VALUE: After Hours (S07 E25): The Wealth Ladder Framework

During their recent episode, Taylor, Carlisle, and Barry Ritholz discussed The Wealth Ladder Framework. Here’s an excerpt from the episode:

Nick: What’s up? Thanks for having me on, guys. Appreciate it.

Tobias: Pleasure. Long time no see. Where Nick’s got a new book out, it’s the Wealth Effect.

And my copy, which came from nick, had a $2 note in the front.

Jake: Oh, I love it.

Tobias: Which I love, too.

Jake: Great touch.

Tobias: Yes.

Nick: The Wealth Ladder. We all have them, and I’ve sent out the $2 bills and everything, so.

Tobias: I thought it was going to be like that you know that scene from Not Training Day. What’s the Draft Day?

Nick: Oh, I haven’t seen that. Oh, where they tape the money back.

Tobias: The money to the back. See what they read it. Yeah.

Only one guy sent the money back.

Nick: That’s funny.

Tobias: Tell us a little bit about the Wealth Ladder. Tell us a little bit about how it’s what you had left unsaid after. Just keep buying.

Nick: So just keep buying. Which is a very investment heavy book. I kind of put it forth as, like, hey, if I don’t know anything about you, here’s my answer on how to build wealth.

Right. Just keep buying a diverse set of income producing assets. And it’s a good answer.

It’s good for most people, especially in the States. Right. You know, but I realized it was a little bit flawed in the sense of it doesn’t cover everyone.

For someone who’s, like, deeply in debt, it’s not the right solution. For someone who’s trying to get to you know, 10 million plus in wealth or something like that, just buying the s and P500 and having a good job, you’re just not going to get there without some extreme circumstance like you invested for 60 years or something like, you’re just not going to get there. The compounding won’t move quickly enough.

So I realized that it was flawed. And so I said, what if I could zoom out a little bit and find a larger overarching framework that kind of answers all these wealth building questions? And I came up with the Wealth Ladder, which takes net worth and it breaks it into six distinct levels, and based on which level you’re in the strategy to get to the next level and like the things to avoid change.

And so it’s just like a very high arching, you know, money book and wealth building book. And so my, my goal with this was instead of providing a one size fits all solution, like just keep buying, which I’m still very proud of. There’s nothing wrong with that.

Just keep buying is just one of the strategies on the wealth ladder. And so you can take any financial book, you know, and it’s going to sit somewhere on the wealth ladder. All of them sit there and they’re all talking to a certain type of person or a certain kind of level on the wealth ladder.

I don’t say rung because I don’t think rung sounds as good. So I’ve abandoned the word rung on the ladder. But yeah, and so I’ll go through the six levels very briefly and then we can kind of dig into that.

Tobias: Before you do it, I saw that there was a, the I think that your levels got tweeted around yesterday with people debating those levels. So I think it’s kind of interesting. Like, let’s, let’s split.

Nick: Yeah, yeah, yeah. So I I, I tweeted a screenshot from the book and I said, these are the new economic classes in the United States. And it like, a lot of people liked it, but a lot of people said it’s crazy.

And they’re both kind of right. And I can get into that. So let’s, let’s go through the levels.

Yeah, it’s, that’s kind of I, I knew it was gonna kind of do well. I didn’t think it was gonna do that well. I got like 2 million impressions, so it even did better than I thought.

So the six levels are once again, this is net worth. So all your assets minus all your liabilities. Level one is less than $10,000.

Level two is 10,000 to $100,000. Level three is 100,000 to a million dollars. Level four is 1 million to 10 million.

Level five is 10 million to 100 million. And lastly level six is over $100 million. Now just to tell you how that breaks out in the U.S.

in terms of U.S. household wealth, there’s about 20% of people in level one, that’s less than 10,000. 20% are in level two.

That’s 10,000 to 100,000. About 40% are in level three. That’s 100,000 to a million.

18 roughly are in level four. That’s about 1 to 10 million. And then the last 2% are in level five and six.

With most of those being in level five. There’s less than, like, I think there’s like 11,000 households in the level six, which is 100 million plus. There’s a very long tail here.

But the tweet that got me in a lot of trouble was I said, okay, all these levels map to economic classes. So it was like lower classes. Level one, working class is level two, level three, which is 100,000 to a million.

I said it was middle class. And then I said, 1 million to 10 million is upper middle class. And then I said, you know, 10 million to 100 million is upper class.

And so obviously, you know, there are some fair pushback. Like you’re saying $8 million in Alabama’s upper middle class. Like, no, of course not.

Right. But I wanted to make it location agnostic in the sense of, like, if you have $8 million and you’re in New York City, you have a fantastic life, but you still don’t have that life that I think the upper class has in the sense of you probably aren’t flying private. And if you are, maybe you do it like once every few years, if that.

Right. You’re probably, you know, you probably don’t have a driver maybe. I mean, there’s a bunch of things that you’re probably not doing that someone that with 10 million-plus could do.

And so I think just realizing that the consumption patterns are a little bit different. And of course, someone with 8 million is very different than someone with $2 million. But, like, they’re more similar than you would think.

And so I think someone with 2 million can look at someone with 8 millions life and recognize the lifestyle, I think, past, you know, as you start to get deeper and deeper into level 5, 10 million, 12 plus. I don’t think they recognize the lifestyle as much anymore. And so that’s where I tried to divide these.

And of course, it’s not perfect. Like, we can make debates. I mean, with home equity prices being higher, there are people that are, quote, upper middle class who are like 65 years old with, you know, $400,000 in home equity and maybe $700,000 in a portfolio.

And that’s like, yeah, is that upper middle class? I’d still say so, but we can. We can get in debates about the particulars.

I’m just trying to come up with a framework that fits the data pretty well. It’s easy to memorize. It does all these things.

And I just happen to come up with something that I think works quite well and people seem to like it so far. But of course there’s. There’s going to be pushback for that stuff.

Tobias: It seems like a pretty good. I mean, just by the percentage it’s got in, it sounds pretty reasonable. I got a question for you.

The. Charlie Munger used to say the first hundred thousand is the hardest or the first hundred thousand is a bitch. And then I guess that most people think it’s like the first million is the hardest.

I don’t know if anybody particularly has said that. And then Boone Pickens, of course, said the first billion is the hardest.

Nick: That was probably right, but Boone is. Yeah, Boone’s the most accurate, I think. I don’t know.

When Charlie Munger said the first hundred thousand is the hardest, it was probably 20 years, I’m guessing, in like. Oh, he’s only 20 years ago.

Tobias: I would guess like, maybe it’s not that long ago. It was more recently. He’s always.

Nick: But when he’s. When he said it. So let’s say he said it in, let’s say 2000, right.

Or 2005. So, you know, inflation’s basically doubled that. So 100,000, that would be about 200,000.

Now, there’s one thing that he said it then, but maybe he’s saying it as like a memory, like when he got his first hundred thousand. So maybe that’s like a million today. Right.

If you go back far enough, you can think with all the inflation adjustments, I think it’s very likely that inflation, if you inflation adjust that statement, it’s the first million is the hardest. That’s what I would say. Of course, I don’t actually know what he thinks about that.

And it’s just fun. Millionaire stats. So, you know, Millionaire became very popular on the turn of the Century, 2000, because the show who Wants to Be a Millionaire Came on right around that time.

That was like a big thing. On becoming a millionaire today, you need about $2 million to have to have purchasing power as a millionaire. But here’s actually the bigger.

The bigger change because this level four, which is 1 to 10 million, that cohort, inflation adjusted, is now roughly said 18% of the U.S. back in 1989. And once again, inflation adjusted, it was about 7% of the U.S.

so it’s a much bigger group now. And so to have the. In 2000, if you had a million dollars, you were in like the top 7% net worth.

You’re in the top 7% of U.S. households today. For you to be in the top 7% or at least in 2022, 2023, it was about $4 million.

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VALUE: After Hours (S07 E25): The Wealth Ladder Framework

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