Stuck on Level 4 of "The Wealth Ladder"?
In his book, "The Wealth Ladder," Nick Maggiulli breaks down wealth into levels:
Level 1: A household net worth of less than $10,000
Level 2: A household net worth between $10,000 and $100,000
Level 3: A household net worth between $100,000 and $1 million
Level 4: A household net worth between $1 million and $10 million
Level 5: A household net worth between $10 million and $100 million
Level 6: A household net worth over $100 million
If I look at the data from the FAANG FIRE Audience Survey, more than 60% of you are in the Level 4 bucket and 5% in Level 5!
I feel like Level 4 here must have sublevels within it, particularly for the FAANG FIRE crowd. A household net worth of $1M seems drastically different than a net worth of $9.9M. What about a 25 year old with $1M vs a 70 year old with $1M?
I wish I could talk to the author… oh wait.
Live Interview with Nick Maggiulli on Thursday
Tune in this Thursday at 11am PST for the live episode 3 of the Not Advice podcast featuring special guest Nick Maggiulli.
The Wealth Ladder Review
Nick Maggiulli is one of my favorite financial writers. His blog Of Dollars and Data blends data and wisdom better than anyone.
/end fangirling
The Wealth Ladder breaks down (with data) each step of the ladder that Nick defined.
One recurring theme Nick really emphasizes is that income is the primary tool to climb the wealth ladder. Household annual income increasing with household wealth is one of the strongest relationships in all of personal finance.
However, based on the data, income alone rarely gets you to the $10M mark needed to reach Level 5. The most common characteristic in those within Level 5 and beyond is business ownership.
Nick claims that it is unlikely you’ll get to Level 5 through a W2 job alone.
This is one area that I think a dual income FAANG household could be the exception. The $10M threshold would still be rare, but the last few years of RSU appreciation pushing up total compensation have made Level 5 as a W2 big-tech worker a distinct possibility.
The book makes it clear that it requires a very high income and very high levels of annual savings.
The 0.01% Rule
He also introduced a few new rules of thumb that I really liked.
The 0.01% Rule: If your wealth is invested and growing by 0.01% per day (5% annually) above inflation, you could spend that amount each day and maintain the same net worth.
$2,000,000 net worth x 0.01% = $200 per day while maintaining the same net worth.
One reason I liked this was that if you do the math the 0.01% daily spend actually ladders up pretty closely to my personal 3.5% safe withdrawal rate I use to calculate my enough number.
FAANG and “Skipping Levels”
Normally, households progress through the wealth ladder step by step, building the skills needed to manage the money you have at each stage.
The book brings up another interesting exception, what happens when you reach Level 5 through a single liquidity event? It would be entirely possible to be in Level 5 while still having no idea how to save or manage money.
I think this concept of skipping levels is fascinating and actually could apply to those in FAANG who have seen their compensation drastically increase due to RSU and equity appreciation over the last couple of years.
You can now have a high net worth, but you skipped all the levels to get there. This means you need to be investing in doing the work needed to ensure that you know how to properly save that money, use that money, and leverage that money to help get you to your financial goals.
"With all the new amenities available to those in level 5, it can be easy to overspend if you aren't careful.”
Stuck in Level 4
He also introduces how as you progress within Level 4 you can feel stuck… because you kind of are.
I recommend checking out the Wealth Ladder and tuning into our interview with Nick this Thursday on LinkedIn.
Can’t make the LinkedIn Live? Don’t worry, the Not Advice Podcast is now available on Apple Podcasts and Spotify! Listen to our first two episodes and subscribe to be alerted when the recording of episode 3 goes live. Show us some love by dropping a rating and review.
What are your thoughts on Nick’s Wealth Ladder Levels?
This is so perfectly timely! I just got off the library waitlist for The Wealth Ladder and hit the chapter last night where he's talking about how W2 alone is unlikely to get you from L4 to L5 and was planning on screenshooting and sending it to some friends for discussion today.