that, that's like, I know that sounds so out of touch, but like it's not like that extra hundred thousand is going to allow you to go fly private all the time or you're going to have a, you know, a full-time butler for the rest of your life. You know, there's just, it's not enough wealth to fundamentally change how you live your day-to-day. But it just goes to show like the, you know, the value of money changes as you have more of it and it just becomes, I would say, less useful at some point over time.

I think there's a few things to think about with this. First is like, how is your wealth comprised? You know, if you have, oh, hey, I have a net worth of $4 million, but 3 million of that is in my house, you know, which I bought a long time ago, now it's worth a lot. That's going to feel very different than, oh, yeah, I have $4 million and it's liquid, you know, or I have a $500,000 house, which I love, and I have another $3.5 million liquid. It's just a different feeling in terms of the amount of cash you have. So, I think composition is a piece of it. The second piece of it is, you know, all the money formulas, rules, spending rules, etc. in the world can't overcome human psychology in a lot of cases. So, some people are just going to feel like, hey, I should never pay that much for this. It just feels like a ripoff to them, even if they could easily afford it, etc. Right? And for the record, like when I think about these spending rules and how to think about spending money, like with the wealth ladder, like once you hit certain levels, I kind of think like you start to get a certain amount of quote freedom in a certain spending category. So, level four, 1 to 10 million, I consider that the beginning of travel freedom. So, you can start to upgrade, you know, your seat on an airplane. You can start to say, hey, maybe I can stay in a slightly nicer hotel, etc. And by the time you get to 10 million, you can basically do anything besides fly private, I think. You know, you can stay at basically any hotel. You can, you know, always get first class if you want to, right? But it's kind of that slow progression that happens over time. And so your point's well taken in that, you know, having 1 to 10 million, that, you know, you could have 5 million bucks and still not feel comfortable upgrading to first class, and that's completely fine. It's really up to you. But, you know, I do think a lot of it is a psychological thing.

It depends. So how you fall down the wealth ladder depends on where you start. And let me, I'll give a quick example of this. So let's say you're in level two. You have somewhere between 10,000 and 100,000. If you told me someone was in level two today and then five years from now they're in level one, my guess is what happened to them is they kind of got unlucky. All else equal, like I don't know anything about their life, but they probably got unlucky in some way. Maybe they had some really bad medical issue. Maybe they lost their job and as a result had to start pulling down out of their 401k or out of some cash they had. Right? So usually like if you're in a lower wealth level and you happen to fall even lower than that, like it's probably from some form of bad luck. That's usually my take. I mean, of course, spending, etc., that can happen, but that's not what I see in the data overall. Like what I see in the data is most people like aren't really bad spenders. So that's the first piece is like probably bad luck. Now if you're in let's say level five, you have 10 million to 100 million, and you told me, hey, five years from now this person's going to be, you know, in level four, you know, 1 to 10 million, or even level three, less than a million. Like, what happened? It's also a form of bad luck, but it was probably because they had an investment that went bad or they were not diversified, you know. So, when you talk about people that have really, really high amounts of wealth that end up bankrupt or, you know, close to zero or just, you know, a much lower wealth level in the future, it's usually because their business went under, they had an investment go bad, they were way too concentrated. We hear stories about this all the time in the financial media of a hedge fund manager that blew up and now they're bankrupt. It's like, how does that happen? You can be that rich and you still lose everything because they just weren't diversified. It's that simple. Like, so the types of things that make some person fall down the wealth ladder are going to vary. There's some form of maybe luck in some way if you want to think about it. But some, it's like things like that affect you as an individual, like, oh, I got sick. Oh, I lost my job. That's going to be probably some lower on the wealth ladder. As you gain more and more wealth, it usually has something to do with your actual assets, like something really bad happened to your assets that caused you to lose your fortune. So, that's what I would say to that. Now,

Yeah, so parental wealth is highly correlated with economic outcomes. You can, I mean, obviously there's a lot of, you know, anecdotal examples, you know, explains why many of the most successful entrepreneurs came from well-to-do families like Bill Gates, Zuckerberg, Bezos, etc. Like they all came from like wealthy families and of course these weren't like ultra, ultra wealthy families, but they were wealthy enough. So I think there is a big correlation there between where you start and kind of, or where your parents start, I guess, or where you start in that sense and where you end up. I think it kind of sets a floor on your future wealth level. Like if you grew up upper middle class, it's very unlikely you're ever going to be in level one. Something really crazy would have to happen for your family to even allow that, you know? So, when I think about that, like there's this sort of floor that doesn't obviously guarantee that you're going to have the same financial success as your parents, but I think it means that your wealth level is likely to be similar to theirs over time. And so, in terms of talking about mobility, they actually just did a study and they found that incomes are still going up. If you're saying, well, that can't be true, Nick. Like, I know for a fact that like millennials and Gen Z, their income isn't higher than like their previous generation. That is actually true. Their income isn't higher, but how's their income higher? Like, what are you saying, Nick? It's because there's now more transfers from parents. So, parents are giving their kids, there's something like 50% of millennials and Gen Z are getting some sort of financial transfer from their parents, whether that's a monthly stipend, whether that's a down payment on a house, help with the down payment on a house, things like that. So, when they actually just measured incomes without looking at where the source of the income was coming from, you'll see that like incomes are actually still going up in some way. And so there is still some economic mobility, but there's a transfer that's going on. So maybe that's not a fair, it's not fair to say economic mobility is going up when that's coming from transfers. But it's a new world we're in now where this is the first generation that they're relying more on their parents for the economic help and they are still doing okay. So it's a, it's a weird, the data is still coming out and so I want to see how this plays out, especially as, you know, all the boomers start to pass on and that wealth gets passed over. That's going to take another 20 or so years, right? Like this, this is going to take time to move through all this stuff and seeing how that ends up and where, because I remember for a long time everyone was like, oh, millennials are the poorest generation ever, and now they're all backtracking all that stuff just because it just took us a little bit longer to get there and once again there's more transfers of this sort that are happening that are kind of changing the data in a way.

Yeah, I think it's just, it provides a different perspective. I mean, my biggest cultural shock was going to Stanford where I just got to meet people from all walks of life. You know, many who came from much wealthier families. And, you know, now looking back, I truly believe that the more wealth levels you've lived in, the more people you've lived around, the more you can just relate to people from different economic backgrounds. Like I know what it's like to have, you know, parents that went bankrupt. I know what it's like to live most of my life in level two. Like I know what it's like to now actually build some wealth, right? And so I now, you know, I work at a wealth management firm where I talk to advisers, we talk to clients that have very different problems than the problems I had growing up. And it's just, it's interesting to see that. And I just try to bring that very experience to my writing. That's the whole goal is like I think because I've seen a little bit of both sides of the economic spectrum, I can kind of write about it in a way that maybe someone that hadn't grown up like that would have written about it.

Yeah, I think it just varies from person to person. Like I personally don't like spending money on fancy clothes, but I have no problem spending a lot of money at a restaurant. Like that's just what I value. I value like the experiences, especially food experiences. You may value a nice car. You may value, you know, really high quality electronics, whatever. Everyone's different, right? And so the only way to know what's high ROI is to determine what you really value in life and then spend money accordingly. I think that's the hard part though. Like what, like it's like know thyself is this thing we talked about. You know, it's been talked about in, you know, Greek philosophy for thousands of years, but that's really the answer is like what do you really want? And that's what's the high ROI stuff is like where you're going to get the highest return on investment is on the things that you actually value. But the hard part is figuring out what you value.

Yeah. So, the 0.01% rule basically says that you can spend 0.01% of your wealth, or just another way of looking at it, it's 1/10,000th. So, you could call this the 1/10,000th rule as well. You can spend 1/10,000th of your wealth on a daily basis without having to worry about anything. And so, I'll explain where that comes from. So, let's say your net worth is $10,000. You're basically right on the cusp between level one and level two. That means you can spend an extra $1 per day without any worry about jeopardizing your future wealth, right? And where that $1, that 0.01% comes from is, you know, on an annualized basis, if you got a return of 0.01% a day, that's like a little bit under 4% a year. It's like 3.7% a year. It's a very conservative return, right? So, every day your wealth is generating that much money, right? So that extra, if you have $10,000 in wealth, every day in theory like you're generating an extra $1 a day without doing anything. So in theory you could spend that $1 and not jeopardize your future wealth. So if you have $100,000 in wealth, you could spend $10 a day. If you have a million dollars in wealth, you can spend 100 a day, etc. Now obviously this isn't like your total spending. No one, you know, it's, if you live in the United States, you're not going to survive on $1 a day. This is the marginal spend, right? And I think that's where everyone's making a spending decision. You're making it on the margin, right? Like when you go to buy a car, like you're not saying, oh, should I get a Toyota Camry or a Maserati? Like you're debating between the Camry and the slightly nicer Camry, right? It's like, that's what I'm saying. You're always doing it on the margin. Like when you sit down in a restaurant and you're like, do I want to get the burger for 20 bucks or the salmon for 30? Like that marginal difference is $10. And so my argument is that once you have like $100,000 in wealth, that extra $10, you can spend that every time you go to a restaurant without worrying about it, right? And so the 0.01% rule works in that way by just, it allows you to have some lifestyle creep because you've shown financial discipline, like hey, look, I've reached this level of wealth so I can now spend more in certain categories, but until I reach that level of wealth I'm not going to do that. And so like in my example, like I still to this day I don't have basically any travel freedom. When I go to a restaurant I'll buy whatever I want, I don't care, but I am still getting the coach seat. Maybe I will upgrade my seat to a slightly nicer seat, not a first class seat, but I'll like get something with more leg room. That's where I'm at in my wealth journey, right? Like one day if I do well, if things go well for me, I will maybe always, you know, get a first class seat, but that's not in the cards for me right now. And so I'm spending according to my wealth level. And I'm very strict about that because the extra whatever 100 bucks or whatever it is is not enough to upgrade to first class every time. So I can't spend that money. That's how I work through it.

I think housing is important for most Americans because it is the primary way in which they build wealth. Even though it is a consumption good, but when you pass on and you pass that property on to the next generation, that's when it becomes a non-consumption good at that moment of time. Right? So if you assume, oh, I have children, they have their own house already, when you pass and you pass on your property, that's the moment when it's no longer a consumption good. Now it's an asset for your family, right? So, it really depends on when it's like, when you're thinking about it throughout your life cycle. Like, yeah, for you it's a consumption good, but for your, you know, offspring and etc., it won't be a consumption good. So, I think primary residence is, you know, once again, the home ownership rate is still like 66% or something like that. In the US, most households have a home. I don't expect that to change in any drastic way. It's going to be anywhere probably between 60 and 70% probably throughout the rest of my life. And it is a way to build wealth because, you know, you own this thing. The property prices don't change too much. I know in recent years they've gone up a ton, but I don't expect them to move a lot for a host of reasons. There's, you know, whether we call it NIMBYism or whatever, people preventing other houses from...

being made, etc. I don't expect major changes in house prices going into the future. Does that mean that they're going to keep growing at the same rate? No. So, we could get into a discussion about the future of real estate prices, but generally it's been a pretty stable asset class, and I think there's a lot of entrenched political and cultural reasons why it will remain a relatively stable asset class. Now, does that mean it's going to be the stock market or whatnot? I have no clue. Um, that's why I say you got to diversify.