Climbing the wealth ladder : A very interesting read.
If we use the 0.01% threshold as a guide, a working-age adult could use the following amounts to determine their wealth level (note: the x-axis is a log scale):
I choose these specific levels because, for each category, the marginal spending decision represents about 0.01% of the net worth level shown. Let me explain.
Let’s say you are at the grocery store and you are deciding whether to purchase a dozen eggs for $1.99 or a dozen cage-free eggs for $2.99.
If your net worth was $1,000, this single choice (paying $1 extra for cage-free eggs) could have a slight impact on your finances as it would represent 0.1% of your total assets. However, if you were worth $10,000 (or more) the decision to spend $1 more would likely be trivial to your finances since it represents less than 0.01% of your wealth.
Nevertheless, we can extend this thinking to more expensive spending categories as well. For example, imagine you are in a restaurant where you are deciding between a burger for $15 and salmon for $25. If your net worth > $100,000 then the $10 difference is trivial (<0.01% of net worth). If you continue to scale this logic upward you will see that the marginal impact of a single decisionwithin each level of wealth could be as follows:
- Level 1. Paycheck-to-paycheck: $0-$0.99 per decision
- Level 2. Grocery freedom: $1-$9 per decision
- Level 3. Restaurant freedom: $10-$99 per decision
- Level 4. Travel freedom: $100-$999 per decision
- Level 5. House freedom: $1,000-$9,999 per decision
- Level 6. Philanthropic freedom: $10,000+ per decision.
When you view wealth in this way, it looks more like steps than a smooth, ever-increasing line. This is because most people in the same level of wealth consume in much the same way. If you are in level 3, you don’t fly private and you only fly first class if you are lucky enough to get upgraded. If you are in level 1, you rarely fly.
More importantly though, the best way to climb the wealth ladder is to spend money according to your level. If you are in level 1 and you book a vacation without caring about the costs (level 4), then you won’t progress further up the ladder. Until you have the money to spend frivolously within a level, you have to be strict about your spending in that level. Get this right and you have a far better chance of progressing up the ladder.
