How to Climb The Wealth Ladder with a Personal Finance Expert

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0:27Good Morning Brew Daily Show. I'm Neil Freiman. And I'm Toby Howell. Today, on July 4th, an interview about the American dream. Climb aboard the wealth ladder and don't look down. It's Friday, July 4th. Let's ride.

0:46Good morning and happy 4th of July. First, I want to salute all the grill masters out there preparing to sweat buckets over a Weber to feed the entire neighborhood. Your efforts don't go unnoticed. Grill on, grill strong. Just don't overcook the burgers. Today, we've got a super fun and informative special episode for you. Toby and I spoke with prolific personal finance author Nick Majuli to chat about his new book, The Wealth Ladder, and learn how all of you can climb from one level to the next. This conversation completely changed my perspective on wealth in America, how to accumulate it, and also how not to squander it.

1:21We covered a range of topics from the importance of owning equity in a business to Trump's baby bonds to the most underrated strategy in personal finance. Now, I hope you're listening to this while also getting called underrated in your 4th of July cornhole match. Make sure to spin the bag. Don't throw it. Spin it. Enjoy the holiday and enjoy this episode. But first, a word from our sponsor, Taco Bell. Are you done? Yes. But man, these Taco Bell refrescas sure are refreshing. Well, that's because they're crafted to quench every kind of craving. This Agua Refresca is a Taco Bell twist on a beloved Mexican beverage mixed with real freeze-dried fruit pieces and green tea.

2:05The Refresca Freeze is my go-to. One sip and I'm mentally on vacation. Head to TacoBell.com slash morning dash brew to learn more. That's TacoBell.com slash morning dash brew. Legal disclaimer, at participating Taco Bell locations for a limited time only while supplies last, Agro refrescas are made with artificial colors and natural fruit flavoring and contain less than 1 % juice. Rockstar Energy refrescas contain 200 milligrams of caffeine and are not recommended for children, pregnant, or nursing women or persons sensitive to caffeine. Nick, thanks for joining us. Thanks for having me on. Okay, so you devised this concept of the wealth ladder to help people improve their financial lives.

2:42What are the basic rungs of this ladder and what was your personal journey climbing it? So there are six levels to the wealth ladder. I didn't use rungs for marketing reasons. I think levels just sounds better than rungs like, oh, I'm on rung one. But each level is a 10x increase from the prior level. So level one, this is less than$10 ,000 in wealth, which you could just think of as your net worth, all of your assets minus all of your liabilities. So that's like everything you own, your cash, your financial assets, et cetera, home equity, and then subtracting out all your debt, credit card debt, loans, et cetera.

3:17So level one is less than$10 ,000 in net worth. Level two is a 10x jump, which is$10 ,000 to$100 ,000 in net worth. Level three is$100 ,000 to$1 million in net worth. Level four is$1 million to$10 million in net worth. Level five is$10 million to$100 million in net worth. And level six is$100 million plus. in terms of my journey up it it's changed over time and so like I would say even though I started with like I didn't have ten thousand dollars I would consider myself in level two because I had a good education and everything so I started in level two kind of grew up in love in like a level two household and over time you know I just worked hard and everything saved money got to level three and then I started writing and doing all the blog and book and all that other stuff and so that kind of helped accelerate me into level four I would have gotten there I think my initial projections were like in my fifties.

4:05And then because of like, it's basically like having a second job that I do on the weekends, which is writing. So I've been doing for nine years. And so that's kind of how I got into level four, but I can talk more about that and give data on each one of those levels, a percentage of households in each level, et cetera. So writing a book about the levels of wealth allows you to climb up the levels of wealth. There's some, uh, meta right there, along with each level though, you explain some of the freedoms associated with each one. So level two brings grocery freedom, level three brings restaurant freedom, all the way up to level six, which brings impact freedom.

4:38Briefly take us through what kind of those freedoms mean. So I think when a lot of people think about spending, like they usually just spend based on their income. And I think spending based on your wealth is a far better way of approaching this problem. And when I say spending, I don't mean like all of your spending, just like on the margin. Like you go to the grocery store and you're like, oh, I kind of want that nicer thing. It's like, oh, at$1 more, should I get it, right? And so if you're in level two, I think you have the freedom to do that. You can spend that extra$1,$2, et cetera. And if you're in level three, let's say you're at a restaurant, like, oh, do I want to buy, you know, the salmon for$35 or the burger for$25?

5:13That marginal difference is around$10, right? And so as you start to think about this, you're like, oh, I'm in level three. I can probably start to buy what I want at a restaurant. And then it goes up from there. Level four is travel, freedom, et cetera. But the thinking behind this is that if you take your wealth and you multiply by 0.01%, that's why I call the 0.01 % rule, that number is going to end up being what this marginal amount is, right? So in level two,$10 ,000 times 0.01 % is$1. $100 ,000 times 0.01 % is$10. Another way to do the math is just divide your net worth by$10 ,000. That also gets you the same number.

5:50And so basically, when you take your net worth, you divide by that, that just gives you a number. And that marginal number is like how much your wealth generates every single day, like on average. And this is a very conservative return. 0.01 % a day is roughly 3.7 % a year, which I think is a relatively conservative return. No one's going to be like, oh, that's too much or anything. So that's the idea. If your wealth is generating this, like when you're making decisions about what to spend, like based on where your wealth level is, I think that's kind of how you unlock this quote, spending freedom to spend more in certain categories.

6:21If you're supposed to spend based on your wealth and not your income, that might be a problem for some people because I know my income, but I don't necessarily know the wealth, my wealth on top on the top of my head. I don't know which level exactly I'm in. So would you advise people kind of know their net worth off the top of their head? You don't need to know exactly, but you should know like approximately what wealth level you're in. Like you don't need to know, oh, I need to know down to the penny. But like, you would probably know, oh, I'm not in level four, I'm in level three, or etc. And so figuring that out, I think is incredibly important just to start.

6:54And of course, like you have to like your income is your main pillar, which you have to spend through. This is more of like the splurge spending. So I want to give people freedom to spend more money, but without going overboard. And I think these levels, like is a way to do that, because it gives you the freedom to spend more over time without worrying about like, oh, am I spending too much? Am I going to actually hold myself back? And the answer is no, because of this equation and everything. You hear a lot of personal finance experts stress the importance of ownerships, aka you'll never be a millionaire with a salary.

7:27In your view, how much is ownership a key driver of wealth? Ownership is a massive driver of wealth. And you can be a millionaire with a salary. It's definitely possible. Your salary is probably going to be pretty high. And you have to just, I mean, you could do it just by saving in cash, but it's much easier if you're investing in income-producing assets, right? And those are the types of assets. When I looked at the wealth ladder, the biggest difference between those in levels 1 to level 3 and those in levels 4 to level 6, which is like the lower part of the wealth ladder and the higher part, is income-producing assets, the percentage they own.

7:59In levels 1 to 3, less than 25 % of their wealth on average is in income-producing assets. So things like stocks, bonds, real estate, private businesses. But on the upper half of the wealth ladder, levels four to six, over half of their assets are in income-producing assets and actually just keeps going up. And each wealth level, it just moves up over time. And I have an image in chapter three of the book which shows that. So in terms of the ownership society thing, that is the biggest differentiator when you look at a household's balance sheet is how much money do you have in income-producing assets versus not.

8:31So we just did a story. Wall Street Journal also did a story on the stealthy wealthy, which was the level of one percenters who derive their income from, you know, very boring, often like regional businesses, like carpet removal or something like that. So it was interesting to see how, you know, ownership. People think it means like starting a million dollar, billion dollar tech company or something like that. But oftentimes it's something as mundane as removing carpet at elementary schools or something like that. But you also do make it pretty clear within the book that the only real shot of moving up the ladder is owning something.

9:04So for someone in maybe a cushy job where they're making$500 ,000 a year, a pretty solid income, what's your pitch for why they should still consider building something of their own? They don't have to. I mean, if you have a cushy job, if you're in$500 ,000 a year, you're very likely to be in level four if you're not already there. And so like I think that's the big one of the big points of the book is like you don't have to get to level five. I don't think this is necessary. Level five and six. That's the top two percent of U.S. households in the United States. I don't recommend it. I think you have to work really hard to get there.

9:38I think you can have an amazing life in level four, which is like the upper middle class. And so my pitch to them is like, do you why do you want to do this? It's not even a pitch. It's a question. And if you have a good answer to that question, then maybe you can push yourself to start a business or do something to, quote, get to level five. 10 million plus. In the book, you looked at the science of can money buy happiness? What did you learn? So you guys have probably heard that old study that, you know, after an income of$75 ,000 a year, you know, money can't buy any more happiness. Well, there's a guy named Matthew Killingsworth who came back and had a different study where he's like, no, my data shows that money keeps buying happiness all the way up as your income even goes up.

10:18And so he sat down with with Kahneman and Dean and he looked at the paper and everything. And the long story short was the original paper, that$75 ,000 figure, was showing that more than$75 ,000 does not prevent unhappiness. I know that's a weird because it's double negative, but basically, no matter how much income you make, you can't like that's not an antidote for not being happy, right? Like anyone can be unhappy, regardless of their income. That's the takeaway there. So once they adjusted for that, they actually said, okay, if you're already happy, more money tends to make you happier. But if you're not happy, more money is not going to do a thing, right?

10:53So that's kind of the thing. So my summary of it is like, if you're happy, more money will likely make you happier. But it's like, it takes like a big jump, like a 10x, like a level jump, basically. If you're poor, more money is going to make you happier. But if you're not poor, and you're not happy, more money is not going to do a thing. That's like the main takeaway of the research. I guess kind of on that topic, you kind of warn that at the higher levels of the ladder, costs often start to rise exponentially as well for relatively small gains in convenience or experience. For instance, there was one anecdote that some wealthy property owners in Seattle were spending$3 ,000 a month on landscaping alone.

11:33So what is one maybe cost upgrade that you see some richer people start to make that they often come to maybe regret? I think it's just like the amount of labor you hire. And I'm not, I don't know, I don't have data on like, oh, hey, how have you regretted hiring all these people or doing all this stuff? But at some point, the costs get pretty large, right? And I think like, even if you look at something like flying a private jet, like the typical net worth of someone who flies a private jet is around$20 million, or they have a net income annually of about$2 million. That's like what the data shows.

12:06That's like kind of the middle of the bell curve. But these types of things or like, it's just shocking that people spend this much money for like, I mean, yes, it's a better experience, but is it that much better than getting a business class seat where you have to spend like, you know, I don't know either, but like, I just, I can't believe it's that much better. So yeah. I, what do they regret? I don't know the answer to that, but I would guess just overpaying, like having so many different people you're hiring and it just, it's a large burn basically. And is that, we've talked a lot about progressing up the ladder, but is that how you slide down the ladder the quickest?

12:38I think it depends where you are. Different things will cause you to slide down the ladder depending on where you are. If you're in level five and six, for the most part, it's over concentration, which is like, oh, all my net worth is in this one business. I'm worth$100 million, but all I have is this business and I have 200 grand in a checking account. You lose the business or it has a massive decline or something bad happens, you're back to level three, which is still good. You're still fine, but relative to that change is pretty large. So it really depends where you are that leads to these exits, and I can talk about it in each level.

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14:13Well, I want you to put your career coach hat on right now because you do emphasize the importance of choosing a career for someone's future wealth. And the framework you lay out for deciding on one is, I think it's inspired by Scott Galloway. It's the intersection of A, what you're good at, be what you're interested in and see what people will pay for. But given the rise of AI and new technologies, it's not so easy to know what skills employers will pay for three years down the road. How would you use your framework to navigate the period of uncertainty that a lot of people are feeling right now?

14:43I think the thing you have to do right now is you have to say, okay, what's probably always going to be valuable? And I know everyone's like, well, you don't go into software engineering because you can't get an intro job. I agree with that. But at the same time, like, I am a little bit of a programmer. I'm not a full-on software engineer, but I've used these things. And they are pretty good, but you still need someone with technical skill. And there's so many people that have no technical skill trying to code stuff up, and it just doesn't work. And at the end of the day, I think those are still valuable skills.

15:12So maybe not software engineering per se, but getting technical skills is one idea. Another is sales. If you can sell something, at the end of the day, I don't think robots are going to be selling us stuff. It's going to be people. And so at least in face-to-face interaction. So if you can sell stuff, that's another huge skill, right? And then I think credentials, you know, lawyers and doctors, are they going to go the way of, you know, I think they have large lobbies. So it's going to prevent them from seeing their pay drop a lot as it is. I mean, even in the US, doctors get paid, I don't know, like five to six X more than in the UK for doing basically the same thing.

15:45So the fact that that can exist, I think there is some sort of mechanism there that prevents that from moving forward. So in terms of just summarizing that, like sales, technical skills, or finding some sort of credential thing that probably has some sort of protectionism around it. Or football player. Yeah. Oh yeah. If you're a celebrity, yeah. By the way, I have a great singing voice. Yeah. Go do that. Yeah. I mean, I thought you were going to say podcast. I would not recommend that. Yeah. I heard the Google podcast, AI podcast, like they're pretty, pretty good. Although of that framework though, and you did touch on this a little bit in your book, what you're interested in, what people will pay for and what you're good at, what would you say you should put the most value on of that kind of three-pronged framework?

16:26Depends where you are in your life, what wealth level. And the reason why is, you know, if you're in level one, you're starting out, you have to get paid. Like that's just essential, right? And then the thing I would focus on after that is like, what are your strengths? Because if you're good at something, I think you, and this is what Scott Galloway talks about, which I talked about in the book a little bit, is like, if you do something that you're good at for a long time, like you will get praise for that and you will start to like the praise. And so then you may even start to like the activity, right?

16:51Like I used to hate writing. And the reason why I started to like it is because I started writing about things that I cared about. I didn't have to write, you know, a 500 word essay on the scarlet letter, right? Like writing about like, you know, money and wealth and other things that's more interesting to me. So one other line that I highlighted in the book is that the most expensive thing some people own is their ego. What does that mean? The context of maybe managing your wealth? I think there's like the difference between people in level three, which is a hundred K to$1 million and the difference between people in level four, which is 1 million to$10 million.

17:23I think a lot of it is ego. And what I mean by that is like people in level four and level three live very similar lives, right? Like they're on the same airplane, like they're probably in roughly similar neighborhoods or they're close by, they shop at probably similar stores, but the difference in terms of, you know, like what's the actual difference? It's a lot of, it's just paying for status and all these other things. Right. So I think when you when you realize that, I think a lot of people in level three can start buying like people in level four as if like, oh, it's a much better life. And it's their ego that's costing them, that's preventing them from saving more.

17:56So that's kind of where that comes from. It's like you don't need to go and buy all these fancy things because a lot of them don't actually fundamentally change your life that much. And on the same topic of ego, you know, when you're climbing a ladder, like in real life, you're always looking up to the next level or wrong. Like that is the concept of a ladder you're looking up. how do you know when it is okay to say, I think I'm satisfied with how high I've climbed. It's getting a little, you know, there's, we're at high altitude here, or is that just not possible? I mean, it's difficult because what's going to happen over time is as you kind of climb the well flatter, if you do start moving into nicer neighborhoods or hanging out in different areas, et cetera, take up more expensive hobbies, you are going to meet people who are even richer than you are.

18:39And you're going to just end up seeing that, that next level, as you say. Right. And so the way to counteract that is to like kind of remember where you come from and like what do you actually value so as i talk about in the book like what do i talk about in level five and six because like that's not gonna be relatable to most people it's not even relatable to me it's realizing that your wealth amplifies different things over time and once you get into level five and six all of the non-financial parts of your life are amplified and why is that because you can't buy these things you can't write your kids a check and say love me you can't buy a new cardiovascular system because you've been neglecting your health, right?

19:13So once you realize that, so people get to this point where they're like, yeah, I probably have enough I can stop. So I think it's starting to focus on the non-financial parts of your life that improves that. So if I'm like a board at a public company, should I try to be incentivizing CEOs with something else besides stock compensation? Or, you know, are they still, I mean, Elon Musk, you know, is going to war over his particular compensation package and he's already worth over$300 billion. Well, yeah, once again, And the most expensive thing some people own is their ego. So I think I would just rephrase that.

19:45OK, I got this a little bit of a curveball, but let's say the government called you in and said, Nick, you're an expert at getting one person from level one wealth to level two wealth. But we were the government. We want to get millions of people from level one wealth to level two wealth. What ideas would you give them and how different would those be from the advice you would give to an individual? Oh, that's a great question. I mean, my initial reaction to this is like because going from level one to level two, that first few thousand dollars is huge because it it just you have so much more security.

20:19Like think about what happened during COVID when people got these stimulus checks. I remember seeing on Twitter people saying like, oh, my gosh, I've never like felt this like more relaxed about my money because I have a few thousand dollars. I'm not going paycheck to paycheck. Now, as much as I want to be like, OK, let's just have a big redistribution program. The problem is a lot of that money is going to get spent. That's going to create inflation. So it's a lot more complicated when we start doing macro stuff. So in terms of what I would do to try and get more people out of level one, I actually think this idea of starting like, you know, a baby fund,$1 ,000, put that in, the government pays for it.

20:52And then by the time they're 18, they're maybe out of level one, let's hope, right? Something like that is actually a decent idea. Of course, like what are the long-term effects of that is hard to predict. So as much as I want to be like, oh, I want to control the government and do all that, I really don't know. And my guess is a baby bond is the closest we're going to get. That's so interesting because on today's show, we're recording this a little bit in the past, but we talked about this idea of Trump accounts, which are doing exactly what you said, is kind of giving a nest egg to every baby born in America of$1 ,000.

21:23Do you think investing it in the market, one of the reasons why they're doing it is that they want people to dip their toe in and have skin in the game when it comes to investing in financial markets. So do you think that$1 ,000 account tied to investing in the stock market is the best way to do that? I mean, it's one way to do it. I think that, once again, the biggest issue with a lot of people lower on the wealth ladders, they have very little ownership of American society. And that's not going to change just from this thing, but it helps a little bit and at least opens the door to continuing that idea.

21:55And once again, I think the biggest issue is income. Once you have income, it's much easier to buy all these things and to own income-producing assets. So I don't want to skirt away the core issue, which is like most people lower on the wealth ladder just simply don't have enough income. It's not their spending. It's their income. I talk about that. But thinking about opening up a higher ownership society would make a big difference here. Okay. We've got a few minutes left. We're going to ask some fill-in-the-blank questions. Fill-in-the-blank. The most overrated thing in personal finance is? Cutting your spending to build wealth.

22:27Oh, so build income faster than cutting wealth. I love that. But also you just recently had a tweet too that caused a little bit of a stir where you said one of the most overrated things in personal finance is, you know, passing on generational wealth to your children. Talk to me a little bit about that and why that caused such a stir. I think it causes a stir because I have nothing against it. But at the same time, like a lot of the people who build generational wealth are like, oh, I came from nothing. It's like, OK, so then you want to then give your child every advantage so that they don't build the same character building qualities that you had.