When Money Stops Being the Point

I recently read The Wealth Ladder by Nick Maggiulli and found it both thoughtful and practical. Below are a few notes and reflections that stood out to me. If you’d like to go deeper, I’d recommend picking up a copy of the book.

Maggiulli’s Wealth Ladder is a tool for thinking about wealth. He divides the financial world into 6 levels, each representing a different functional level of net worth. There’s nothing magical about where these levels start and end. What it highlights instead is how your net worth affects your life at each level, both in terms of opportunities and challenges. 

Level 1: <$10,000

Level 2: $10,000 - $100,000

Level 3: $100,000 - $1,000,000

Level 4: $1,000,000 - $10,000,000

Level 5: $10,000,000 - $100,000,000

Level 6: $100,000,000+ 

Level 1 is vulnerable and stressful because it means not having enough money to easily absorb a small financial setback. 

Level 2 is better because you start to have some cushion for car repairs, vet bills, and even a down payment on a home.

Level 3 means you might not worry so much about which groceries you buy, or whether you order an appetizer with dinner. You can still be frugal, but a $10 swing either way likely isn’t shaking your financial world. 

Level 4 is where many of my retiree clients live. Level 4 usually means you have a paid-off house, and enough investment income to put freedom of time within reach.

Level 5 is what Maggiulli calls “house freedom,” you can probably buy a house in any neighborhood you want. 

Level 6 is more like “total freedom.” (<0.01% of US households)

Roughly speaking, most households fall in Levels 1-3, though Level 4 represents a sizable chunk at roughly 18% of US households. Levels 5 and 6 represent a much smaller percentage. 

Each level is characterized by its own path to getting there, as well as its own challenges. By the time you reach level 3, for instance, you’ve already established yourself in a career, you might own a home, and you’re probably at a point where you’re saving a significant amount for retirement. Saving money on smaller purchases matters a lot less than career advancement and good investment results.

Level 4 is, I think, one of the biggest shifts in how you spend your life. You might have a paid-off house, a healthy 401k balance, and some assets in taxable accounts. At this point, you might still be working, but you’re far more free to choose when and how you work. Financial considerations remain, but freedom of time is within reach, whether or not you’ve chosen to grasp it. A lot of people retire at this level, depending on their age and the other income available to them from pensions and social security. 

What I see most often at this level is more like a sense of uncertainty than a hunger for more. People realize they could keep pushing, and they might get a lot of personal value from their work. But as they reach (and cross) the threshold of financial independence, their focus shifts from “How do I get there?” to “What is this actually for?” 

Some people find themselves wanting to work less, even if they have a hard time actually doing so. Others find the opposite. They actually start to enjoy their work much more, having shed some of the stress and pressure to perform, as well as any fears of being laid off, fired, or speaking up to their managers. 

Also at Level 4, you start to think about protecting your financial situation, more than maximizing the growth. That looks like liability insurance, proper titling on your assets, and having a good estate plan in place that protects your assets for the next generation. 

One surprising thing from this book is the gulf that exists between level 4 and level 5. An amount that would have once been utterly life changing earlier on, say $100,000, just doesn’t make nearly as much difference to your daily lifestyle when you’ve already got $3,000,000. What you might infer from this is that continuing to save money isn’t going to move the needle very much in terms of your overall lifestyle. The more powerful factor is time. An extra 10% return on $3,000,000 is a gain of $300,000. That’s far more than most people can save in a year (or several years). It’s for this reason that I sometimes recommend a shift to working part-time for people in this position. The extra dollars from saving matter a lot less to your life than freeing up some extra time in your week, and a lot less to your portfolio than the extra year of growth. 

The other interesting thing about level 5 is how much harder it is to save and invest your way to $10,000,000. 

While it is true that compound interest is indeed a powerful force for wealth accumulation, Maggiulli wisely points out that saving and investing your way to level 5 strains the limits of the human lifespan. If you max out your 401k ($24,500 a year, adjusted for inflation), and the money grows at 6.55% (net of inflation), it would take you 52 years to reach $10,000,000 (in today’s dollars). 

Even in the unusual scenario where you routinely saved a quarter of a million dollars a year, it would still take 20 years to hit $10,000,000. 

To me, that begs the question, “what is your life worth?” 

It is one thing to chase your dreams, and to find yourself blessed with a level 5 situation many years in the future. It is another to make it your life’s ambition. To me, that looks like obsessing with an outcome rather than enjoying the process. 

What can you actually do differently with your life when you have $50,000,000 instead of $5,000,000? Your house might be different, your accommodations while traveling might be different, but what about how you spend your time? 

My personal perspective is that most of the things I enjoy are relatively cheap or free. The greatest constraint I have is whether I have enough time to do them, and whether my friends and family members have time to do them with me. 

Really, the scarcest resource is not money, but time with loved ones. My clients often echo this sentiment. Even when their net worths differ by millions of dollars, the primacy of relationships and social connection remains constant. It is easy to become preoccupied with your career and with making money, but experience will show that these personal relationships are truly the most precious and valuable form of wealth.