The Wealth Ladder: How Income, Spending, and Happiness Are Connected With Nick Maggiulli (EP.214)

0:28We all need to make smart decisions with our money. dollars and data and author of the book, Just Keep Buying. He joins me today to discuss his new book, The Wealth Ladder, which is just a really innovative framework for personal finance decisions. We explore some of the unique concepts of the financial levels that he talks about in the book. We also go through two of the very actionable rules for wealth management and some data-driven insights on earning, spending, and happiness. Now, before we get to the conversation, So much of those two actionable rules that I mentioned have to do with your net worth.

1:02So if you open up the episode description in your podcast app, you can download my net worth worksheet and be able to apply so much of this conversation directly to your situation. So be sure to check that out while you're listening to our conversation, which I won't hold back from you any longer. Here is my conversation with Nick Majuli.

1:26Welcome to The Long-Term Investor. Today with me, I'm thrilled to have Nick Majuli, author of the wonderful blog of Dollars and Data, and here today to talk about his new book, The Wealth Ladder. Incredible stuff, Nick. Thanks so much for joining me here today. Thanks for having me on again, Peter. Appreciate it. Let's start high level. I'm going to dive into the details, but just tell us high level how you came up with the concept because you write a lot about data. You had another book earlier called Just Keep Buying. And I got to say, I was impressed that you had a second coming out. Really fantastic stuff.

1:59Just give us some of the inspiration. So there was this Jay-Z lyric. Actually, no, it starts before that. So I think his name is Stuart Butterfield. The guy who founded Slack had this idea called like the three levels of wealth. And it was like, you can buy what you want a grocery store. You can buy what you want a restaurant. And I can't remember the third level. Like it's I can't remember it honestly anymore. but he had that idea at the same time jay-z had this lyric or i'm not going to say the full lyric because he curses but he just says like what's 50 grand to someone like me can you please remind me at the time his net worth was 500 million so i was like oh that's like 0.01 percent of his net worth that's like a trivial amount of money there's these levels i'm like what if we could like come up with like a levels of wealth that actually kind of go across different like logarithms like 10x jumps and i think that was the idea behind the wealth ladder and having these six distinct levels.

2:46And I then realized, you know what, that this could apply outside of just spending, it can apply to income, it can apply to investments, et cetera. And the whole idea behind it is like, what financial strategy you follow will vary over time. And as you build wealth, you may want to change your strategy. You may have to use a different strategy depending on where you want to go. And that's kind of the big insight. Like, as I say in the introduction, like, just like a fitness coach would give different advice to a more really obese person versus like a well-trained athlete, I think we need to apply that same thinking to the financial world.

3:17And that's kind of the point of the wealth ladder, which is like, hey, once I know your net worth or kind of like your net worth range, which is which wealth level you're in, then I can kind of give you more advice on what you could be considering to do next. And as somebody who creates content themselves, that seems like a really daunting task. And you're right. So much of the content out there is directed at the masses, but it really only applies to a specific group of people. And here you've kind of created a new lens through which people can think about personal finance decisions. I want to start with something that I just have a feeling is going to be in personal finance content for the next decade or two.

3:54And that's the 0.1 % rule. Tell us what that is, because I really think anyone who writes a personal finance book is going to be referencing Nick Majuli's rule from here out. So the 0.01 % rule, or you could think of it as a one 10 ,000th rule is just you take your net worth, you multiply by 0.01%, which is actually 0.0001, right? It's one basis point, or you could divide by 10 ,000 as well, the same thing. So take your net worth, divide by 10 ,000. That gives you an amount of money. And once again, that amount of money is what I consider a trivial amount to you. So whatever your net worth is, it applies to anybody.

4:31So for Jay-Z, if he used the 0.01 % rule at the time when he wrote that lyric, it would have been$50 ,000, right? For someone with a million dollars, the 0.01 % rule is$100, right? So it's a very small, you know, that's one 10 ,000th of your net worth. And the idea behind this is, this is the amount of money you can spend without thinking about it. And the logic behind it is that your wealth is generating 0.01 % per day. So if you do that over the course of a year, 0.01%, you do that 365 days in a row, that's 3.7 % a year, relatively conservative return. I don't think anyone's going to be like, that's too crazy, Nick.

5:06So I say conservatively, your wealth should be able to return about 3.7 % on average every year. If that's true, it's throwing off this amount of money. You could consume that and still have the same wealth over time. All else. Of course, your income matters and how you spend money and everything, but I'm just trying to help people with that marginal decision. Like, oh, do I buy the nicer eggs? Do I buy the nicer entree to restaurant? Can I upgrade my seat on an airplane? These are all the questions. And that amount of that decision should be dependent on your net worth. And that's where it comes from.

5:37And so I have these six wealth levels and we can get into the levels. Yeah, I should have let you lead with that. Why don't you walk us through the six wealth levels? So once again, this is net worth. That's all your assets minus all your liabilities. So everything you own, such as your car, your home, your stocks, include home equity, include all that stuff on the asset side, subtract out all your liability. So your mortgage, student loans, credit card debt, et cetera. You're going to have a number. Hopefully it's a positive number. Hopefully it's a large positive number, right? And once you have that number, it's going to put you on somewhere on the wealth ladder.

6:08Level one is less than$10 ,000 in net worth. Level two is$10 ,000 to$100 ,000 in net worth. Level three is$100 ,000 to$1 million in net worth. Level four is$1 to$10 million in net worth. Level five is 10 million to$100 million in net worth. And level six is over $100 million. And the idea is if you just memorize one of the levels, I say, just memorize level three, that's 100 ,000 to a million. You can figure out all the rest by multiplying or dividing by 10. So if you remember level three is 100 ,000 to a million, which is, by the way, in the data that looks like that's like the middle class in the United States, about 40 % of US households are in that level.

6:46So 100 ,000 to a million total net worth. 20 % are in level one, 20 % are in level two, around 18 % are in level four, that's one to 10 million. And then the last 2%, that's the wide tail. That's like level five, 10 to 100. And then there's like 10 ,000 households that have over $100 million in net worth. It's a very, very rare place to get to. So once you have that, that's just the idea for the levels. And then on terms of the spending with the 0.01 % rule, I say, hey, if you're in level two, that's grocery freedom. You can start to spend more at the grocery store. By the time you get to the end of level two, you don't have to worry about what you buy at the grocery store, right?

7:22By the time you're at level three, which is 100 ,000, the beginning of level three, by the end of level three, you have restaurant freedom. So level two is grocery freedom. Level three is restaurant freedom. Level four is what I call travel freedom, et cetera. And you can kind of go from there. And so the idea here is like I wanted a rule because I think lifestyle creep in the personal finance space is very hated upon or disliked. Like, oh, don't spend any more money. You can't let your lifestyle creep at all. My argument is you should let your lifestyle creep, but only after you've built wealth.

7:50And I think this system allows you to spend more over time after you've demonstrated the financial discipline. You're like, hey, look, I made it to level three. I can now start to buy more at a restaurant without worrying about it. Or, hey, I made it to level four. I can start to upgrade my seat or stay at a nicer hotel. I think that's a way of allowing lifestyle creep. So you kind of allow your spending to go up, but it's much slower. And I don't know, the levels just make sense to me. They made sense to me when I read it. And you also visually within the book show it so simply and so cleanly.

8:21I think for those of you watching us or listening to us, when you have this book in your hands, or if you read it on Kindle, I'll admit I actually read it electronically, despite the fact that I'm holding the physical copy in my hands. What you'll start to do is you'll see where you slot. And I think one of the things, Nick, that I experience in my professional life as an advisor is people want to know, like, well, how am I doing versus people like me? And so I think people are going to really enjoy saying, well, am I in level three or level four and level five? And this first rule that you introduced, you're right.

8:53It does allow some lifestyle creep and you can relate to it. I sit there and I think, yeah, I do order whatever it is I want at the restaurant. And I do travel a lot, but I don't go to the Ritz every day. You know, I think the key and maybe I'm going to explain how I read it. Maybe you can put your own spin on it. But basically, it's not saying you can just take whatever vacation you want when you have travel freedom. The idea is that the choice between one hotel room and another or one tour guide or not having a tour guide, you know, when those things are trivial, then you can spend more confidently.

9:25And honestly, money is a tool to live a fulfilling life. Why not spend more confidently on these different things? I will tell you, though, Nick, I can't get over a lot of stuff at the grocery store. I still cheap out, but maybe maybe I'll get cage free eggs next time. Am I interpreting that the way that you were thinking as you laid it out? That's exactly correct. Right. So when I'm thinking about it, it's like, yeah, it's that marginal decision. And really, you have the full freedom by the end of the level. And even within that, there's always context. Like when I say travel freedom, like I mean, like you can basically upgrade to first class anytime you can basically stay at any hotel by the time you have 10 million dollars in net worth.

9:59can you fly private maybe once a year but like regularly no it's just too expensive even when you have restaurant freedom you can't be buying thousand dollar bottles of wine right so there's always exceptions but in general like that spending category becomes open you can travel when you want to go somewhere and where you can go basically anywhere in the world if you have 10 million bucks i don't think there's any place you couldn't go could you go private probably not right could you do certain other things probably not but for the most part you're going to have that freedom and so that's kind of the thinking.

10:27It's not trying to be perfect. It's just trying to get people to think about this differently. And you brought up a good point. Like not everyone's going to feel the same that these categories work with them as well for you. You're like, no, I still cheap out of the grocery store. I don't care. It's not about the money. There's got to be a behavioral thing or a reason or a quality thing. Every person has different feelings about things. You're like, you feel like you're getting ripped off and you're not going to spend that. That's for you. You know, that's for you to figure out, you know? Well, it's important to note that you mentioned this is liquid net worth.

10:56So typically, when you're thinking about this rule, for those of you listening, for those of you watching, you might want to back your house out of your liquid net worth. And maybe if you're still in your prime working years, you might even back out your retirement accounts. I guess that's a little bit of a toss up. How do you think about that? And then also, let me kind of tack on something. How would you think about this rule specifically for retirees? Because their liquid net worth is their retirement accounts and their bank accounts at that point. Any thoughts around that? Yeah. So in general, when I say your wealth level, I say use your total net worth.

11:27And that's what I've used throughout the book. But you're right. When we're talking about spending, you do got to kind of think about liquid net worth because you can't eat your home equity in the traditional sense. Yes, you can get a HELOC. There's a lot of stuff you can do to get access to it, but it's not the same as having that liquid. And so you're right. You're like, oh, I have$1.1 million. But if half a million of that's in a retirement account and$400 ,000 is in home equity, you're not going to feel like you have that much travel freedom with whatever,$100 ,000,$200 ,000, right? So I do think that matters as well.

11:55And I kind of get into the nuances there, but you're right. And then for retirees, it really depends on your situation. That's where I think income matters more because for someone who's working, okay, I have income, I'm spending some amount. And then how much is my wealth throwing off is a second question. But I guess I would include all the retirement assets in liquid net worth because it is still generating income. They are using that. So I think it is liquid by the time you reach retirement. But before then, you might want to discount it a little bit. Well, I wrote down a quote when I was reading the book.

12:24It says, having wealth signals financial discipline. And I'll tell you, a lot of retirees who have a substantial amount of wealth, it is very difficult to get them to spend their money. And I promise you, the 0.1 % rule is going to become a natural part of conversation. Let me shift a little bit, though, to talk about the 1 % rule, because your writing in general, and certainly in this book, throughout your career, you've made a pretty strong case that people should be focusing on earning more than just saving or budgeting. So why do you think that message is underrepresented in personal finance?

12:58And then maybe you can transition and talk a little bit about the 1 % rule, not to be confused with the 0.1 % rule. Yeah, I think people have kind of demonized spending a lot because it's an easy target. And also because we probably all know someone that spends too much. I think it's very easy to think of like, oh, an anecdote. Oh yeah, I know that person. They spend crazy. Like that's why they're not wealthy, right? When if you actually look at the data, like overwhelmingly, it's the people that have higher incomes that are able to save more, that are able to invest more, earn more, et cetera.

13:30And that creates a flywheel that builds wealth. So if you look at the data, as I show in the wealth that I talked about a little bit and just keep buying, but I dug even deeper and got even more data on this. And like, it's the strongest relationship in personal finance. Income and savings rate are so highly linked. It's crazy. Like in general, the higher someone's income, the more they're able to save. Of course, you're going to know someone that's like, well, that guy makes double what I make and they don't save anything. Well, yeah, I can name people like that too, but overwhelmingly higher income earners save more than lower income earners.

13:58And it's not because they're amazing budgeters. It's just because they have more at the end of the month. It's a lot easier to save money when you don't have to think about it, right? If I just think about it now, let's say you're budgeting, you have whatever your budget, and I just add an extra 100K to your budget right now, a year. If all else equal, you would just save all of that, right? It's not going to be like, oh my gosh, okay, I'm now going to spend all 100K. No, you'll probably spend some of it, which is natural, but you're not going to spend all of it. You're probably going to find it difficult even to spend all of that unless you know, like, oh, I already know what I would spend it on, right?

14:27So it's a lot of the personality decisions and things that go into that. In terms of the 1 % rule though, the 0.01 % rule is great for spending because it's like a daily measure. In terms of the 1 % rule, I just wanted to say, hey, 0.01 % wasn't enough on the income side. It's enough on spending, but on income, like when you're evaluating an income opportunity, I say, if it's not going to move your net worth by 1 % over some time span, then you probably shouldn't even waste your time on it. And it doesn't have to be exactly 1%. It could be a little bit less, a little bit more, whatever. But there's millionaires out there that drive across town to save like two cents on gas.

15:02And I'm like, what are you doing? Like, don't get me wrong. You are saving money, but like relative to other things you could be doing. It just doesn't make sense to me. And I think those are examples of like, if you use the 1 % rule, you can basically say like, okay, if my net worth is a million dollars, the question is, is this opportunity going to eventually produce$10 ,000 for me? The answer is no, I probably shouldn't even get started on or anything close to that. Obviously, the amount of time matters. If I said, hey, clap your hands, I'll pay you a hundred bucks, everyone would do it. But my point is, in the real world with realistic income opportunities, you need to look, oh, is this raise worth it?

15:36Is this career opportunity worth it? Is this new client worth it? You're going to be evaluating things like this and like, wow, if this is not going to even move my net worth by 1%, why am I spending so much time, effort, energy, stress, et cetera, on such an endeavor? And so I just wanted to come up with something that allows people to reevaluate their income decisions a little bit. Yeah, that totally resonated with me when I was reading it. I know I signed a consulting contract for a physician's group a while back, and it took a lot of work. And I remember being like, is this amount of money?

16:06It seemed like a lot of money. And at the time, I was kind of OK with the extra work. I think having this rule of thumb for knowing whatever your extra side hustle is or whatever you say yes to, because as you become more successful, a lot of what made you successful was saying, yes, you need to learn to say no. The one percent rule gives you a really nice framework to do that. And I also just a few weeks ago, I remember meeting with a spinal surgeon who has young kids and he's doing some consulting work on the side. And they were asking if the income was really worth it. And they had a specific use case for those dollars.

16:38I hadn't read your book yet at that point in time. Again, I think you've touched on a lot of things that is going to resonate with a lot of people. I've already mentioned the data. I'm just going to read off some of the things that I found really interesting. So when you're reading the book, you'll see some percentages of wealth that different things make up. So if we're looking at levels one through six, like what percentage of the net worth is cash? What percent is cars? What percent is homes, retirement accounts, business interests, real estate? And I think those of you watching us, listening to us, wouldn't be terribly surprised by some of them.

17:10But when you see the hard data, it's pretty impressive. So let me ask you this, Nick. I mean, what are the things you learned about the financial makeup of the different levels that surprised you? And what were some things that did not surprise you? So I kind of knew this a little bit in some other data I had seen, but I never had it broken out by wealth level, but it's just how much of the financial assets in those in level two and level three have in their primary residence. And like it is the vast majority of their assets, right? So I knew that kind of intrinsically, but when I saw it, it's just a little bit more jarring.

17:41Like, wow, these people have, you know, 50, 60, 70%. Remember this is on average across the entire wealth level. This is not just like one person. Like there are some people that have 90 % of their assets in their home. Right. And so it's not shocking necessarily, but it was more extreme than I thought. Things that didn't surprise me, obviously, people higher on the wealth ladder own more stocks, bonds. I knew that type of stuff. They're going to have more in their retirement accounts. They're going to own more real estate. I also knew that people higher on the wealth ladder generally own more businesses, like business interests, so they have their own businesses, or maybe they're in a startup and they have a lot of equity in a business, et cetera.

18:14So I knew that as well. I think the other thing that kind of shocked me, though, is I basically said, okay, cash, that's not income producing. A vehicle, that's not income producing. Your primary homes, not income producing. Everything else on this list that you listed, stocks, bonds, retirement, real estate, your own business, that's all income producing. So I just put a binary on all these and then I sum them up by wealth level. And I was surprised at how linear it was in the sense of as you move up the wealth ladder, every level had more income producing assets than the one below. And it went all the way up to level six, like every single one.

18:46It's just more and more income producing assets. And it's funny because I quote my first book, just keep buying. And the mantra there is like the continual purchase of a diverse set of income producing assets. And I was like, I kind of knew this was directionally correct. And now that I have this other data set and I'm like breaking it out, I'm like, oh my gosh, like this is so obvious. And I think the main punchline for those like looking through chapter three, which is the investment chapter you reference, less than 25 % of the assets of those in levels one to three is in income producing assets, right?

19:16So if you're in levels one to three, on average, less than 25 % of their assets are going to be in some sort of income producing asset. But in levels four to six, it's over 50%. So it's a night and day difference across the wealth ladder. And seeing that makes you realize, oh, wow, they put a lot of their money into things that give them more money. And it becomes a flywheel. Your money starts creating money. And it's very easy to have more wealth. And that creates more wealth. And it's just your income goes up with it. And it's one of those things where people know this. They've heard these ideas before.

19:45But to see it so clearly in the data is the thing that I think is going to be valuable for a lot of people. That advantage, compounding, and you go back to some of your lessons of compounding at one point in the book, people always understand or will tell you, yes, I understand compounding. But until you look at the data or see the extreme examples, you really can't always appreciate it. And I feel like it shows you why it's so hard to set policy that helps everybody because everybody's in such a different situation. And yes, you're at levels one and two, not having any income producing assets really puts them at a relative disadvantage to the other levels in our country.

20:20I'm sure if you looked at the whole world data, our country would actually look quite good, though. I mean, we always forget that we do just generally have it pretty good here. You know, one of the other things that stood out to me is that as you start looking at the different levels, you also kind of get a sense about what it is that helps people move up and down levels. Do you mind sharing some thoughts on that? Yeah. Yeah. So in general, the one takeaway across the levels is like you need to raise your income. And of course, that's easier said than done. I wish I had a magic wand and we all could just raise our income.

20:49Usually it's a multi-year journey. It takes a ton of work. Like there's no easy way to do it, unfortunately. But if you look at the data, it's very correlated. And seeing that like, hey, what's the difference between those people who stay in level two over time versus those that make it to level three, let's say over a decade. And the same thing with like those going from level three to level four versus those that stay in level three. The big difference is their starting income. What is their income at the beginning of the period? You could have two different groups of people within level two.

21:18Those with the higher income are more likely to end up at level three. The same thing was going from level three to level four, right? The higher income person's more likely to end up in level four. And I followed the same set of households. I actually got my hands on a data set from the University of Michigan, which follows the same households over time. And we can actually see that. A lot of the data we look at is snapshots. I'm seeing how American wealth as a whole is changing, but I'm not saying how individual household wealth is changing. And so by keeping the same households over time and following them, you can see, oh, wow, like that's the difference or, oh, that's interesting.