Climbing the Wealth Ladder

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Once you start doing the math, you realize you're never going to get out unless you change your strategy.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard That's Nick Maggiulli. He's the COO of Ritholtz Wealth Management and a personal finance writer. He's joining us today to talk about The Wealth Ladder. That's his new book on building wealth. It's up next. Listening in is our audio producer, Alexis Moore. Hi, Alexis.

Hi, Jack.

I normally don't do ladders, but we're talking about the wealth ladder today. True story. I had a, uh, I had a very high bulb, a set of bulbs in like a chandelier that needed changing in my house. And I was embarrassed to hire someone just to change bulbs. So I bought, I bought a, um, a special ladder. It's like a platform ladder. Like you go up and it's got a very wide area for standing at the top. And then this sort of thing that extends up and around your waist so you can hold onto something. So I figured that way I could go up that high and change the light bulb. And I got up to the top or near the top and my knees started shaking anyway. And I had to hire the guy to go up on the new ladder that I just bought and change the bulbs. It cost me like double. Nick Majuli has a new book out. It's called The Wealth Ladder, and it's about what it takes to build wealth at every level. We had a chat about it a short while back. Let's get to some of that conversation now.

My first book, Just Keep Buying, I focused on investing and the tactics of how to invest and do all that. And with The Wealth Ladder, I kind of zoomed out a bit and said, here's a new framework for thinking about wealth. And so what are the different strategies you can use at each level? And if you're okay with it, I could explain the ladder framework. It makes it a little bit easier to kind of follow after that.

Yeah, sure.

So there are 6 distinct wealth levels in The Wealth Ladder. And this is all using net worth. As a reminder to your listeners, that's everything you own, all of your assets minus all of your liabilities. And then based on your net worth, you're in one of the 6 wealth levels. Level 1 is less than $10,000. Level 2 is $10,000 to $100,000. Level 3 is $100,000 to $1 million. Level 4 is $1 million to $10 million. Level 5 is $10 million to $100 million. And level 6 is over $100 million.

Got it. Is there different advice for each level depending on what level you're on or different things you should focus on?

Yeah. Yeah. So the idea is there's different strategies and as you kind of move up the wealth ladder, what you focus on can change. Like in level 1, the thing I talk a lot about is like getting to some sense of relative safety. It's like, you know, having an emergency fund, having people you can rely on, whether that's friends and family in case you get into a tough financial spot, because the thing that keeps people in level 1, there's a lot of factors we can talk about here, but once you start getting into debt and you start falling behind, it can be very difficult to get out. Over half of the financial distress events in the United States, only 10% of households are responsible for over half of them. So it's like a very small percentage of people get caught in these traps and they're just in there over and over. And so my advice there is to prevent yourself from getting caught in one of those. And if you are in one, what can you do to get out? What are some of the actions you can take?

It's important. I think it's frustrating for people. They say, I've got $5,000 and I want to put it in this hot stock I heard about or this crypto coin or something like that. And you say, well, hold on a second. You have to have enough money set aside if you have something come up that you can pay for it. So maybe it's not time just yet to invest.

Yeah, because let's say you doubled that 100% return in a year, which is a great return. It's very rare. It's unlikely that's ever going to happen. Of course it has happened. But let's say you doubled it. Okay, you go from 5 to 10 grand. That's still nice to have that, but that's not going to change your life as much as having that 5 grand there guaranteed. That's the thing I think about. In the event it doesn't go up, it doesn't double, you know, then what do you do? You know, and you run into some bad luck.

What does this mean in the level? If you're between $10,000 and $100,000, you say to focus on education. What does that mean?

Yeah. So that's in level 2. And the idea there is that the trajectory of your life a lot of times is determined by what skills you have and education, among other things. And I think the thing to focus on there is saying, hey, what skills can I build out or what education can I get such that I help increase my income over time so that I can build wealth and move up the wealth ladder? I think level 2 is where it's incredibly important because there are 2 types of people in level 2. There's those people who already have the education, everything, and they just need time. Maybe they're young or they just need more time to get to level 3 and level 4. And then there's the people who are maybe a little bit older and they've worked really hard. They've saved some money. They kind of got into level 2, but they're like, hey, how do I progress further? And those are the people that might need to kind of make some sort of career adjustments to increase their income and move further up the ladder.

For them, are you talking about going back to college? Are you talking about trying to get some kind of a certificate? Or—

It's very open-ended. There's a lot of ways you could do this. I mean, going to college is one solution, but it really depends. I'm very particular about going to college. What are you going for? What type of degree? How much debt do you have to take? Like, these are all the questions, you know, that matter before you do all this. Like, the question is, are people hiring for that role you're getting, right? If you're just like, oh, I'm just going to go back to college, you don't know what you're going to go into, you don't know what the pay is or any of that. I don't think that's a smart move. You have to look into that and say, okay, if you're in, let's say, your mid-30s or mid-40s and you're trying to make a change to increase your income, you got to say, well, is there demand on the other side of that? And I don't just think it has to be a college education. There's a lot of ways you can educate yourself. And you know, there's skills obviously out there, trades, things of that sort. But I think you just have to look at the market and say, what's the market doing right now? And is there demand for this particular skill? And how much would I get paid if I had it?

Okay. We're moving up the ladder. Now we're somewhere between $100,000 and $1 million. This is level 3. And the word you have next to that is investing. I always think when people have less than that, where they're— I hear from people sometimes, maybe they've got $20,000, $50,000 in their life, but they're talking about the fine details of their asset allocation. And I always think your wealth increase is going to be dominated by how much you can save. Like you almost don't have to spend too much time thinking about it at that level. If you get yourself, you know, a broad market index fund or something like that, you're not gonna go so wrong if you're saving a lot of money while you're doing that. But once you start to get, you know, pushing up to the hundreds of thousands of dollars, you need to pay more attention to your asset allocation and how you manage your risk and that sort of thing. Is that fair to say? Would you agree with that?

I agree completely. I think you hit the nail on the head here, Jack. And the idea is, let's just say early on in your wealth-building journey, because I don't want to say career, everyone's at different points. People can be later in their career and still not have a lot of wealth. But let's just say early on in your wealth-building journey, you are going to make a bigger impact on your wealth than your investments do, right? And you can just do simple math. Like, let's say you have $10,000 invested. Let's say you got a 10% return, just to make the math easy. That's $1,000, right? Not a lot of money in the grand scheme of things. You can probably save over $1,000 in a year, right? So early on, you're going to outcompete your money in terms of adding money to your wealth. But as you said, over time, as your wealth gets larger and larger, at some point your wealth is going to get so large that, you know, it may even eclipse your labor and your ability to save. Even if you could save $100,000 a year, by the time you hit level 4, which is $1 to $10 million in wealth, if you have a portfolio with $1 million, a 10% return is $100,000. Now it's basically equal to what you could save. And remember, $100K, that's a lot of money to save as it is. And then as you get to like $4 million, $5 million, you know, you can't even compete with your own investments at that point. So that's just something to think about as you're kind of moving up the ladder. I think level 3 is where that shift starts to happen and you have to start focusing on it differently. So That's the thing I tell people to focus on at level 3.

And should they become experts on how to invest? Should they hire experts on investing or whichever one suits them?

Whatever one suits them. I think every person's different. I think you just want to avoid a lot of the big mistakes that people make. So that's like going all to cash or going all to stock. Like any of those big jumps that happen when people get emotional, I think is usually a mistake. Making small adjustments over time is fine, but I think anytime someone starts going into making these big moves, I think it, it might be indicative of maybe you need an advisor, you need a behavioral coach or something.

I think of it sometimes like, you know, you ever see those bumpers that they put in the gutters in bowling so the ball doesn't go in the gutter? And so if you're investing, I don't, I'm not sure this is good investing advice, by the way. I don't hear like financial advisors talk about this, but just emotionally, if you're someone who is prone to doing rash things with your portfolio, if you might sell everything or go all in on risk or whatever, maybe you just create a little lane for yourself to go crazy in. You know what I mean? Like if your stock allocation is supposed to be 60%, maybe you create a lane 50% to 70%, and then you could just, wherever your mood is, you could move up back and forth within that lane. But you know, try not to stray from that lane. Is that crazy talk or would a strategy like that help people to take an active hand but not do too much damage?

Yeah, no, I agree with that completely. I mean, in the first book, the mantra of just keep buying was the continual purchase of a diverse set of income-producing assets. And in the book, recommend anywhere between 85 to 95% of your assets are income-producing. So that's like a diversified basket of stocks, bonds, real estate, etc. But I do think there is some value to having some money like outside of that, whether that's active bets you're making or whether you want to buy non-income-producing assets. I understand people like to own things like gold and Bitcoin, and I have nothing against that. I own some of that myself, but it is not the majority of my portfolio because once again, you're buying something that's kind of only based on the price of someone else buying it. That doesn't mean it's not valuable, but it's just the fundamentals for me are a little harder to follow because it's just completely based on belief versus businesses at least have to produce something that like someone is willing to pay for. I think that's the, that's the difference.

I like that idea too. This big account over here is for following the rules, but this little account over here, that's for getting wild. You could, you know, make your bets in that account, whatever you want to do in that little account.

Here's the funny part. I guarantee you they spend 95% of their attention on looking at the small account and 5% looking at the big account, right?

Yeah.

That's what I realized. I would, I could have one stock with $1,000 in it and I'm like checking the price multiple times a day. And then my 401(k) over here, which has, you know, multiples more than that, is jumping up and down every day and I don't even look at it. Right.

That's what's great about the big account. That's probably why it's big. You don't have to think about it.

Exactly.

All right. So now we're millionaires. We're over $1 million, between $1 million and $10 million. Now, this one throws me in here. You have starting a business. That should be your focus. But I mean, that's not for everyone, is it? What if you're a wage earner? But you know, you make a good wage and you're socking away money in your retirement accounts. I mean, should everybody be thinking about starting a business or what's the importance there?

So the advice there is if you want to keep climbing, if you want to get to level 5 specifically, that is the advice, right? If you want to just like, oh, I need to just keep building wealth, but I'm going to stay in level 4, you don't need to change anything. I don't even recommend that at all. But if you're trying to get to level 5, if you just run the math on it, like your 9-to-5 job plus saving money plus investment returns is just not going to do it.

And we got to get over $10 million to get to level 5.

Yeah, so that's the level 5. I'm saying that's a very specific recommendation. If you want to get to level 5, your 401(k) and all that's just not going to get you there unless you have a really long time. And let me just give you a quick mathematical example. We'll show this. Let's say you just hit $1 million just in your investment portfolio, right? So your net worth is probably a little higher, but let's just say it's $1 million. Let's say you earn 5% a year on that portfolio and inflation adjusted. And let's assume you save $100,000 a year, right? So how long would it take you to get to $10 million? The answer is 28 years. This is after you've already hit $1 million. So you've already kind of accomplished this pretty big financial, like, milestone. It's not easy to save $1 million after tax or have a million-dollar net worth, and then you're still saving $100K a year and you're earning 5% and it still takes 28 years. Even if you save, let's say, $300,000 a year. So I'm tripling. That's a lot of money. You're talking someone's making probably close to $1 million after costs and taxes and everything. They're saving $300K a year, right?, and still it would take them 17 years to hit $10 million. So once you start doing the math, once you get into level 4, you realize you're never gonna get out unless you change your strategy. You have to go and either start a business that you sell for a bunch of money, or you have to join a startup early and get enough equity, and then it grows into something that sells for a lot of money.

Thank you, Nick. Let's take a quick break here. We'll be back with more of my conversation with Nick Majuli.

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Welcome back, Alexis. You learning anything about climbing the wealth ladder yet? Yeah. I'm holding out for a, you know, those like the stairlifters that the old folks sometimes use. The wealth stair chairlift. That's what I need. Probably a follow-up from Nick. But for now, let's get back to our conversation with Nick about the wealth ladder. Now we've started a business. We're at between $1 and $10 million. Now we've crossed over the $10 million mark and the next device is scaling a business. Just if you've got a business that's gotten you over $10 million, You just need to stick with it and make it larger. Yeah.

You either scale it or you sold your first business and you start a new one and have to scale it even more. And once again, I think level 4 is the point, especially in the United States where I don't think you need to keep climbing. You could even say that somewhat in level 3, depending where, if you're in a low cost of living area, I think you can have an incredible life in level 3. I think in most of the US, if you're in level 4, you can have an incredible life. And so I think going past level 5 is not necessary. And so that's one of the things I mentioned in the book. So I know where I'm talking about financial and, you know, keep climbing, et cetera. But at some point it becomes unnecessary. The effort can become very large. And once again, the things that got you into level 4, which are like saving, investing, having a decent income, all that are not the things that get you out to level 5 and beyond. And so one of the things I'm bringing up here when you're talking about level 5, level 6 and all that, like, yes, I do talk about money in those levels a little bit, but I think it's the non-financial things that are actually the focus of those levels.

And I can explain why the non-financial things.

Yeah, I think when you're in level 1, most of your problems are likely money problems, right? Like money could solve a lot of your life problems. As you move up the wealth ladder, that becomes less and less true, right? Like if you have a problem in your life in level 5 or 6, it's rarely a money issue. It's more likely to be, oh, something's going wrong with my spouse or my kids or my health or something. And you can't pay for that, right? You can't write your kids a check to make them love you, right? You can't go and just buy a new cardiovascular system, right? So ironically, as you build more and more wealth, like your money has less of an impact on your life and what it can do for you, right? In terms of your overall happiness and enjoyment, contentment, et cetera. So the things I focus on in level 5 and 6 is really the non-financial parts of your life. Like your relationships are important regardless of your wealth level, friendships, your health, all that stuff's important regardless, but it becomes even more important in level 5 and 6 because the money's not going to buy it, right? Like you have to work for it. And that's just the truth.

Okay. I'm going to write this down. I had assumed that, uh, you know, being rich would make me popular too, but I'm going to write this down and be nice to people, relationships. Okay. Now the final level, the final level is more than $100 million. We should all be so fortunate and successful. And you have here protecting your wealth. I mean, I would have thought protecting your wealth becomes important at lower levels of wealth. What's the particular significance for this level?

Level 5 and 6, I kind of group together a lot because a lot of the similar, the people that get there are very similar in terms of how they got there for the most part. Level 5 is $10 million to $100 million and level 6 is over $100 million. In terms of protecting your wealth, I think the issue is like the people that get into level 5 and 6 besides like, you know, celebrities, athletes, entertainers, it's mostly business owners. It's entrepreneurs of some sort that either sold a business or they still own a business that's worth a lot of money. And they're not diversified, right? They tend to have most of their eggs in one basket, a.k.a. that business that made them wealthy. And so because of that, they're overconcentrated. And so if something happens to that business, they could see their wealth kind of collapse pretty quickly. And so that's why I say protect your wealth. It's like you need to have some sort of diversification that so you can kind of have some base level, right? If you have a business worth $100 million, like you should be thinking about how to sell at least a portion of it so you can keep, you know, and be like, hey, no matter what, even if this thing some unfortunate unforeseen event happens, I'm still gonna be okay. I would have enough for my family for this generation and the next, et cetera. So that's the type of stuff I'm thinking about in level 5 and 6.

Most interesting, Nick. Thanks for walking me through the book. What else are you hearing or thinking about these days? Do you speak with people like in, in connection with your writing, your reporting about, you know, do you, do you get any sense of like what are the big mistakes people make out there? Or is there, is there some, is there some dumb thing that people are just doing over and over again that keeps them from getting rich? If you could just snap your fingers and change one thing about people's behavior to get them on a better path to getting wealthy, what would it be?

I would tell people to focus less on spending. I think spending can matter, especially in the lowest wealth level, it definitely can make a difference. But all the data I've seen, it's overwhelming how positive the relationship is between income and wealth. And so they're so highly correlated. The higher your income, the higher your wealth.

They say skip your daily latte. And if you take all that money and you compound it over time, I think they say it's worth $387 billion by the time you're 65, right?

I think I'd pay off the deficit if we all just didn't drink coffee.

You say that's not going to do it.

Yeah, it's just the data is overwhelmingly in one direction and that's towards income, not spending. And so if I had a magic finance wand, I'd say, hey, let's get rid of this belief and I've seen the data. I talk about it in The Wealth Ladder. I talked about it a little bit in Just Keep Buying, but I dug even deeper and did it by wealth level. I said, hey, in every wealth level, here are the incomes, right? And so I show it. I have a table in the book in the second chapter that basically says, hey, here's the income in every wealth level. And so as you can see, like as you go higher on wealth, you know, more wealth leads to more income and vice versa. It's almost like a flywheel in that sense. So just something to consider as you're thinking about kind of building wealth over time and like, what do I need to do? It's cut what you can, but then stop spending time and effort focusing on that and focus all of your attention and energy on your career and your income.

Thank you, Nick. And thanks to all of you for listening. If you have a question that you'd like played and answered on the podcast, you can send it in. Might be on a future episode. Just use the voice memo app on your phone, send it to jack.hough@barons.com. Alexis Moore is our producer. You can subscribe to the podcast on Apple Podcasts, Spotify, wherever you listen. If you listen on Apple, you can write us a review. Thanks and see you next week.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.