The Wealth Ladder: Proven Financial Strategies with Nick Maggiulli

20:52So that truly is like the middle class. That's how much wealth they have. Once you know that, you can kind of jump around. So your question in terms of mindset, how does the mindset need to change? I think it depends where your starting level is. If we want to talk about people in level one, I think the big mindset change there is like, what do I need to do to eventually raise my income to get out of the situation I'm in? Now, of course, that is not something that's going to happen overnight. It's like if you're already working, let's say, two jobs trying to get ahead, like you're maybe saving some and that's helping you kind of move that forward, but you're going to have to find a way.

21:25Does that mean education? Does that mean you learn a new skill? It might take years before that starts to pay off, but you need to find a way to increase your income so that you can start saving more and then get out of that level, right? That's the key. And even in level one, like there's a lot of, if you're in a really rough circumstance, You might have to go above and beyond, do things that it's going to sound very like hustle, you know, hustle culture type response. But like when you're in, you know, the catchphrase in for level one in the book is atypical results require atypical actions.

21:57Because if you are in a very bad situation, you have to go above and beyond to get out of it. There's no way around it. I wish I could sugarcoat it and say, oh, no, all you got to do is just believe in yourself and stuff like that. Like that's not enough. I think like just believing in yourself, like that's great, but you need to go above and beyond to kind of get there. And unfortunately that that's not true in every level. I don't think that the difference getting from level four to level five is, is that type of, oh, you need to go above and beyond. I think in every level, the strategy changes depending on where you're trying to go.

22:26So, and I can get into that a little bit more.

22:28Nick Maggiulli:Yeah, I love it. This is great stuff so far. Yeah. So for example, let's talk about level four a little bit, because I think this is, this is the best example of why strategy matters. So the strategy to get into level four, which is about$1 million to$10 million in wealth in general, is have a pretty good income, save for a lot of years, invest that money, and if you do it for a long enough time, you'll get into level four. I think that's generally the case. The income has to be pretty high though. I think, so by the way, the average income, or I'm sorry, the median income of households in level four is about$200 ,000 a year.

23:04So it's a high income, right? There's a household. So this could be you and your partner, you by yourself, whatever. So that's a household income of about$200 ,000. That's the median. So if you took everyone with$1 to$10 million in wealth, looked at all their incomes, sorted them, took the middle person basically, or middle households, it would be around$200 ,000. And that's as of 2022, 2023, roughly. So just giving you an idea. So maybe it's changed slightly, but probably not too much. So given that, that's the strategy you get in level four. You save that money, you invest it in the markets, you get there.

23:34By the way, the median age of the household in level four is 62. So this is not a 30-year-old that's in there. Less than 1 % of households in level four are 30 or below. Most are older, right? So that's another thing. It takes time, right? There's no debate. The data shows this. But you're like, oh, I want to get to level five, 10 million to 100 million. The strategy to get there is very different. The working a nine to five W-2 income plus investing in the market is just not going to get you there. The strategy is very different. And the strategy to get to level five is usually some form of entrepreneurship.

24:08Besides celebrities and athletes, entertainers, things like that, basically all the people in level five are some sort of entrepreneur. I'm obviously excluding lotto winners. I'm excluding inheritance. I'm excluding married into it. Ignoring all those people, it's basically all entrepreneurs. It's business owners of some sort, whether they started their own business or they joined a startup very early and got a decent amount of equity. And then that business sold for a lot of money. So one of those things happened and got them into level five or level six. And so as you can see, if we're just talking about strategy, the strategy to get into level four is very different than the strategy to get out of level four.

24:47And that's like the most, I think level four is the, I call it the no man's land of wealth, because once you're there, getting out is like, it's not impossible. It's very, very difficult to get out of level four, which is not saying you need to get out of level four. Level four is great. A lot of people get in there and then they coast. That's where coast fire got popular. It's like, hey, I've done enough. Now I can take my foot off the gas, maybe earn less money and go do something I love and just be okay to not get to 10 million, not to keep going after more money. I think it's a very rational response.

25:17I think it's the right response actually. But if you really are just gung-ho on building as much wealth as possible, that W2 plus just investing in the in the stock market is probably not going to get you there you know yeah that's

25:31Nick Maggiulli:that's interesting it kind of you wonder how many people burn their chance to succeed in level four because they take too much risk in the stock market trying to get to level five not realizing that it's kind of a different game you should be playing yeah it's just really tough like i mean of course like warren buffett could have done it because he was compounding at 20 a year i'm assuming you know let's just do the math on this real quick like let's say you just hit a million bucks, which is already a feat in itself. It's not easy to do. Very few people ever do it, right? So once again, level four is going to be, let's say about 18 % of the US, right?

26:04The top 2 % is level five and six, roughly. Remember, these are approximated. The actual numbers are in the book, but 18%. So you're already at like, you know, the top 20 % is level four, five, six. It's already hard to get there. Let's say you got a million bucks. You're saving$100 ,000 a year. This is after tax money. It's a lot of money to save, right? And you're growing your portfolio 5 % a a year. Let's assume that's inflation adjusted, right? So it's a decent return, right? Not super high, but decent, right? It would still take you 23 years before you hit 10 million if you're doing that.

26:34Start with a million, add 100K a year, grow it at 5 % a year, 23 years before you get to 10 million. Let's say you're like, oh, Nick, I'm going to save more than that. I'm going to save $300 ,000. Remember, this is after-tax money. That's a lot of money you're saving. It still takes you 17 years to get to 10 million. With the same start at a million, add 300K a year, do the 5 % growth. It still takes you 17 years. So the math, once you get into level four, it's just very difficult because like even like saving 300K a year, you got to be making at least double that, if not more, you know, like it just, it's crazy when you look at the numbers, like there's just no way to get there, right?

27:09You have to have this massive exit. So once you start doing the math on this stuff, you start to realize like, oh, wow. Yeah. You, you really need to take a different strategy because even saving good, really good money and compounding your money for many decades still may not be enough or it just

27:22Nick Maggiulli:takes a long time to get there yeah that's crazy so what about like level three to level four what are the unique challenges for level three so level three that's going to be your you know hundred thousand to a million that's your typical middle class i think that these levels are much more similar than they seem in terms of lifestyle like there is a difference like people level four generally live a slightly fancier lifestyle, but it's not as different as people think. I think a lot of it is status and buying expensive stuff to make yourself seem like you're much richer than necessary. You're on the same plane.

28:00I'm telling you, people in level four are generally not flying private. Maybe once you get to the very high end, eight to 10 million, you can do it once a year maybe, but no one in level four is regularly flying private. It's just you can't afford it. It's too expensive. So you start doing the math on this stuff and it's like, you're in the same airplane. You're just in a different seat, right? You're probably maybe in different neighborhoods. You have a slightly nicer house, but it's not like you. And both of them probably own a home if you're in level three or level four, like this very common home ownership in both levels.

28:28But in terms of like, what's the mistakes that prevent people from level three getting into level four, my guess is it's level three households. And I have some data that shows this as well. It's level three households that are spending more to look more like level four households. And as a result of that, because they're spending so much higher, they aren't saving as much to actually go into level four. So not everyone at level four is trying to show status and be flashy and all that. But people, because they're so similar, that's how they try to differentiate themselves, right? And so the big thing that I noticed in the data is the difference between the households that make it to level four from level three versus those that just stay in level three, there's two differences.

29:08One, the starting income tends to be a little higher for those that go into level four. So that's income's a piece of it, but also spending. These households, the households in level three that stay in level three end up spending a lot more than those that are in level three that go to level four. So even though their incomes might be quite different, their spending is very similar. And those types of things end up holding them back and preventing them from getting to the next wealth level. Whether they want to get to level four or not is completely up to them. I don't really care. It's whatever you want.

29:39But I think overspending on big ticket items, that's where it does happen. So I'm not going to say cutting your spending is not a way to get wealthy. I don't generally recommend that. It's mostly through your income. But there are times when it can put a little bit of a break on your growth rate in terms of your wealth building.

29:57Nick Maggiulli:Was there anything in the data? I'd be shocked actually if the data was this granular, but was it like boats taken out? Oh, no, they don't show that. All you can really see is just general spending. And unfortunately, that's not the best metric, right? I wish I could look into every single thing. And like, you know, there's always the joke about the boat, you know, the best day in the there's the best day in the boat is the day they buy the boat and the day they sell the boat, right? So it's like, it's, you know, that's, that's the joke I've heard before. But I don't, I have no clue what causes it.

30:28I think we don't have enough granular data. and I'm just saying in general, it's probably because once again, level three and level four aren't that different. Like that's why it's, that's why I classify level three as the middle class and level four is the upper middle class. I know you're gonna say, well, Nick, you're saying someone with$5 million is upper middle class. Well, in a lot of the U S yes, in parts of the U S no, it depends where you are. Like if you're in a more rural or low cost area,$5 million is a lot and you're definitely upper class. But for most of like the big cities where a lot of people are, you can really get nice stuff, but your lifestyle is going to be very similar.

31:01You're still getting on normal planes. You're not flying private. You don't have a yacht. You don't, you know, maybe you can pay for, you know, maids or cooking services possibly. But even then it's like, I don't think that's really that much of a differentiator in terms of lifestyle. A little bit, but not, not too, too much. So.

31:17Nick Maggiulli:Gotcha. That's interesting. So what about level two? talk to us about level two what's what were the big takeaways there how do their challenges or opportunities change from all the other levels i think level two so that's ten thousand to a hundred thousand dollars i think the big differentiator there is education of some sort now like what gets people into those next levels you can imagine you know most most people start in level one some technically like i would consider myself starting in level two though i didn't have, I had less than$10 ,000. I had like$1 ,000 to my name after I signed my signing bonus for my first job and left college and everything.

31:58So I technically was in level one, but I had an education. I had a family I could fall back on. So through those associations, I would say I started in level two. And so you can imagine that the leg up I had over other people just from those things, right? Like I was, I already had a higher trajectory because of the education, because of all these other things that ended up helping me grow my income, all these other things. So So I think the thing is like, how do you, if you're in level two, the big differentiator to get out of there, you're either a temporary visitor because you have a good income and you'll just give you time and you'll get out of there.

32:29That's one piece of it. I think another piece of it is like, okay, well, what's the trajectory of your career looking like and how can you raise your income such, or your long-term income such that that trajectory changes and it's easier to get out of level two. So once again, all this stuff comes back to income. And I talk about income so much because, you know, we hear all the whole, you know, cut you're spending. Don't buy lattes, avocado toast, all these silly things. And there's no data that I think supports this at all. I don't think spending is the culprit. Yes, you have anecdotes about, well, I know this guy that spends too much, or I know that person.

33:01That's fine. I'm not saying there aren't those people, but in the aggregate data, wealth and income are so correlated, it's crazy. I just love reading. I have a table in the second chapter in the Wealth Ladder, which basically talks about the median US household income in each level. And I'll just read that for you now. So I'm just going to read the levels. I'm not going to say the wealth. So level one, the median household income is$32 ,000. Level two, it's$48 ,000. Level three, it's$83 ,000. Level four, it's about$200 ,000. Level five, it's$724 ,000. And level six, it's$4.3 million. And so by the way, you know, a lot of this, this is like a flywheel.

33:47Once you have wealth that can build income and then, you know, it's vice versa. Like if you have$100 million and you're earning 4 % a year, that's$4 million a year in income, right? And so they're earning 4.3 million. That's the median household income. So you can see that like it does start to just creep up that way pretty easily. But the point of that is like these two things are so connected, income and wealth, that it's like the strongest relationship I found in all of personal finance and investing. I cannot find a better data set that better predicts someone's income. And if you look at the data, spending does go up as wealth goes up and as income goes up.

34:22They both increase, but spending increases at a slower rate than income. And that gap, that delta, that growing delta, that's people saving money and investing it and building wealth. That's it. I mean, we can sit here and talk about people need to cut their spending all you want, but at the end of the day, the delta comes from income. And that's why I tell people to focus on income. And that doesn't mean you're going to, oh, yeah, you can't just wave a magic wand, your income goes up. You have to really spend a lot of time and work at something and figure out some sort of way of doing that, whether that's a new job, whether that's a side hustle.

34:53There's a lot of different ways. And I talk about some of that in the book. But I think that's the thing people need to focus on.

35:00Nick Maggiulli:It's actually really profound that you found such a strong link. It reminds me of Michael Mobison's work he talks about for free cash flow growth, earnings growth for a business, the biggest driver of that is their revenue growth. It's that top line. And so you're saying it's a similar thing for people. It's that very top, how much money is coming in that helps you more so than even if you can cut expenses to the bone. The majority of people are finding that it's that income. So yeah, I find that's really fascinating. Yeah, thanks for that. So can we talk about some of the kind of takeaways? I know obviously people should go check out the book, but it's called The Wealth Ladder, Proven Strategies for Every Step of Your Financial Life.

35:48Nick Maggiulli:Can you tease kind of like a side hustle, some of that piece that you talked about that people can do to tangibly increase the income? Yeah, there's side hustles and then there's something I like to call like the leverage framework, which is not mine. It came from Naval Ravikant. But the idea behind leverage is that there are these four things you can do to create leverage, which makes it easier to raise your income. And so one of them is using labor. I will get into all these. One is using capital or your money or someone else's money. One is using content and then one is using code. And so like labor is the simplest one.

36:27That's like, oh, I have a business. I employ other people to work for me on that business, and they generate more revenue than what I pay them. And so that's how I earn money as a business owner, right? Everyone kind of understands that one. It's very straightforward. Capital is like, hey, I borrow money from someone or I take money from investors. I invest in a way that creates a greater return than what I'm paying for the money, whether that's the fees I'm charging or the interest I'm paying to a bank, etc. And then I use that to create my leverage, which helps increase my income, etc. Content, very straightforward.

37:03That's kind of what I do. I create content. I try and write helpful pieces on personal finance investing. I put it out there. And it can keep earning me money, whether it's ads on a blog post, whether it's a book that's sold, etc. And that's the type of thing where my time is being divorced. In all these cases, your time is being divorced from the act of producing income. Because for most people around the world, and then myself included, I still have a full-time job, by the way. So I'm doing this. I'm in the trenches working at a wealth management firm doing all that. But I do this stuff on the side.

37:31This is my side hustle, right? But the idea is that, you know, you work 9 to 5 and you get paid for those hours, right, et cetera. These are systems you can create where you're getting paid outside of those hours, right? They say getting paid while you sleep or whatever. I mean, that's an analogy that's used. But it doesn't have to be while you're sleeping. It can be at any point, right? And so I think that's the idea is to create one of these leverage systems and using code is the same way. You create a computer program or an app or something that people are using over time that you can keep making money from that over time.

38:01And with AI solutions, it's much easier to get into like you can get into coding. And if you have a good idea now with these solutions, you can kind of create maybe an initial version of an app or something. And so it's much easier to get there. So I think you're going to start to see much more idea people going out and creating apps without having to hire a bunch of engineers or take as much risk. Maybe they create the app initially, it works, and then they hire someone. Like there's a lot more that we're gonna see because of AI that's gonna really help, I think, the code environment. So those are just four examples.

38:31In terms of side hustles, I've heard people do all sorts of side hustles. Like my stepbrother makes diesel engine, like heaters, like heating. Like I don't know if they're lamps. I don't know what they do. They heat things, but they use diesel. And he 3D prints them. He's a 3D printer. He prints them and sells them on the internet. chips them out. It makes good side money doing it, right? I've heard of people like in the book, I talk about these two, there's two side houses I talk about. This one is in Maryland. I think there's a bridge, Chesapeake Bay Bridge. It's one of the scariest bridges in the world.

38:59People are so scared of it. Like people actually, you know, people have crashed and stuff happened. So people are so scared of it. A guy's decided to open a van service where he drives you over the bridge. He makes his revenues six figures a year, driving people over a bridge. That's how he's had thousands of customers, right? It's like, I'm not saying that you're going to have a crazy bridge. You're going to have this, but like, there are so many ways to make money and it's not easy, but you have to start, you have to start going and doing something and you're going to figure out what works, what doesn't.

39:25Okay. That was a waste of time. That wasn't read Reddit. Reddit talks about different side hustles. Like there's whole communities that talk about this stuff and you got to start somewhere and then you build it. Like in my case, I didn't, I did everything wrong. Like I spent three years writing. I didn't make a single dollar. And then finally in 2020, I started in 2017 and 2020, I built up enough of an audience. I started running web ad and started making some money on it. So did that, did ad partnerships. I now have a few books, right? So it's taken me a long time, been doing this for nine years.

39:53And the first three years I made$0. I just did it because I love it. And I still love it. And I'm going to keep doing it regardless of the money because I enjoy it, you know? So I think that's the thing is like, follow your interest a little bit and see where that leads you and then kind of keep working from there.

40:07Nick Maggiulli:I love that. That's great advice. And funny to hear those examples of problems being solved and people will pay money for problems. So that's really, really great. Any last words? Maybe some of these super inspired by what you do. Maybe they're big fans of Nick Majuli. Feel like they think similarly to you and maybe they have been kind of grinding on a side hustle, but just haven't seen any results yet. Can you speak to that person and give them a word of encouragement or advice as it relates to continuing to grind on a side hustle? Yeah, I will say two things. I will say either A, you haven't been doing it long enough, but if you haven't been doing it that long, you should be getting some sort of positive reinforcement.

40:53It doesn't mean you've made it yet, but you should be like, okay, I've had some positive break. If you're seeing nothing positive from this, you probably need to change. So that's what I would say. If you've seen some positive reinforcement, keep going. If you haven't seen much of anything, then you probably need to reassess whether this makes sense and you maybe need to change it up, try something different. That's what I would say. Because I had some pause, even though I wasn't making money early, I had pause and reinforcement and more people following along, more people commenting, things like that.

41:17So that said, hey, you have something here, like keep going at it and it can become something. So that's, I never thought I'd write a book, let alone two books. And so it's, you can surprise yourself if you really work at something, you know, for a long time. So that's what I would say.

41:31Nick Maggiulli:That's awesome. Perfect. Well, once again, check out the books. Just Keep Buying is the first one. And then this one, The Wealth Lather, Proven Strategies for Every Step of Your Financial Life. Nick, thanks so much for being generous with your time and your advice. Where else can people check you out, see what the work that you're doing? You have a great newsletter as well, by the way. I appreciate that. Yeah, you can find my websites of dollarsanddata.com or you feel free to DM me on Twitter. I'm under dollarsanddata. Instagram, it's nickmajuli, just my full name. And then on LinkedIn, it's nickmajuli.

42:04So you can find me any one of those places. Send me a DM. I respond to every DM and I will respond to all of them. Just give me time. I promise I'll get there. Yeah. So thank you. Thank you for your time. Appreciate it.

42:15Nick Maggiulli:That is going to wrap us up. Remember, invest with a margin of safety. Emphasis on the safety. We will talk to you next time. Peace. We hope you enjoyed this content. Seven steps to understanding the stock market shows you precisely how to break down the numbers in an engaging and readable way. with real-life examples. Get access today at stockmarketpdf.com. Until next time, have a prosperous day. The information contained is for general information and educational purposes only. It is not intended for a substitute for legal, commercial, and or financial advice from a licensed professional. Review our full disclaimer at einvestingforbeginners.com.

43:04Thank you.