By Lorna Tan,
Head, Financial Planning Literacy
If you’ve only got a minute:
- The Wealth Ladder by Nick Maggiulli presents a way to visualise the journey of building wealth.
- To move to the next wealth level, the strategy differs for each wealth level.
- It is prudent to spend money according to your wealth level as doing so ensures a sustainable way to climb the wealth ladder.
This article was first published in The Business Times.
At some point in your wealth accumulation phase, you might have wondered why the needle simply isn’t moving. Perhaps you are stuck at a certain money level despite making your money work hard for you and are frustrated at how to move forward in your financial journey.
The book The Wealth Ladder – Proven Strategies For Every Step Of Your Financial Life by Nick Maggiulli presents a way to visualise the journey of building wealth and offers some clarity on how to move from one wealth level to the next. The author suggests that wealth isn’t a straight line but a ladder. In fact, he says that the six wealth levels are separated by a factor of 10, because it corresponds with the increase in wealth needed to create a large lifestyle change.
The Wealth Ladder
Source: The Wealth Ladder, Nick Maggiulli
- Level 1 (<$10,000) Paycheck-to-paycheck: You are conscious of every dollar you spend. This includes people with crippling debt.
- Level 2 ($10,000-$100,000) Grocery freedom: You can buy what you want at the grocery store without worrying about your finances.
- Level 3 ($100,000-$1 million) Restaurant freedom: You eat what you want at restaurants.
- Level 4 ($1 million-$10 million) Travel freedom: You travel when and where you want.
- Level 5 ($10 million-$100 million) House freedom: You can afford your dream home with little impact on your overall finances.
- Level 6 ($100 million+) Philanthropic freedom: You can use money to have a profound impact on the lives of others (eg buy businesses, engage in large-scale philanthropy, and so on).
Level 1 is for those with a net worth (assets minus liabilities) less than $10,000 while level 2 is for those whose net worth is from $10,000 to $100,000, and so on. Each wealth level up the ladder is more difficult to reach than the one before it, which explains why the number of people in each level tends to decrease as we climb up the ladder. The book stated that most people fall in levels 1 to 2.
The enjoyment of wealth isn’t something that goes up with every additional dollar we get, but something that increases in steps. This is because most people in the same level of wealth consume in much the same way. For instance, if you are in level 3, you won’t typically own a yacht nor fly in a private jet. And you may only fly first class if you are lucky enough to get upgraded or have chalked up travel miles. If you are in level 1, you rarely fly.
So, while the person in level 3 can afford a lifestyle that is quite different from that of a personal at level 1, the individual with $900,000 lives somewhat similarly to a person with $800,000. Despite the difference of $100,000, they likely shop at places, drive similar cars and live in similar homes. Both have similar lifestyles but one may be slightly fancier.
Mr Maggiulli also noted that the same amount of money given to people on different wealth levels would have a different impact. For example, if you are in level 3, an extra $10,000 won’t move you to level 4. However, if this amount of money is given to a person in level 1, it may get him to level 2.
The Wealth Ladder helps us understand why some people don’t feel rich, despite having a lot of money, particularly if they are in say level 4 and comparing with people in level 6.
How to climb the Wealth ladder
The financial strategy to get you from level 1 to level 2 will be very different from the strategy you use to get from level 5 to 6. That is, what got you here may not get you there. The book highlights that as you move up the wealth ladder, you spend less time working for money and more time having money work for you, such as starting a business where others are employed to help build your wealth, and via investments.
For level 1, the author’s advice is to build safety - whether it is financial safety or emergency funds - to avoid falling back financially. In a zoom session with customers who pre-ordered his book, he said that those in level 1 should try to get into some level of safety, so they don’t have to worry about what happens next. Once that is achieved, focus on increasing income and “escape level 1 forever”.
As you move from level 1 to level 2, for most people, the focus is on working smarter, rather than harder. This means building your skillsets so that you get paid more per hour.
Level 3 is where career advancements, side hustles and individual investments can make a bigger difference in your income. Every decision you make should eventually add $1,000 - $10,000 to your wealth. This means that you should be deliberate in your career choices and be mindful of what skills would increase your income over the next few years, said Mr Maggiulli.
Once you are in level 4, the book stated that the best way to increase your income is through career pivots, starting a business, and making additional investments. You may also find yourself stuck in level 4 permanently because it is the most difficult level to break out of. Relying on your job alone will likely not move the needle enough to get you to the next level. The “most realistic way” to climb beyond level 4 is through business ownership, especially one that can be sold at a significant profit in the future.
Spending money according to your wealth level
It is prudent to spend money according to your level as doing so ensures a sustainable way to climb the wealth ladder. For instance, if you are in level 2 and splurged on a lavish vacation without caring about the costs (level 4), then it would be difficult to move further up the ladder. Until you have the money to spend frivolously within a level, be strict about your spending in that level. When you are disciplined in this, your chance to progress up the ladder increases.
I believe that it’s alright to stay at a certain level and be contented about it. For example, if you are already at level 3 or 4 and have enough wealth to pursue your life purpose and fund your financial freedom, that’s fine.
Furthermore, the median age tends to go up as you move up the wealth ladder so if you are in level 4 you are likely to be in your 60s.
As such, you have the option of accepting that level 4 is your future so be contented and enjoy life, or use more leverage to climb higher.
Role of financial literacy
The efforts required to achieve financial wellness go hand in hand with continued upgrading of financial know how. The quest for financial knowledge was evident in the 2,000 people who attended the two-day National Achievers Congress organised by Success Resources last month. Another 500 attended via online. Of the total, about 800 participants were from overseas.
While there were other speakers on real estate, options investing, AI, and brand building, the star attraction was undoubtedly author and wealth guru Robert Kiyosaki. His core message that true wealth begins with financial literacy remains unchanged since his maiden appearance at the congress in 1994 to launch his book Rich Dad Poor Dad.
Financial literacy is a critical factor in accumulating wealth, providing the knowledge to make informed and wise investment decisions in an ever-changing world. With the plethora of financial information on the Internet and the availability of wealth-related seminars and programmes, we are spoilt for choice on how we empower ourselves to build wealth.
