Wealth Ladder - Getting the Rungs Right

I'm a sucker for "rate yourself" tests on the Internet, for example, how do you measure up in health, sports knowledge, 20th century history, or wealth? Concerning the latter, Nick Maggiulli's Wealth Ladder has specific numerical criteria: [bold added]

Those on the first rung have almost no wealth; the threshold is less than $10,000. Each subsequent rung represents an upper threshold of wealth 10 times as large as the previous level. Mr. Maggiulli’s scale is designed to express the declining utility of money as it accumulates. He also denotes each rung by the “freedom” such wealth generates.

Level 2, $10,000 to $100,000, offers “Grocery freedom” because “you can buy what you want at the grocery store without worrying about your finances.” Level 3, $100,000 to $1 million, provides “Restaurant freedom” because you can order what you want when you dine out. The fourth rung, $1 million to $10 million, means you can travel wherever you want; the fifth, $10 million to $100 million, means you can afford the home of your dreams. Mr. Maggiulli’s sixth and highest level, anything above $100 million, gives you the ability “to have a profound impact on the lives of others” through business and philanthropy....

Mr. Maggiulli recognizes that knowing which rung of the ladder you’re on doesn’t help in getting to the next one, so at each level he describes what is required to climb higher. Getting more education is most effective at Level 2. Income-producing assets are vital at Level 3. Once you get to Level 4, you’re going to have to take a different approach. If you reached Level 5 it is probably thanks to concentrated investments—the result of starting a business or accruing a big slug of company stock.

Some rungs are far too wide. Rung 3 spans $100,000 to $1,000,000, but IMHO there is a huge difference between the low and high end of the range. In the Bay Area $100,000 could be a half-year's salary, perhaps enough for an emergency expense reserve, while $1 million in many parts of the country allows one to have a paid-up home plus hundreds of thousands of dollars in savings.

There is a similar difference between $1 million and $10 million; again in the Bay Area, the lower amount could be a down payment while $10 million does allow one to have that four-bedroom house plus a comfortable retirement.

As for rung #5, over $100 million, I'll never get there and I'm glad because I don't need those kinds of problems (he said disingenuously).

Update - 7/29: Nick Maggiulli elaborates in a Morningstar interview.

Christine Benz: You share what you call as the 0.01% rule. Can you talk about what that is and how it can aid with decision-making about doing spending, and what expenditures to stress out about and which to not stress out about?

Nick Maggiulli: Yeah, so the 0.01% rule basically says that you can spend 0.01% of your wealth or just another way of looking at it’s one-10,000th. So you could call this the one-10,000th rule as well. You can spend one-10,000th of your wealth on a daily basis without having to worry about anything. And so I’ll explain where that comes from. So let’s say your net worth is $10,000. You’re basically right on the cusp between level one and level two. That means you can spend an extra $1 per day without any worry about jeopardizing your future wealth. And where that $1 that 0.01% comes from is, on an annualized basis, if you’ve got a return of 0.01% a day, that’s like a little bit under 4% a year. It’s like 3.7% a year. It’s very conservative return. So every day your wealth is generating that much money. So if you have $10,000 in wealth every day in theory, you’re generating an extra $1 a day without doing anything. So in theory, you could spend that $1 and not jeopardize your future wealth. So if you have $100,000 in wealth, you could spend $10 a day. If you have $1 million in wealth, you can spend $100 a day, et cetera. Now, obviously this isn’t your total spending. If you live in the United States, you’re not going to survive on $1 a day. This is the marginal spend. Everyone’s making a spending decision, you’re making it on the margin.

Like when you go to buy a car, you’re not saying, oh, should I get a Toyota Camry or a Maserati? You’re debating between the Camry and the slightly nicer Camry. That’s what I’m saying. You’re always doing it on the margin. Like when you sit down in a restaurant and you’re like, do I want to get the burger for $20 or the salmon for $30? That marginal difference is $10. And so my argument is that once you have like $100,000 in wealth, that extra $10, you can spend that every time you go to a restaurant without worrying about it. And so the 0.1% rule works in that way by just it allows you to have some lifestyle creep because you’ve shown financial disciplines. Like, hey, look, I’ve reached this level of wealth so I can now spend more in certain categories. But until I reach that level of wealth, I’m not going to do that.

And so like in my example—I still to this day, I don’t have basically any travel freedom. When I go to a restaurant, I’ll buy whatever I want. I don’t care. But I am still getting the coach seat. Maybe I will upgrade my seat to a slightly nicer seat, not a first-class seat, but I’ll go like get something with more legroom. That’s where I’m at in my wealth journey. Like one day if I do well, if things go well for me, I will maybe always get a first-class seat, but that’s not in the cards for me right now. And so I’m spending according to my wealth level, and I’m very strict about that.

It’s because that the extra whatever $100 or whatever it is, is not enough to upgrade to first class every time. So I can’t spend that money. That’s how I work through it.