Climbing the Wealth Ladder ft. Nick Maggiulli

We know what you're thinking, but climbing the wealth ladder isn't as simple as taking one step at a time. Nick Maggiulli, the chief operating officer for Ritholtz Wealth Management and a financial author, breaks down different strategies to improve your financial life while you grow your wealth.

Get Nick's book, The Wealth Ladder. 

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Transcript

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- My strategy of just sitting and going through openings over and over was not the way to kind of like get better at chess. I had to do something different, right? And I think the same thing is true in our financial lives, right? And so I use this story because the strategy you use at one point is not necessarily the strategy that's going to get you to that next level.[upbeat music]- Welcome to Common Cents on the Prairie™, a podcast dedicated to helping you demystify the sometimes complex topic of money. I'm Adam Cox, head of Wealth Management for The First National Bank in Sioux Falls. We're a community bank based out of South Dakota. In this podcast, we share expert insights from around the country and stories from our local community to arm you with the tools you need to make better financial decisions. Because the truth is, the more we talk about this stuff, the better off we're all going to be.[upbeat music continues] Today's guest is Nick Maggiulli. Nick is the Chief Operating Officer and data scientist at Ritholtz Wealth Management, where he oversees operations across the firm and provides insights on business intelligence. Nick is the author of two outstanding books on personal finance, "Just Keep Buying," and soon to be released,"The Wealth Ladder." He is also the author of a blog focused on the intersection of data and personal finance called OfDollarsAndData.com. His work has been featured in the Wall Street Journal, CNBC, and the Los Angeles Times. Nick graduated from Stanford University with a degree in economics and currently resides in New York City. I hope you enjoy my conversation with my friend and return guest, Nick Maggiulli. All right, Nick, welcome back to the show. Great to see you man.- Thanks for having me back on, Adam.- Oh, pleasure, pleasure. So whenever possible, I always like to start on the personal side of things, and so if you wouldn't mind, would you mind telling us a little bit about what money was like for you growing up? Because I think it's always so interesting how it shapes our personal views about money into our adult life.- Yeah, so my parents declared bankruptcy twice before I was 18. I would say I grew up in generally like a lower middle class family, but I kind of had aunts and uncles who always were, I would say, middle class, so. We never went hungry. I wasn't in poverty or anything like that, but we just didn't have a ton to go around. I knew the dollar menu or the value menu very well, which no longer exists, but many of your listeners probably remember it at one point. But yeah, I mean that was my upbringing. You know, I used to, generally until age 18, I had a certain worldview on money and then I went to school and in particular I went to Stanford and that was a very different world, and I bring that up only because the students that I met there, my fellow peers were very different from the people I grew up with, and so you get just exposed to a very different worldview. Some people who were from very wealthy families, but many were just from like the middle to upper middle class, and so just seeing that difference, I think it was just a big change for me to meet people from different walks of life that viewed money differently and all these types of things. So in terms of my background, that's kind of what informed some of my money views and my perspective. So I've kind of seen it all from, not exactly in pure poverty, I haven't been to what I call the lowest part of the wealth ladder, which we can get into later. But I've seen, you know, quite a bit.- Yeah, wow, well thanks for sharing that. That's a great perspective. So, all right, I am really excited to have you back on the show for I guess two basic reasons. The one is I love talking personal finance with you, and then the second is you wrote a fantastic new book called "The Wealth Ladder," so I'd love to hear a little bit about the book and the project and why you decided to write it.- Yeah, so my first book, which is called "Just Keep Buying," my purpose of writing that book was if I didn't know anything about you, like what financial advice would I give? And so my answer was just keep buying, which is like the continual purchase of a diverse set of income producing assets, and as great as that advice is and whatnot, it's applicable to a lot of people, but it's not applicable to everyone or it's not applicable to people with different types of goals, right? And so I realized that there were pieces of the personal finance market that I was missing, right? And for example, if you're deeply in debt, like telling someone,"Oh, you just need to buy income-producing assets," is not the solution for them. They need to get out of debt. There's a lot of other things they have to do before that. And there's someone who's like,"Oh, I want to get to a hundred million dollars in wealth," or something, just keep buying is not going to get you there. Just saving and investing in the S&P 500 won't get you there unless you have a massive income, in that case, you probably have something else going on outside of the investing, right? So as you can see, like when I knew nothing about you, just keep buying's a fine solution, but with the wealth ladder, I said,"Hey, what if I knew something about you? What if I just knew your initial wealth? Like I just know your wealth today, and then I can classify you based on that." There's six levels of wealth in the wealth ladder. So once I know your wealth level, I can then say,"You know what, if you're in this level, I think this is the right strategy for you to follow." And the analogy I use in the book is just like a fitness instructor would give different health and exercise advice to an obese person than to someone who's a well-trained athlete, right? You would give different advice to them. The principles are going to be the same, right? Diet, exercise, sleep, nutrition, all those types of things are probably going to be very similar, but the particular tactics and strategy you might follow would differ based on where you are today, and so that's the same thing. I wanted to bring that thinking into the personal finance space and that's kind of why I wrote the book.- Yeah, well that's great. Let's dive into that. Let's talk a little bit about the wealth ladder as a concept and maybe the different levels of wealth.- Yeah, so for the levels of wealth, I'm doing that based on net worth. And just as a reminder to your listeners, that's all your assets minus all of your liabilities. So that's going to be everything you own, your house, your car, cash in your bank accounts, your stocks, and retirement accounts, all those that's on your asset side minus any debt you have, right? So mortgage debt, credit card debt, student loans, you kind of take that, you know, you do that math and now you have your net worth, right? And you don't need to have the exact number for this, it doesn't need to be perfect, you just need to approximate. So then once you know your net worth, you can figure out which level you're in. And so the first wealth level 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 million to $10 million, level five is $10 million to $100 million, and lastly, level six is over $100 million. And I set this up as like, you know, factors of 10 because then, A, they're very easy to memorize. Like, okay, so if I know level three is 100K to a million and I just memorize that wealth level, I can back out, oh, level four is a 10x jump, 1 million to 10 million from there. So that's one thing why I think it's useful, just it makes it easy, but also it actually mapped very well onto economic classes in the United States, right? So like 20% of households were in level one, which was less than $10,000, 20% were in level two, that's 10,000 to a hundred thousand dollars, 40% were in level three, that's a hundred thousand to a million dollars, that's like your typical middle class, and then about 18% were in level four, that's $1 million to $10 million. And by the way, this is household wealth, not individual. So your household, so if you have a spouse or something, you would include their net worth with yours. And then the last 2%, the top 2% was level five and six. And level six, which is a hundred million plus is like there's only 10,000 individuals. So the top 2% is just those two of basically above 10 million. And so once I looked at wealth in this way, I found like, hey, one, it also, not only does it map well to the classes, but it also maps well to big differences in lifestyle changes. Like in general, going from zero to 10,000 is a huge change for people psychologically, for the safety and everything. But then going from 10,000 to 20,000 maybe isn't as big of a change as going from zero to 10, right? But then going from 10,000 to a hundred is a big change, right? And so once again, every 10x jump is a big change, but then the changes, you know, have to get bigger for you to feel the difference, right? If someone with 3 million bucks, giving them another $10,000 isn't going to change their life at all. Like they wouldn't even notice it, right? But for someone with nothing, that $10,000 is very impactful. Everyone knows this intrinsically, but once you actually, you know, see it within the data, it's actually very cool too.- Yeah, so a couple follow up questions, I'll start with this one. The first is why focus on wealth when, I think you and I can probably agree, most people live their life based on their income and not their wealth.- Yeah, so income's very fickle. Like I know people like to focus on income, but there was a study which I quoted in the book, which there's a 10% chance a household is going to experience a 50% drop in income in the next two years. And so just to kind of make it make sense, let's say you had 20 different households and let's say they're all just people with their spouses, right? 20 different households, there's a 10%, one in 10 of those households, one of those people is going to lose their job in the next few years, right? So it's unlikely, but it still happens. And so spending based on income, if that income dries up, now you're like, oh my gosh, what am I going to do? And so I think using wealth, it's slightly more stable, I think, in the long run than income. And then in addition to that, your wealth is actually showing some sort of financial discipline. Besides trust fund babies and lottery winners, like everyone who has wealth has had to do some work for it in some way, right? So in general, I like seeing something, that shows financial discipline Because if you have a million dollars a year in income and you spend that million dollars a year, right? Or whatever post-tax money, if you spend all that, you don't have any wealth at the end of the day. And so while you can live a nice life while you have that income, if that income dries up, you're in a lot of trouble.- Yep. So with the run up in house prices over the last several years, home equity as part of net worth has become kind of a hot topic in personal finance. How do you view things like home equity and maybe even some retirement counts as part of this equation?- I mean, you have to include them for the wealth ladder, and I do because I think it impacts your decisions. At the same time, you can't necessarily spend that money, right? You can't eat your home equity, so to speak. I know you can get a HELOC, home equity line of credit, and you can pull money out and do things, so it's not completely not liquid, but for the most part, like if you think,"Oh, my retirement assets are for when I'm 65 and I'm actually retired," if you really think that way, then that money doesn't exist in the traditional sense. I do count it for the wealth ladder because I think it's very tough to take the data and start excluding stuff and it's like, I'd rather just have everything and just say,"Hey, here's everything we have," and then comparing the same apples to apples across all the data sets and then later we can dig down and say,"Okay, without this, you should use liquid net worth in these circumstances," basically.- Yeah, I mean we see people who are, what they call house poor. They have a high net worth, but a lot of that's tied into maybe their personal residence or other real estate and they don't have a lot of cash, and then we see the opposite, and those are two very different situations, but they have an equal amount of net worth.- Yeah, I have a friend whose parents, their net worth's around $4 million, but they only have a hundred thousand dollars in a bank account. The rest is like properties and a business and things like that. And so if they do liquidate, all that money will become real, right? Assuming they could sell everything at the price they're estimating it at. But at the end of the day, it's tough to be in that spot if you need liquidity now and it's all locked up in a lot of different things.- Yeah, so one of my biggest takeaways from your book was your idea of the 0.01% rule. Can you describe that for us?- Yeah, so the 0.01% rule basically states you take your net worth, you multiply by 0.01%, or you can divide by 10,000, the math's the same, and that is the amount of money that your wealth is generating every day. So that amount of money, which is what I will call a trivial amount of money, and so if you do 0.01% per day, and you do that over the course of a year, 365 days a year, that's roughly 3.7% a year. So that's a very conservative estimate of how much your wealth is generating. So I'm not saying, oh, you're generating seven, if you have all your money in the S&P 500, on average, historically you would've generated 7% a year after inflation, right? So I'm assuming 3.7%, which is almost half of that and in like a diversified portfolio. But the idea here is, okay, your wealth is throwing off this amount of money, that amount of money is what I call a trivial amount of money, so you can spend that without thinking about it, right? So let's say you have a net worth of a hundred thousand dollars. The 0.01% rule would say that you could spend $10 a day without thinking about it, right? And so every wealth level has what I call some sort of spending freedom. And so level two, which is 10,000 to a hundred thousand dollars in wealth, that's going to correspond to $1 to $10 in this like 0.01% rule. Like that's how much trivial spend you could have every day. And so I call that level two is grocery freedom, because you could go to the grocery store and okay, I'm going to get the cage free eggs, that's $2 more. I'm going to get this, this, whatever. You spend $10 more a day there, and it's not going to impact your wealth. And that assumes you don't even go to the grocery store every day. So if you go once a week and you kind of pull it across the seven days or whatever, you can see by the time you have a hundred thousand dollars in net worth, you can basically buy what you want at the grocery store without any issue, right? And then level three, which is a hundred thousand to a million dollars in net worth, that corresponds with $10 to $100 in this average kind of daily spend, and that's what I call restaurant freedom. So every time you go to a restaurant, you can go and by the time you have a million bucks, you can basically get what you want at a restaurant. Besides like the super fancy wine list, you can kind of do anything, you can buy anything on the menu and not have to worry about it, right? And so the idea behind this, I mean we could keep going. Level four is travel freedom. We can keep going through all these different levels, but the main idea here is I wanted to come up with a spending framework where it allows you to spend more over time. So there is some lifestyle creep, but it's so slow that it's not going to really impact your wealth that much. I didn't want to be like, okay, yeah, now you can do this, now you can do that, and then it actually holds people back. I think following the 0.01% rule is an easy way to say,"Hey, if I want to spend more, if I want to get to what I call travel freedom in level four, then I need to have the financial discipline to build a million dollars in wealth." And once I've done that, then I can say, "Okay, you know what? I can upgrade, I can get a slightly nicer seat or I can stay in a slightly nicer hotel," et cetera. And as you think about it, because of the 0.01% rule, that amount of money is just growing over time. So by the time you have $5 million, you can basically spend $500 more a day, without having to worry about your wealth, impacting your wealth. And so that could be like, oh, I want to take a nicer trip, I want to stay in a nicer hotel and it's $500 more a night than staying in like a standard hotel. Okay, I can make that type of upgrade because I've built $5 million in wealth. So a long answer, but that's kind of the framework I'm running through.- Yeah, well I love that because it builds in flexibility. I mean, I think a lot of the issue with personal finance advice can be it's very rules based and the rules are static and they never change, and what I like about this rule or this concept is it allows you to change over time as your circumstances change, which I think is totally appropriate.- You know, that's the whole idea behind the wealth ladder is your financial strategy should change as you kind of move up the ladder.- So one of the things I love about your advice and some of the stories that you share is that they are a little bit different than the traditional personal finance experts. And so I thought it'd be fun to break down a few of those that I've pulled from some of your posts over the years. The first is that, and we've talked about it a little bit, but just the basic idea that most financial experts only harp on saving, like, saving, saving, saving. You have to save more. And one of the things you talk a lot about is the impact of earning more, especially as you're young. Why do you approach it that way?- Because all the data I've seen in all of personal finance suggests that it's your income that is building wealth, not how much you can cut your spending, et cetera. I'm not saying spending doesn't matter, especially in the lower wealth levels. I think in level one, if you're in a dire situation, you do need to kind of like tighten up where you can. But I think the way out of level one into level two, et cetera is a higher income, and there's just so much data that demonstrates this, that it's overwhelming. So let me read from, not read, I guess, quote the data from chapter two in "The Wealth Ladder." So I'm going to provide the wealth level, and then I'm going to tell you the median U.S. household income. So once again, this is household income, this is as of 2022/2023. So it's a little dated, but I don't think incomes have moved that much since then. I know wealth has probably moved a bit with stock market changes, but these incomes should still be pretty close to what they are today. So level one, the median household income is $32,000. That's for households with less than $10,000 in wealth. Level two it's $47,000. Level three, it's $83,000. Level four, it's about $200,000. And that's for someone with, 1 million to 10 million in wealth. Level five is $724,000. And level six, the median household income is $4.3 million. So you can see, I mean it's kind of like a flywheel in a lot of ways because as your income goes up, it allows you to save more and build more wealth, and then your wealth, if it's invested in income producing assets of some sort, and we can get into that, that can generate more income, which allows you to save more and so it becomes a flywheel where your wealth is built, is creating income, and then your income is creating more wealth. And then it's just like, think about this, if you have a hundred million dollars, let's just say it's just invested in a diversified portfolio and once again being conservative, let's say it gets 4% a year. You should have an income for $4 million per year for like basically the rest of your life. Of course in any year, the market could be down in a year and your income won't be as large, et cetera. But you could imagine if you have a hundred million dollars portfolio, it's very hard to not have an income of over a million dollars. You'd have to have that a hundred million dollars just sitting in cash and not earning anything, not even in a treasury bill or anything that's earning money. So it's very difficult to not have income once you have wealth.- Yep, well, and the caveat there to that is just the idea of as we earn more that we need to also be saving more, and sometimes, we get caught in that treadmill, right? As we earn more, our lifestyle creep happens and things go up and up and up and while our income increases, our savings actually hasn't increased, so we haven't really made any progress. So it is both, right? I mean it's obviously both. You have to save more, but you also have to focus on the earning side of things. You can't cut like to zero, like you have to eat, you have to have shelter, you have to have all of these basic things, but at some point you do have to focus on the earning side of money, especially I think as you're young because the more you earn, the more your career progresses and the more those things have chance to compound over time.- Yeah, I think you hit the nail on the head here. Like you can only cut spending so far, like there's a limit to survival and you know, living in a society, et cetera. With your income, there is in theory no limit. Of course, you know, at some point, like, once you're the richest person in the world, I mean that's where your most of your income has to do with probably changes in the value of the business you likely own, but for the most part it's just the income. It's just crazy once you start revving that up how much it can progress.- Yeah, the second perspective I thought kind of jumped out to me, I saw maybe a few weeks ago, you mentioned the impact of avoiding big mistakes versus focusing on getting things perfectly. So trying to time the market or just getting the absolute perfect thing when it comes to personal finance. What's a great example of that?- I mean, I think it just in general, people are so obsessed with optimization and like, I want to make sure I buy at the lowest price possible and all these things and over very long periods of time, like your entry price almost never matters, especially 30 years from now. It doesn't matter if you bought market peaks or not. Of course, it does matter on the margin, but like what matters is, does the market actually produce value, right? You know, grow in market cap so that you actually build wealth, right? In terms of just mistakes, like, you know, one 50% loss, you sell too early or you panicked in March 2020 and sold when the market was 33% down, and then you sat outside the market and waited for things to kind of cool down. The market can already recover before the dust is even settled, right? But while things are still getting worse, the market's already kind of pricing in, oh we're going to recover, we're going to get out of this. And you know, it goes on onward and upward from there. I like using 2020 as an example because, literally, the data was getting worse and the market was already recovering. In April 2020, no one was like, oh my gosh, everything's great now. No, things were getting worse, they were looking bad, but the market had bottomed in March 2020, right? And so like a month prior, market had bottomed, and then it started moving up and you know, from March 2020 to March 2021 is one of the greatest 12-month returns in the history of the U.S. stock market, and it was also a period of high uncertainty. No one knew what was going to happen, but if you had been sitting there making a big mistake by jumping out of the market and doing something like that, like you would've lost a lot, on a relative basis compared to someone who just said, Hey, I'm just going to stick with it and just keep doing what I've been doing, which is my plan, so.- Yeah, I remember driving down the interstate when the market was catering at the beginning of the pandemic blaring AC/DC thinking, well this is the end.- We were on a highway to hell, but we somehow made it off, so.- Yes, yes, we were. And I think the third thing that maybe it's a personal favorite of mine was your advice to people who are behind on retirement savings to not only save more, but to exercise more. Tell me about that.- Yeah, I think the typical advice which is like, oh, you didn't save any money until 45, like, what should I do? Everyone's like, oh, you got to just save more. That's like the default answer, of course, that's just like the mathematically obvious answer. If you don't save any money, you're not going to have anything for retirement, so it's obvious that you have to save more. I don't think that's an insightful answer. I don't think it's helpful because everyone knows it. There's no person that was like, oh my gosh, that's actually the answer I need, to save more. Like, no, obviously, right? So my solution was a little bit different, which is like, I think you should actually start exercising more. And the thinking here, not only is that going to improve your health and be good for your health and your longevity and all these other things that make you feel better, that has its own positives, but that's not even the reason. I'm saying this from a financial perspective, and the idea here is you didn't save early on in your career for one reason or another. Don't beat yourself up over it. You can't change that now. You're here, so what can you do now? Exercise more to improve your health so that you can work more years later. So if you were normally going to retire at, oh hey, I'm going to retire at 60, maybe through working out and doing all this stuff, now you can retire at 70. So now you've just given yourself another 10 years to save money, have your money compound before you hit retirement, right? And of course that's not a like, well Nick, that's not a great solution. I don't want to work 'til I'm 70. Well, you got to come up. If you didn't make the sacrifice before, you got to make it later. There's no shortcut here. There's no magic wand I'm going to have that's like, oh, just do this and all that money's going to show up. It's just not going to happen, right? Like I think the thing to think about is like, okay, yes, you need to save more, but how do you do that? And so the only way I know how that's basically guaranteed to work is to give yourself more time, because time is the thing you lost and that's the thing you need to get back. So that's what I would focus on is like how do you build that additional time in there and how do you kind of use that to then improve your financial life in the future.- Love it. You shared a story in the book which was, I mean, you shared a lot of great stories, but one of the ones that stuck out to me was about you learning how to play chess as a kid and then how you equated that to wealth building. Can you tell me a little bit about that story?- Yeah, so when I was five years old, my dad, or I think I was like four, when he started teaching me chess. And so by the time I was like five or six, he'd invite his friends over to play me. Now of course his friends didn't really know how to play chess. They maybe knew how the pieces moved, but that was it, and so I would beat them, right? So like, it was very interesting because imagine you go over to your friend's house and there's a 5-year-old, a kindergartner in there and you're playing a game that you've heard of, you know about, maybe you probably didn't actually study it or anything, but you're now playing a game and then the five-year-old beats you, right? It's pretty impressive. But I will admit I was not some chess prodigy or some genius. I just practiced the game a lot as a little kid. That's all I really did in my free time when I was four to five years old, right? I was playing chess a lot with my dad, and so I played and then my parents divorced and I talked about the bankruptcy. Well they had a bankruptcy and divorced, right? And then I kind of stopped playing. I didn't really play that much anymore. You know, maybe once in a while I'd play with my dad, on occasion, on a holiday or something. And then, when I was like 15, 16, I was in high school and a friend was really into chess, and I said, okay, maybe I should get back into it. So I started playing again, whatever. I started to get a little bit better. I'm like, okay, cool, and then we said, let's start a chess club. We started a chess club and then eventually we went to our first chess tournament, and there was a guy at this chess tournament. I don't remember his name, I'm not going to lie, I said Victor in the book, but it doesn't matter, I don't remember the guy's name now, but I just remember he was really good, and I'd watch him play, right? Because you have breaks between all your games and stuff, and I couldn't predict what he was going to do. It was like, I was watching. Most people I could be like, okay, that's what I would've done, or yep, I get that, or I've seen this or whatever. I just couldn't predict his play, and it was so fascinating to me because how I played chess was I went and I studied openings and I kind of just, I did the same stuff over and over again. I got very good at like learning a certain opening, learning how people would respond and then kind of just countering that and then using that to my advantage. But because this guy was like unpredictable in his play in some ways and he was good, I couldn't compete with him, right? And so he beat me and you know, I eventually, I think I faced him another time and he beat me again, like I never could beat him. But I think the lesson he taught me was like my strategy of just sitting and going through openings over and over was not the way to kind of like get better at chess. I had to do something different, right? And I think the same thing is true in our financial lives, right? And so I use this story because the strategy you use at one point is not necessarily the strategy that's going to get you to that next level, right? And I'll give you a very simple example of this. And this is what I think is very relevant for people in level four, so that's $1 million to$10 million in wealth. So in general, to get into level four, you need a few things. You generally need a decently high income, right? You don't need to be making necessarily like 500 grand a year, nothing that high, right? But you probably need to make six figures or close to it, right? You need to be able to save money, right? So you need to have a decent savings rate, you need some decent investment returns, and then you need time. So those are the four ingredients, right? It's like the income so that you can save money, the investments so that's helping you compound your wealth, and then time. And so if you give someone enough time and they have a decent income, they'll likely get to level four. And for the record, the time factor, the median age of all the households in level four, which is 1 to $10 million in wealth is 62 years old. So if you took all of those households in the US, you put them in a room and then you took the median, the middle age basically, they would be 62. So time is a big factor in a lot of this, right? But to get to level five, all of those things I just said are not the way to get there. Like, you are not going to get to 10 million plus by going to a nine to five job, saving that paycheck, and then investing it in the S&P 500. It's just not going to happen in any normal timescale unless you're like a celebrity or an athlete, entertainer, something like that, where your income is just over a million dollars a year or something. That's the only way you're going to do that. But if you don't have that, then you're just not going to make it. And the reason why is, because the math is just so, it gets difficult to break 10 million. So let me just give you an example of this, and this is in the book. Let's say you start with a million dollars, you hit a million dollars in your portfolio, so that's your net worth. Let's just assume that's the only thing you have is your portfolio. You hit a million dollars today, which is already a massive accomplishment, congrats. You're saving a hundred thousand dollars a year after tax. That's a lot of money to save, right? That's no joke. And you're earning 5% a year. How long does it take you to get to $10 million once you hit a million? The answer is 28 years. Like, think about that. If the median age of someone in level four is 62, that means if that person just continues the math I gave and everything, using those assumptions, they're not going to hit level five until they're 90 years old. Now who wants to work and do all that, saving 100k a year for 28 years just to hit 10 million, right? It's crazy. Even if you're saving 300,000 a year, which is an even higher amount of money, right? That's going to still take you 17 years, right? You hit a million, you save 300k a year, earning 5% a year, it still takes you 17 years to get to 10 million. So the logic here is, why I told this whole story and all this math is, the stuff that got you into level four, the tactics and the strategy you followed are very different than the things you need to do to get out of level four. And so that's kind of like this chess story I told earlier where like I was learning, I was following one strategy. I'm like, oh, this strategy is going to work, and it did get me good enough at chess, but it wasn't sufficient to get me to the next level as a chess player. And so I just realized that, I didn't know that at the time, but I realized it later and then I was able to apply it to wealth building.- Yeah, I love that story. In the intro to the book, you said this book is both a guide and a warning. Sounds ominous, what do you mean by that?- So it's a guide because I want to provide a high-level understanding of how to build wealth, at least within like a developed economy, at least at this point in time, and it's a warning because there's not necessarily this need to keep building wealth. People sometimes feel there is, but I don't think it's always necessary. And so the guide is like, hey, here's how to build wealth. The warning is, but hey, you may not want to keep building wealth beyond a certain point and here's why. And so it shows the downsides of wealth. It highlights a lot of the other things that people overlook when they're trying to build wealth. There's a lot of people in level four like, oh yeah, it would be so cool to have 10 million, 15 million bucks and be in level five. But I make a lot of arguments that actually it's probably not what you want and the sacrifices you might need to make to get there could actually make your life worse, and I kind of talk through a lot of those things and it's not just a cope, I fundamentally believe it. I think it's very difficult to get into like level five and six, and I think the people that do it are generally entrepreneurs and they just love being entrepreneurs and our society just by chance, given we have a capitalist society, happens to reward those people more than someone who is not an entrepreneur, right? At least when they do well, of course. So I think that's the big difference there, and that generally the people that make it into level five are some sort of entrepreneur that sold a business or joined a startup early, got equity, and then that business became very, very valuable, and so once you realize that, you can say, okay, do I want to follow that strategy? I'm in level four now, so it's like, do I want to quit my job and go start my own business and do all this? I'm not sure that's necessarily the right strategy for a lot of people in level four, and I just challenge that and I say, hey, what's the cost of possibly doing something like that?- Yeah, that's great. I think we'll end with this one. I'd like to ask you to expand on one of my favorite quotes of yours, and that was,"The most expensive thing some people own is their ego." What'd you mean by that?- I think there's a lot of times when it comes to building wealth where an individual's ego is actually preventing them from either building more wealth or keeping the wealth that they have, and there's plenty of examples of this. If someone's trying to portray a certain lifestyle or identity, and they may spend more than is necessary to live a certain lifestyle, and as a result of that they end up lowering their savings rate and then as a result they can't build as much wealth. That's one example. I think this is very true in like level three to level four because people in level three and level four, yes there's a 10x difference in their wealth, but their lifestyles are roughly similar. Like they may shop at slightly different grocery stores, maybe they drive slightly different cars, maybe they live in slightly different neighborhoods. Level four is probably a little nicer than level three, but their lives are roughly the same. Most of those people are still going to work, they have a nine to five, like they're on the same airplane, like people in level four aren't flying private, right? So when you go through the checklist of like, what do I do with my life? Like someone in level three and level four are very similar in many ways, right? And so when you think about that, like the people in level three that try to spend as if to show like they're in level four, like by having the nicer car, living in the nicer neighborhood, et cetera, they could end up holding themselves back because they don't have a sufficient income to support that lifestyle, right? So that's one way of doing it. The other way is I think in like levels five and six, for some people, the most expensive thing they own is their ego, and what I mean by that in level five and six is that those people can get so into, oh, my business is the greatest thing ever. I'm not going to sell any of it. I'm not going to diversify my wealth at all. And so what tends to happen is they're over concentrated and then if their business has a hiccup or something bad happens, like they could lose a lot of that wealth, right? If their business goes through a really tough period, they could lose everything, right? And so I think that's ego as well. It's not admitting like, hey, I don't know the future, I don't know what's going to happen, and so I think I should diversify a bit, and a lot of those people don't and as a result they end up losing that wealth and dropping out of level five, six, et cetera. So it's a very nuanced statement, but I think it applies across the wealth ladder depending on your situation.- Yeah. Nick, this was awesome. Thank you so much for doing this, and congratulations on your new book. It's fantastic. I hope that all of our listeners pick up a copy. Where can people learn a little bit more about you and your work?- Thank you for that, and I'm at OfDollarsAndData.com. I blog once a week, but in addition to that you can find me on Twitter/X, Instagram, LinkedIn, et cetera, and I try to answer every DM, so if you have a question about something, feel free to DM me. I'll try to answer as soon as I can. So thanks for having me on the show, Adam, and I appreciate everyone listening.- All right, good to see you again, Nick.- Thanks.- [Adam] I hope you found this helpful. If you did, please subscribe and share with your family or friends. If you have a topic you want us to cover in future episodes, send us a note through our website. And, if you're at the point where you want an expert opinion on your finances, reach out and we'd be happy to start a conversation. And remember, any comments, insights, or strategies discussed on this podcast are intended to be general in nature and therefore may not be suitable for you and your situation, whatever that may be. 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