Book Review: The Wealth Ladder

People seek universal answers to personal finance questions, but the correct answer almost always starts with “it depends.”  What is good advice for one person may be terrible for another person.  This fact is often overstated, though.  For each question there tends to be a small number of important factors that determine the correct answer.  One such factor is your current wealth level.  In his book The Wealth Ladder, Nick Maggiulli explores how your current wealth level affects the financial choices you should make.

Maggiulli refers to his book as “a grand unifying framework that will fundamentally change how you think about wealth and how to build it.”  On one level, this sounds a little grandiose.  However, it can be challenging to get through to people who seek universal answers that don’t exist.  These people need to be hit over the head with the idea that your best choices going forward depend on your current stage of wealth accumulation.

Some readers may object to the idea that the purpose of life is to climb a wealth ladder.  For wealthier people, the author addresses the question of whether they should stop pursuing more wealth.  However, for those who hope to have shelter and food after they’ve been forced to retire, there is little choice but to climb at least part way up the wealth ladder.

Before discussing strategies at each level of the wealth ladder, the author introduces two interesting wealth-dependent rules: the 0.01% rule for spending and the 1% rule for income.

The 0.01% rule

Depending on how wealthy you are, some expenses are trivial.  Maggiulli sets this level at 0.01% of your wealth.  So, someone worth $100,000 shouldn’t worry about $10 for a coffee and bagel, and a billionaire shouldn’t worry about $100,000 for a car.  I’m not a fan of this rule as stated because it leaves out two important factors: frequency of the expense and current income.

As it happens, 0.01% is roughly how much of your wealth you can spend each day and still expect your money to last for the rest of your life.  It stands to reason then that if you have no other income, you can’t afford to waste this amount every day.  

People worth $100,000 can only waste $10 daily if they have a large enough income that $10/day is insignificant.  As for the billionaire buying a car, it’s likely that even a million dollars for the car would not be a problem because car purchases tend to be infrequent.

Maggiulli prefers that you “spend based on your wealth, not your income.”  If we’re excluding income, then this 0.01% rule can only be used perhaps once or twice a month.  To make it daily, it would have to be more like 0.001% or less.

I see no way to save this “rule” without incorporating the frequency of the expense.  Your wealth level and your income dictate how much money you can spend freely per month or year, not how much you can spend on each transaction.

The 1% rule

“If a particular income opportunity can increase your net worth by at least 1 percent, then you should do it.  If not, then forget about it.”  So, at low wealth levels, you might take on odd jobs that pay $100.  As you get wealthier, you start to focus on getting the skills for higher-paying jobs.  For those who make it to the higher wealth levels, salaries aren’t enough and they need to consider starting their own businesses or abandon the pursuit of more wealth.

The wealth levels

Maggiulli splits people into 6 wealth levels:

Level 1: <$10k
Level 2: $10k-$100k
Level 3: $100k-$1M
Level 4: $1M-$10M
Level 5: $10M-$100M
Level 6: >$100M

For each wealth level, he looks at a number of different types of statistics, such as income ranges and mobility between wealth levels over time.  Based on his analyses, he offers advice tailored to each wealth level.

An obvious benefit of reading this book is to get some of the author’s good advice that is relevant to the reader’s wealth level.  A less obvious benefit is that Maggiulli’s framework will make it easier to see that other advice you encounter may be safely ignored because it applies to someone with either more or less money than you have.

I won’t try to summarize all the different types of advice for each wealth level.  Instead, I’ll comment on a couple of other parts of the book that struck me.

Saving early

The author gives an example of “someone who saves $10,000 a year for forty years while earning 7 percent on their money.”  He follows this up with a chart showing how the early years of saving contribute much more to the final portfolio value than the later years of saving.  This is intended to persuade people to start saving when they’re young.

I wrote a piece recently that explained why such examples are nonsense: The real reason to start saving when you’re young.  If we consider someone who started saving 40 years ago, $10,000 was likely more than their annual income.  If we consider someone starting to save today, in 40 years, $10,000 will be a trivial amount to save in a year because of inflation and the likelihood of wages rising faster than inflation.

These facts undermine Maggiulli’s “Go Big, Then Stop” strategy for saving.  The idea of doing all your saving when you’re young is unrealistic for almost everyone.

Money is a relative concept

The author makes the good point that what you’ll do for money changes as you get wealthier.  “How you feel about [money] will change as you get more of it.”  I quit a job 8 years ago that a younger and less wealthy version of myself would have dreamed of.  “I know how incredibly out of touch this sounds, but once you’ve experienced it for yourself, it’s hard to see things any other way.”

Before becoming wealthy, people “focused mostly on the things they couldn’t afford.  But after they became wealthy, they … realized that their true desires were relatively inexpensive.”  “It’s a cruel irony that many don’t learn this lesson until after they’ve spent so much time chasing wealth.”

Conclusion

This book provides a useful framework for determining your best way forward with your personal finances at each stage of your wealth journey.  It’s worth a read despite a few rough areas.