The Six Levels of Affluence
January 21, 2020 11:31 AM   Subscribe

"If I gave you $100, would that change your life? What about $100,000? How about $100 million? Your answer will depend on many things including age, family situation, and your current net worth. More importantly though, how you change your behavior after receiving such money can tell you a lot about your current financial standing." Climbing the Wealth Ladder
posted by COD (64 comments total) 46 users marked this as a favorite
 
The log axis submarines his main point, missing his audience altogether. Not saying he's wrong in principle, but the values seem arbitrary, too.
posted by j_curiouser at 11:38 AM on January 21 [2 favorites]


It's not a bad axis for consumption. It might be made better if focused less on leisure (eating out and vacationing) and more on more fundamental moves around wealth formation and transfer, such as paying for kids education without financial aid, and giving kids down payments on their first homes.
posted by MattD at 11:55 AM on January 21 [18 favorites]


The essential idea of the logarithmic significance of costs seems right. The quantization into steps seems like a mental shortcut rather than anything real.
posted by Jpfed at 11:56 AM on January 21 [8 favorites]


I really like this model, thanks.

Over recent years I've been delving quite a bit into things like the positive psychology research, and one thing that emerges is that supposedly one's happiness doesn't increase with annual income beyond US$70K.

(this would, of course, depend on the cost of living wherever you are, but let's just assume average American cost of living)

Beyond that, the theory goes that people just get stuck on a hedonic treadmill, and if you're on $70K and unhappy, then you think $100K will do it, then $500K, then $1M, $10M, 100, 1000, 10000M and you have psychologists counselling literal billionnaires who are still unsatisfied.

(because the cause of suffering is craving, naturally)

But cross referencing that $70K figure against this model, you're past the point where groceries (and everyday bills) aren't an issue, and while you can't order everything at every restaurant all the time you could probably splash out on a Michelin meal every now and then, and eat out weekly at a minimum.

You could also holiday annually at worst, in reasonable style, if not at the best Conde Nast private Malidives resort.

To me this makes sense, that happiness can exist at that level of income because you're not under financial stress all the time but still regard luxuries as special occasion items, not blase everyday consumption.

Once it becomes everyday there's a real risk of turning into a hungry ghost, constantly trying to consume things that fall straight through to the ground and provide no satisfaction.

Thus have we heard. May this continued research provide happiness and the sources of happiness to all living beings.
posted by UbuRoivas at 12:08 PM on January 21 [32 favorites]


People don't necessarily move up this hierarchy, though. I know a couple who have wealth at step 5, who are spending on their dream home in ways people at lower steps never could. Multiple dream homes, even. Yet steps 1 through 4 are so deeply engrained on their psyche that it's negatively impacting their health and relationships.

Eating in a restaurant with them is a nightmare. No I don't want to go to Taco Bell, and can you please stop hassling the waitstaff about the price of coffee? Sheesh.

People are weird and some of them never get over certain kinds of scarcity.
posted by elizilla at 12:15 PM on January 21 [64 favorites]


This really resonated with how I've always thought about money, although in my head the steps are formulated differently.

There's a threshold I'm willing to spend without really thinking about the decision, a threshold where I don't really worry about the decision but it has to be a good value or something I really need, a threshold where I seriously consider the pros and cons of spending that money on that thing vs. other priorities, and everything above that is house-level investments that impact my financial situation for decades.

As I've gone through life the dollar values on each threshold have radically changed, but how I think and feel about each level hasn't changed at all. If I'm trying to relate to the decisions of a billionaire, all I have to do is imagine that everything was in the lowest tier.
posted by allegedly at 12:17 PM on January 21 [5 favorites]


This is why, when I am confronted by someone who insists that trickle-down Reaganomics actually work, I hold back my immediate impulse to push them away with a snow shovel and instead attempt to explain it to them in very similar terms.

Each of these tiers has a similar set of basic needs: food, shelter, transportation, education, health care, recreation and entertainment, emergencies. Each of them addresses these needs in their own way, according to the limits of their resources. But there is far less flexibility at the lower end of the scale in terms of HOW these needs can be addressed, and what percentage of one's daily budget must be applied to each need. The wealthier person has the option to be frugal. The poor person has the necessity.

If I make $40k a year and tax cuts give me back an unexpected $4000, to use an overly simplistic example, what am I likely to do with that $4k? Spend it. Put it right back into the economy. Because of two factors: one, I am not likely to be able to invest $4000 in any way that will produce a satisfying short-term return, and two, _I got bills to pay_. I have pressing and immediate needs. I can use it to stretch towards the next tier up -- a better or more reliable form of transportation, a better place to live, paying off debt, etc. -- or I can sit on it for a while as a rainy day fund, knowing that rain may well be right around the corner. But the point is, that money will get used without much delay under most circumstances.

If I make $400M a year and tax cuts give me back an unexpected $40M, on the other hand, what am I most likely to do with that windfall? _Invest it_. By that stage of life, I am aware of the power of compound interest and what it can do for me, and I already HAVE all the money I could possibly need to fulfill my basic and immediate needs. Might I use it to engage in risky expansion of my business, hiring more workers, paying my current workers more, sharing the wealth? Some might. But the vast majority will shove that money somewhere where it can simply make MORE money without effort on my part.

The more you have of a needed resource, the less adding any more of that resource to your pile will impact you. The less you have, the more impact each addition will have. That's as basic as economics gets.
posted by delfin at 12:22 PM on January 21 [45 favorites]


So, basically Bloomberg's presidential campaign represents about the same level of financial impact to him that ordering the ribeye represents to me.

Got it.
posted by spilon at 12:31 PM on January 21 [71 favorites]


It seems to me that there's a spectrum of thriftiness that exists outside of this scale. When I'm at any restaurant, regardless of whether it's a cheap taqueria or a fancy sit-down restaurant, I'll choose something below the median price for entrees. Similarly, I might splurge on a trip, but the idea of paying extra for leg room goes against something deep inside me (even though I'm tall and the small seats cause me a lot of pain).

And my parents are the same way. They'll treat themselves to nice vacations but it would never occur to them to get something better than the cheapest room at a hotel.

So when I look at this chart, I think, "Well, I do care what things cost at a restaurant or grocery store, and probably always will" even though I haven't been living paycheck-to-paycheck in years.
posted by roll truck roll at 12:33 PM on January 21 [12 favorites]


So when I look at this chart, I think, "Well, I do care what things cost at a restaurant or grocery store, and probably always will" even though I haven't been living paycheck-to-paycheck in years.

Yes, the maple syrup bottle in the fridge is about 1/3 full so every time I go to the grocery store I check to see if it is on sale. I wouldn't notice the $2 difference in price but because I know it goes on sale all the time and I don't need it just yet I don't want to get it until it is on sale.
posted by any portmanteau in a storm at 12:48 PM on January 21 [7 favorites]


delfin, the Reaganomics cheer squad would argue that investment is still putting that money back into circulation, even if the investor isn't directly spending it.

For example, a pool of investment money to fund startups: those startups will hire employees, lease office space, invest in tech, etc. So the money keeps circulating.

Where that all falls down IMHO is in purely speculative investment. To take an extreme example, the high art market. So I'm a billionaire and down at the cigar club one of my peers has a Van Gogh, so I'm off to Christie's to outbid all and sundry for some other great artwork.

That money does nothing except transfer around amongst the rich. I might keep my artwork for a decade and when I sell it, it's just another transfer from the rich to the rich.

That shuffling of on-paper wealth amongst elites can be extended to all kinds of markets, from stocks to real estate. None of these markets are 100% rich-to-rich shuffling, of course. Normal people buy houses and IPOs generate finance for companies to spend.

But you're right. A lot of extra income for the upper levels of wealth gets parked in non-productive speculation, while at lower levels of income it all gets spent again very soon.
posted by UbuRoivas at 12:52 PM on January 21 [3 favorites]


s/_Invest it_/_Use it to speculate_/
posted by GCU Sweet and Full of Grace at 12:55 PM on January 21 [3 favorites]


\me shakes fist at UbuRoivas
posted by GCU Sweet and Full of Grace at 12:56 PM on January 21 [4 favorites]


Yes, the maple syrup bottle in the fridge is about 1/3 full so every time I go to the grocery store I check to see if it is on sale.

*Checks pantry* 4 bottles of on-sale maple syrup, 1/3 of a bottle in use.

If it's an item you know you'll use, just-in-time inventory management isn't optimal because you could run out before it's next on sale. Better to buy as many as you may use within their expiry period, which is ironically both an exercise in frugality at the same time as it's evidence of not having to worry about every last dollar (because you're not harmed at all by buying 5 bottles when you only immediately need one).
posted by UbuRoivas at 12:57 PM on January 21 [10 favorites]


GCU: I like your precis version :)
posted by UbuRoivas at 12:57 PM on January 21 [1 favorite]


I still buy The Things That Are On Sale at the grocery store for the most part, even though I am in the don't need to worry at the grocery store level. But if I were to get an unexpected 10% of my annual income right now, I'd save 3/4 and spend the rest, even though I make well under $100k. I am a total freak about staying out of debt and being liquid in case of emergency. Paying rent on my credit card a couple of times has made me a monster - whether it is Elmo or the yeti, I do not know.
posted by wellred at 12:59 PM on January 21 [3 favorites]


Isn't the agnosticism to class kind of strange given his argument? So that it being totally missing is actually a fatal flaw?

Ie, people have a self-perception that largely informs their behavior that is entirely socially constructed. So there are people that have factors related to where they live, who they hang out with, what church they go to, etc that is much more relevant than the causality he's focusing on?

If it's a cliche that "philanthropy is the gateway to power", then there's really a lot more going on as you move through this scale.

Sorry if people feel this is bringing a marxist gun to a knife fight, but I feel like his claims are not only simple, but actually just not right.
posted by Reasonably Everything Happens at 1:00 PM on January 21 [4 favorites]


So when I look at this chart, I think, "Well, I do care what things cost at a restaurant or grocery store, and probably always will" even though I haven't been living paycheck-to-paycheck in years.

Exactly. There is a shifting range of _which_ monetary values translate into trivial, moderate and challenging costs, based on each person's income and assets, and there is also a consciousness of consequences of each cost level that is a separate thing.

There are multi-millionaires who are overwhelmingly thrifty because they assume that that's a large part of how they got that far (waste not, want not). There are poor people who are aware of upcoming needs, but their money flows like wine when they have it because screw it -- I'll figure something out when the time comes. And there are many, many levels in between.

There was an article on the Blue not long ago -- perhaps a month? -- about many young Koreans, IIRC, who are adopting a there-will-be-no-tomorrow-so-let's-live-today attitude towards spending and saving. I can't say I haven't seen the same behaviors over here in 'Merka.
posted by delfin at 1:03 PM on January 21 [12 favorites]


100 would make a small difference. I helped a family member do some catering at Christmas and earned a surprise 200. I'm quite frugal, will take me a while to do something fun with it, but I will.
10,000 would make a difference for a while. I could wipe out my credit card and medical debt, pre-pay my house taxes and insurance, and start getting my teeth in good shape. I could donate to things I care about, help family members.
100,000 - I could also fix All The Things at my house. I might be able to fulfill the fantasy of building a sustainable house.
I play the lottery every year or so. It's fun to imagine what I would do with a bunch of money. One thing about having a bunch of money is that it buys social mobility. I Live Simply for reasons, and am happy with my choice, but it is tiresome to be considered Lower Class and Negligible. Anybody else notice that politicians now talk about the Middle Class, seldom the Working Class, and not the Poor.

Like most Americans, the Great Fear is a serious illness. A million might make me feel pretty safe. What a country, eh?
posted by theora55 at 1:20 PM on January 21 [13 favorites]


It's basically Maslow's Hierarchy of ...Consumer Spending Comfort.
posted by DirtyOldTown at 1:22 PM on January 21 [6 favorites]


A million might make me feel pretty safe.

Honestly its not really enough, if you want money left over afterwards. A relative simple set of surgeries ended up with a $300k bill for me a couple years ago (yay balance billing). I was able to negotiate, but legally I was on the hook for that if they hadn't agreed. And this is with "Cadillac" insurance.

A million won't go very far in a serious illness. Its one reason the "upper middle" class (making $100-$300k a year, lets say) can't truly relax, you need many millions before you get to the point where it can't be wiped out by illness.

Of course those with tens, hundreds, or thousands of millions are probably fine.
posted by thefoxgod at 1:33 PM on January 21 [16 favorites]


A million won't go very far in a serious illness. Its one reason the "upper middle" class (making $100-$300k a year, lets say) can't truly relax, you need many millions before you get to the point where it can't be wiped out by illness.


Hasn't this changed with Obamacare regulations? I have a max out of pocket of $12k per year for decent insurance, and health problems are not uncommon among the median and upper income set, and I've never heard anyone done in by bills, including a young friend who had a heart transplant and another who had serious breast cancer. I'm not saying $12k is a small number, but it's not even close to $300k.
posted by The_Vegetables at 1:59 PM on January 21 [4 favorites]


There are multi-millionaires who are overwhelmingly thrifty because they assume that that's a large part of how they got that far (waste not, want not).

And 95% of them would be wrong.

I noticed allegedly's value changing quite a bit when I jumped up the income ladder for a while, and then moved back down. Like, the amount of money that gave me pause before spending it probably quintupled on the way up (whereas my income went up by an order of magnitude). However, that was within certain categories in my mind that seem to be designated as containing desirable items/experiences at higher levels of spending (e.g., clothes, furniture, travel). I was still, like, squinting at the prices on ordinary items at the drug store, because my brain believes there's no reason to spend $10 on those items today if I could get them for $7 by waiting on the sale. Even when it came to the "good stuff," for standard consumer items like furniture and clothes I would still have a consciousness of whether they might go on sale and some willingness to operate under that constraint.

There definitely are cliffs of spending. I carry no debt on a month-to-month basis. $100 might be a nice-ish dinner out. But $100K might not even be enough for me to buy an apartment nice enough for me to give up my rent-stabilized apartment, given the necessary debt service on my current salary. So it probably wouldn't change my life even though it's certainly a nontrivial amount compared to my net worth or my annual salary.
posted by praemunire at 2:01 PM on January 21 [5 favorites]


So when I look at this chart, I think, "Well, I do care what things cost at a restaurant or grocery store, and probably always will" even though I haven't been living paycheck-to-paycheck in years.

I was having much the same thought, but then I went and tied it back to the other phrasing, about suddenly getting a windfall.

Suddenly finding money isn't going to change anything at the grocery store for me--it's not going to make me go "Oh, now I'll buy the name-brand drink mix." Finding $100 though, very well might make me choose a more expensive restaurant for dinner, or switch from making dinner to buying it. It would have to be a particularly impressive windfall for me to consider a new vacation because of it--possibly big enough that now I'm effectively at the next level of wealth.
posted by Four Ds at 2:07 PM on January 21 [2 favorites]


I am glad I read all of your comments as my first reaction was literally "why would anyone bother doing this? (making up a scale of lifestyle wealth brackets.) I don't think you measure wealth by its effect on your consumption choices I think it is more appropriate to think of it in terms of how much you are free from risk, freedom which I think translates into income but not earned income. Earned income is not wealth; in my view wealth is the thing that generates income without it's holder having to lift a finger or get out of bed. The British, (at least in novels,) were always describing each other as "worth 1000 pound a year," not as worth 30,000 pounds.

The other part of wealth that complements freedom from risk is power. I imagine for a lot of rich people,(the feckless inheritors for example,) this power is latent, however it is still there. If every year you are effortlessly spinning off 5 million from your 100 million think of how much power that gives you. You can lobby, you can donate, you can borrow another 100 million to capitalize projects that will garner political influence through spending, 100 million that will kick loose other golden pots of money from the government or insurance companies with money to invest. All of this when these days 100 million is not even that much money.

My point is that I do not think that this kind of maundering about the consumption changes as hypothetical n=1 people move up an income ladder does anything to illuminate anything except our vast appetites for stupid personal finance verbiage, with neat little tricks about how to set fire to our little part of the boat to keep warm.
posted by Pembquist at 2:09 PM on January 21 [3 favorites]


There are multi-millionaires who are overwhelmingly thrifty because they assume that that's a large part of how they got that far (waste not, want not).

Consumption scales linearly with income, increasing income inequality also leads to increasing consumption inequality, which means that the lower incomes now spend less on consumption than they did historically, and you have to be a serious outlier to spend outside your income profile.


Also even when considering debt-based consumption, buying goods and services is only 4-5% of debt-based spending, with asset-based spending (not consumptive) being housing/education/car make up like 85%. Spending a few bucks less at the grocery store is not enough to move a person out of their normalized spending profile. To do that, you'd have to buy a super cheap house, or get wealthy on very little formal education.
posted by The_Vegetables at 2:10 PM on January 21 [1 favorite]


Hasn't this changed with Obamacare regulations?

Not in my case, at least. I have a "max out of pocket" for out-of-network, but thats "max of the 'allowable amount' set by insurance company". The rest is my responsibility, to an unlimited amount (this is balance billing). [The surgery I referred to was in network! Well, the surgeon was. And the facility was. Except, apparently, the room I had my surgery in, which was not! So it all was considered out of network].

Now, some states have protections against this. California does, but it doesn't cover self-insured plans like my employer has. And because my employer offers insurance, I don't think I can buy it on the exchange.

Last year my medical bills came close to $30k, for example.
posted by thefoxgod at 2:10 PM on January 21 [9 favorites]


The British, (at least in novels,) were always describing each other as "worth 1000 pound a year," not as worth 30,000 pounds.

This was because of a specific, low-risk asset class with a fixed return in which it was possible to invest for an extended period of time (plus land). When WWI came, those guys all got creamed by inflation. Money (and risk) is more complicated than the generational-wealth-preachers will tell you.
posted by praemunire at 2:15 PM on January 21 [4 favorites]


This was because of a specific, low-risk asset class with a fixed return in which it was possible to invest for an extended period of time (plus land). When WWI came, those guys all got creamed by inflation. Money is more complicated than the generational-wealth-preachers will tell you.

"Because of" is a strong phrase. My point remains the same across inflation regimes and all asset classes. Everything with little exception is dreamily valued as a discounted income stream in one form or another. The most important feature of wealth is that it produces person lives of equivalent income where people without wealth only have there own person life to sell; and that can be hocked to satisfy a medical debt or what not.
posted by Pembquist at 2:21 PM on January 21


And can you point me at a "generational-wealth-preacher" because if I am guessing right they sound like the kind of personal finance guru/douchebags that I hate read.
posted by Pembquist at 2:25 PM on January 21


One common meme is "I can now get guac at Chipotle," which is a casual way of saying that you have finally entered the restaurant bracket.
posted by tofu_crouton at 2:33 PM on January 21 [6 favorites]


"Because of" is a strong phrase. My point remains the same across inflation regimes and all asset classes.

Yes, it's a strong phrase. Money is inescapably embedded in historical circumstance. People of that time were comfortably able to refer to an income largely guaranteed to be generated by a certain amount of capital because they were able to invest in Consols, government-backed bonds that paid a fixed interest rate. They thought this meant there was little to no risk of loss. Additionally, they relied on agricultural income based on land holdings. With the extraordinary inflation of WWI and the interwar period, anyone who had their money in fixed-rate bonds got their heads kicked in, and holding land whose income-generating power had dropped off sharply wasn't all that much better. Speaking of novels, note that no one talks about how much the Marchmains have a year, and indeed they are forced to sell off substantial properties, while the pushy up-and-coming son-in-law from the City fights settling money on the daughter in old-fashioned bonds, preferring to keep it liquid (and himself probably then got slaughtered in the Great Depression, though we don't see it). While it is certainly true that it is almost always better to have more capital than less, and lots of capital rather than only moderate capital, and that in the last few decades the returns to capital have outstripped growth considerably, this idea of abstract wealth as providing an escape from risk doesn't hold up historically.
posted by praemunire at 2:36 PM on January 21 [6 favorites]


(This is why, by the way, the National Historic Trust has so many very lovely buildings for the public to look at.)
posted by praemunire at 2:42 PM on January 21 [4 favorites]


Praemunire - great points on the nature of fixed (largely landed) wealth of the British gentry, and how it went away. The National Trust got their stately houses in part from the erosion of the real value of agricultural rentals, but a number of other things came into play, including the post-Second World War governments' introduction of high death duties and retention of high wartime income tax rates, and their imposition of a welfare state/pro-union paradigm which diverted the low-wage workforce that maintained stately houses.
posted by MattD at 2:48 PM on January 21 [4 favorites]


The thing that drives me spare about stuff like this is that it encourages focus on all the wrong spending.

Material consumption is a lot less relevant to wealth than nonmaterial consumption. If I were crafting a model like this, I'd definitely rethink it because it doesn't consider a step where you're dropping thousands on childcare and private school tuition and extracurriculars and college savings and orthodontists per child and you don't break a sweat.

(It also doesn't take into account nonmaterial spending around health, like insurance or gym memberships; or hired help, like housekeeping services or home health aides for older relatives; or saving for the future, etc.)
posted by sobell at 2:56 PM on January 21 [11 favorites]


I probably found this on MetaFilter originally, but it's worth a repost. This GQ article has brief stories about different people at different income levels. What they have, what they don't, what they worry about. What's made very clear is that once you get beyond a certain point, the rich aren't just you and me, but with more money; the life they life is of a fundamentally different kind. The person who earns $100,000 a year probably has the same structure to life as someone who earns $200,000 or even $300,000. Their house might not be as big and the car not as shiny, but it's all cut from the same cloth. Get higher and life itself starts to change.

There was a reddit comment that illustrated (first hand, or so the guy claims) how life works at different wealth levels.
posted by It's Never Lurgi at 3:04 PM on January 21 [22 favorites]


My ex-wife and I once found a $100 bill on the sidewalk on the Upper East Side of Manhattan. We were poor as hell. But being dumb kids, we thought we'd spend it on $100 worth of lottery tickets, and turn it into millions. So we went to the nearest newsstand, and bought $100 worth of scratch-off tickets, then spent the next hour so scratching them off. It was fun. Our total winnings added up to only $70. But the laughs were well worth the $30.
posted by Modest House at 3:21 PM on January 21 [5 favorites]


Having wealth doesn't preclude you from losing it, just as being an aristocrat doesn't mean your descendants won't get it in the neck a la the Romanoffs. I am not sure what you object to in what I said. I never said that a fortune made is a fortune forever. I am speaking about the difference between having wealth today and not having it, and the idea that if you are going to make a scale of wealth it should not be based upon how people feel about spending but about how much that wealth has the ability to insulate its owners from risk and how much that wealth has the ability to generate power for them. I never said anything about multi generational wealth. I strongly disagree with you if you are arguing that historically wealth does not provide escape from risk and access to power.
posted by Pembquist at 3:27 PM on January 21


Today I got a US$450 "severance" check from the university I teach at (they fire me every December and hire me back every March, they're nice like that) and I was thinking how it'll just go into my checking account and I won't even notice it, but for somebody a few steps down the ladder from me this amount of 'free' money could have meant finally buying a bicycle or computer or getting their child a medical procedure they needed, etc.

And I could use it to get a bass guitar, but do I really need one?

And how, at that level, my spending is more limited by a mild sense of embarrassment at having too much musical gear I don't really need and the limited space in my smallish house rather than the actual cost of said bass guitar.

In summation, I think I'll get the bass.
posted by signal at 3:56 PM on January 21 [10 favorites]


I have a very different view of money (working in Finance) - money is not an absolute quantity you own, but money has a tiered "cost of access" depending on your asset position. Let's say I'm evaluating how much it costs me to purchasing a thing.

Tier 1 - First I access free cash, at 0.8% per year - cost of interest forgone less tax.

Tier 2 - I can then access money backed by investment property collateral at 1.9% per year - cost of interest payments in offset account less tax deductions.

Tier 3 - I can then access money backed by owner occupied property collateral at 3.1% per year - cost of interest in offset account.

Tier 4 - Once I max out collateral backed cash I start liquidating investments, the cost of which is the forgone expected return on those investments - say 5% to 10% per year.

Tier 5- Once I run out of assets I run up a balance on my credit card, at a cost of about 14% per year.

Tier 6 - Finally even the bank won't give me credit anymore so I turn to payday loan operators that will lend at a cost of 50% per year.

Basically, the more assets you own, the cheaper you can access cash, and the more of it you can access, and this tiered access cost determines the level of investment you participate in - if I can access cash at 1.9%, it makes sense for me to invest in shares yielding 8% per year, but if I can only access cash at 14%, then I can't participate in that. This is where the real inequality lies, where some people have ready access to investments yielding 8% per year while others are locked out of it.
posted by xdvesper at 3:59 PM on January 21 [34 favorites]


I like the tiered portrayal of spending -- that seems very true to how I have experienced life. I would have to have an awful lot more money to transition from being able to order pretty much what I want at a restaurant (which is basically my current level) to, say, the level where you buy multiple houses.

However, up to a certain level, this is more about cash flow than it is net worth. You don't buy the ribeye with your investment account, you buy it with the portion of your salary that hasn't already gone to pay for housing and student loans. (At higher levels (vacation homes, private jets) it becomes all about wealth; people aren't living that life on a salary.)
posted by Dip Flash at 5:36 PM on January 21 [3 favorites]


"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."

There's a big hole in the logic. Sure buying eggs *once* is a trivial decision for someone with $10K. But you're buying them weekly. On top of that you're buying bread, apples, oranges, and so on. If you're paying $1 extra for each additional grocery item your $10K is going t oturn into $9K pretty quick.

In fact this way of looking at "saving" is disastrous. The analogy to make here would be to say to someone on a diet that it's ok to eat potato chips, french fries, poutine, cheese doodles, butter tarts, chocolate donuts, and a dozen other things as long as each serving is under 100 calories, because 100 calories is such a small fraction of our daily caloric needs.

What matters is total spending as a percentage of wealth.
posted by storybored at 7:11 PM on January 21 [4 favorites]


You know how sometimes you read an article and it makes so much sense and you feel really seen, as if the author must have some deep understanding of how life works in general and how your life works in specific?

This is the opposite of that.

I get the overall impression that this person has literally never had to manage a household within a budget in his life and has no idea what that even vaguely might look like.
posted by jacquilynne at 7:33 PM on January 21 [10 favorites]


xdvesper, I am an artist and I don’t even understand what you mean by half of those sentences.
posted by egypturnash at 7:42 PM on January 21 [5 favorites]


First I access free cash, at 0.8% per year - cost of interest forgone less tax.

Doesn’t this neglect the opportunity cost? You could always invest that cash.
posted by mr_roboto at 7:46 PM on January 21


I'm basically at level 1 despite a decent (c. 60k) income, which I arrived at only in my 50s. Most of my friends seem to be at this level as well. I also seem to be at both level 2 and level 3, perhaps because I don't worry enough, or choose relatively inexpensive grocery stores and restaurants. I also know a number of people who merely aspire to level 1 (i.e. are indigent or homeless), all of which is to say that: his levels seem to be a bit off.
posted by not_that_epiphanius at 7:49 PM on January 21 [3 favorites]


The steps make sense but the specific commodities don't quite relate to each other—the marginal prices of day-to-day expenses at the lower levels are much more relevant than the marginal prices of the expenses higher. You can't really compare eggs to overseas holidays, unless your life is dependent on having overseas holidays as often as you eat eggs.

For instance, when I buy petrol to put in my car, even though in absolute terms a tank of fuel is an expensive purchase, I run my car so relatively rarely that it's not worth my while to find the cheapest price. For a professional driver or the owner of a business that uses lots of fuel, though, a difference of cents (or tenths of a cent) in the litre is the difference between profit and loss—even though they have much bigger budgets for fuel than I do.
posted by Fiasco da Gama at 8:39 PM on January 21


Doesn’t this neglect the opportunity cost? You could always invest that cash.

That is a good point too - why not value all cash at the opportunity cost of investment? That would be a lot simpler! I guess this is a short term analysis and your asset portfolio is relatively fixed for that period of time - say you were in 50% property, 30% shares and 20% cash, you aren't going to be re-balancing that every time you get paid or spend on something. That's something an investment fund might do, but not your average worker. There would be structural reasons to hold cash and not invest it - I'm not sure you want to be 100% invested in the share market or property market right now in early 2020 - perhaps you want to hold some reserves to invest if the markets fall from their all time highs.

I'm taking the current asset structure as a given and just computing the cost of accessing cash out of that structure in the short term. So going down those tiers for example, including drawing on mortgages backed by property but not actually liquidating those properties... while shares can be liquidated easily if necessary in the short term, which is the next step after.

In the long term, sure, all cash could be valued at the opportunity cost of investment...
posted by xdvesper at 8:47 PM on January 21 [1 favorite]


At level 3 or below, you likely don't have enough money to invest to be eligible for interest rates or investments that offer a high enough interest rate or return on investment to make that a worthwhile option.

The thing this article does get at nicely is that whole "why don't millenials buy fewer avocados" thing. Setting aside that when that was a thing other people got het up about, there were certainly many millenials who couldn't afford avocados and didn't confirm to that very rough stereotype. There were certainly millenials who did make some slightly more expensive food choices while still being broke and/or having seemingly insurmountable amounts of student debt (still are, in fact). The article is accurate in noting that there is a socioeconomic level where you can buy more expensive items in some categories (like groceries), but the scale of expenses is such that those decisions (yes, even added up over a year) aren't going to make an effective difference in much larger scale expenses like student loan debt or buying a house.

It is certainly the case, however, that the 1 on the proposed scale is not the bottom end of socioeconomic status.
posted by eviemath at 5:29 AM on January 22 [4 favorites]


At level 3 or below, you likely don't have enough money to invest to be eligible for interest rates or investments that offer a high enough interest rate or return on investment to make that a worthwhile option.

This seems like a huge misunderstanding about how personal investing in the long term works so I don't think I can agree. I mean, who the heck are putting at level 3? People above Level 2 (in the article) can purchase homes (and people at Level 1, but I'll preclude them). Are you saying that people who can get a $200k loan 'aren't eligible for decent interest rates'?

This isn't even true:
" if I can access cash at 1.9%, it makes sense for me to invest in shares yielding 8% per year, but if I can only access cash at 14%, then I can't participate in that."

How much 'cash' someone needs or has access to is dependent upon situations, and not at all straight forward like you are suggesting. A real life example is a credit card, which has interest rates in the ~20% range. Having credit card debt (any at all) should not preclude you, even at low income levels, from investing. There are real differences between short-term debt and long term debt.


Not only that, the yearly return on most investments is determined after you have already invested in it (unless you are wealthy enough to do only fixed income investing, which is basically Level 6), which is why you can't 'time the market'. So yes, you can develop a risk profile that says "I want 8% returns", but you won't know if you are hitting that until the year has passed.

The real difference between income levels and investing is whether you have spare money to invest at all, and if you have enough to make a difference over the time period you have.
posted by The_Vegetables at 7:24 AM on January 22


More importantly though, the best way to climb the wealth ladder is to spend money according to your level.

The amount of bullshit is painful.
posted by FirstMateKate at 7:28 AM on January 22 [5 favorites]


I think this is an interesting look at generalizations on material spending. Generalizations ipso facto really never hit the mark, so many nuances to consider!, so coming up with a concrete value of .o1 % material consumption across all but the very highest income (cuz infinity) is satisfying in its own way (a magic number) and has spurred an interesting feed, so there's that. Agreement and heated disagreements ensue. Basing a model on nonmaterial consumption would be more relevant to wealth but would then effectively lump the mid to high income groups together.

Like power manifested as thriftiness. That's a hot topic.
posted by waving at 7:42 AM on January 22


More importantly though, the best way to climb the wealth ladder is to spend money according to your level.

The amount of bullshit is painful.


This is what really struck me from the article. It’s the “personal responsibility” bullshit. I am a relatively “responsible” spender in this way, but I’ve gotten to my current level of economic comfort largely through the fact that my parents were at a similar level, and that all of us are lucky enough not to have had a major health crisis.

“Spend within your means” is to personal finance as “just don’t drive” is to carbon production. The problem is systemic, and decisions of individuals occur within that broken system.
posted by nat at 8:58 AM on January 22 [11 favorites]


More importantly though, the best way to climb the wealth ladder is to spend money according to your level.

Agreeing that this is 18 shades of bullshit. The best way to be financially secure at your level is to spend money at your level, but people already know that. Climbing the wealth ladder is a combination of hard work and luck and a lot of it is luck (the hard work helps you capitalize on the luck. In my case, the luck was being born a nerdy dude who likes computers when tech was really starting to kick into gear).

There's an old joke told about some billionaire, but I can't remember which one. They were asked how they made their money and they said something like "I bought an apple for 5 cents and spent all day polishing it until it glowed. I was able to sell it for 10 cents. With that money I bought two apples and polished them all day and sold them for 20 cents. I kept doing that, day after day, buying apples cheaply and selling them for a little more money. Then my father died and left me a billion dollars"
posted by It's Never Lurgi at 9:30 AM on January 22 [16 favorites]


I mean, who the heck are putting at level 3?
...
This isn't even true:
" if I can access cash at 1.9%, it makes sense for me to invest in shares yielding 8% per year, but if I can only access cash at 14%, then I can't participate in that."

How much 'cash' someone needs or has access to is dependent upon situations, and not at all straight forward like you are suggesting. A real life example is a credit card, which has interest rates in the ~20% range. Having credit card debt (any at all) should not preclude you, even at low income levels, from investing. There are real differences between short-term debt and long term debt.


Ok, context clues are maybe helpful here: given I was talking about folks who couldn't purchase a house, I clearly misremembered the levels and meant level 2 and below. Going back to the article, one of the assumptions (which is perhaps inaccurate given that "house poor" is a thing) is that people in level 1/2 don't own their own homes.

The rest of this relates to someone else's comment, but I do happen to agree with it. Accessing credit is more costly the less money/wealth you have, and gets cheaper the more wealth you have. The article's level 1 is, explicitly, people living paycheque-to-paycheque. People living paycheque-to-paycheque are often using their credit card credit (if they even have one, which, if they do, might have a credit limit somewhere in the $500-$3000 range) as a slush fund, so that's not available for investing. And wtf investments are you thinking of that yield more than the 18-19% interest rate on a credit card?! That would have to be a high-risk investment, and people living paycheque-to-paycheque can't take that sort of risk. Heck, I own a home and am not living paycheque-to-paycheque, and I still don't have enough money to qualify for my bank's actual interest-generating savings accounts or to make investing the small but comfortable amount of spending money that I have earn more than the investment fees.

But let's look at someone who owns their own home but is house poor and still living paycheque-to-paycheque. (a) The folks I know in such a situation certainly don't own $200K houses (I don't own a $200K home). (b) If they could time travel, sure, they might have made a different choice to invest whatever down payment they put on the house rather than use it as a house down payment. Modulo financial advice telling them that real estate is a good "investment", depending on the specific housing market they're in, and depending on if they actually had the down payment saved up or if instead it was a gift from a relative (who may not have gifted the money for a different investment) or they had a crappy low- to no-down payment balloon mortgage like the ones that caused the 2008 financial crisis. But at the present moment, they own that home. So "if you could buy that house you could have invested" isn't particularly useful advice.

Main point: on the lower end of the socioeconomic scale, 'cash' really does work like that and there are not significant differences between short-term and long-term debt. A long-term investment does me no good if I go bankrupt because I can't pay for my day-to-day needs in the mean time and my investment gets repossessed to pay for the bankruptcy. A long-term investment also does me no good if I have to go on welfare/social assistance for a period of time to meet my basic needs, but a prerequisite for receiving social assistance is first using up all of my available assets, so I have to cash out the investment early and thus forgo a significant portion of the profit due to it being a bad time in the market or due to whatever fees and other structure are in place around that investment. In mathematical probability theory, setting yourself a specific target winnings and then stopping the game when you reach that point is a great gambling strategy - it's a valid "stopping time", and you'll win that target amount with probability 1. But even in theory, there is no lower bound on how far into debt you might go along the way (not to mention the issue of how long it might take to get there), and in real life, people (most of us, anyway) don't have access to unlimited credit.


But I also notice, on re-read, that the original "three levels of wealth" that the author cites from someone else are three levels of wealth - as in, we're talking about the subset of the population who already has positive net worth. Our author tries to extend this a bit on the lower end, but it's about as useful as giving budgeting advice to someone who simply doesn't make enough to pay all their bills. I still contend that the analysis is partially useful on the low end in refuting that spurious "why don't millennials invest that avocado money" carp: because that amount of money is small enough in the grand scheme of things that it's not enough to move our archetypical millennial into a higher wealth category, so they may as well enjoy some small daily/weekly mini-luxuries within the category that they can afford.
posted by eviemath at 9:48 AM on January 22 [3 favorites]


Just doing the math roughly, each "level" is 1000% the level before, and anything we classify as "trivial" is 0.01% of your current level.

To go from one level to the next requires you gain 900% of your current level.

They give the example of someone at level 1 booking a vacation, which isn't trivial until level 4. Which would mean the cost of the vacation is 1000x your trivial threshold. 1000 x 0.01% is 10% so to make it to level 2 you need to do the equivalent of skipping 90 vacations.

So if my math is roughly correct, the "spend money according to your level" advice presumes you've got 90 vacations worth of fat to trim from your budget.
posted by RobotHero at 10:03 AM on January 22


More importantly though, the best way to climb the wealth ladder is to spend money according to your level.

There's definitely a grain of truth in this, assuming that it isn't just scoldy bootstrapperism.

The only way to go from pretty well off to actually rich is to not horde money but, rather, to buy things that create cashflow that you then fold back into buying more things that create cashflow. But maybe that's stretching the definition of "spending"?

I agree with eviemath that this article is pretty useless for anyone who isn't already pretty well off.
posted by Reyturner at 10:57 AM on January 22


I feel like this oversimplifies to the point of uselessness. For one thing, if you look at spending, people in the lowest income group spend a higher percentage of their income on charity than everyone else. Look at Jeff Bezos, world's cheapest man, giving out one millionth of his net worth. And many, many people in this country are paycheck to paycheck. I like the "cost of money" approach, I think that may be closer to the truth. If you don't have a good income or credit score, you are looking at payday / title loans, selling plasma, really desperate options.
posted by wnissen at 11:15 AM on January 22 [3 favorites]


The article is written by a financial advisor - presumably for his clients and potential clients - ie. people with positive cash flow that have money to invest. So yes, it is very much written for people that are, at worst, on the road to well off. That includes a pretty significant number of people right here on Metafilter.
posted by COD at 1:50 PM on January 22


It seems some people may be reading a little too much into that pull quote... the full context:
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.
Just a recommendation not to spend beyond your means. It's unfortunate that the article is titled "Climbing the Wealth Ladder" when he doesn't really say much about how to do that; he's mostly just describing the rungs. The point mainly seems to be: Know your level, and don't spend like you're in another level. If you're at "Restaurant Freedom", don't think you can spend like you're at "Vacation Freedom" or "House Freedom", that will only set you back financially, not move you forward.

And there's no benefit to spending like you're in a lower level, either. Packing your own lunch or clipping coupons when you're at "Restaurant Freedom" isn't a good use of your resources. It's not going to get you any closer to the next level. Your life won't significantly change. Spend your time on something else.

It's not so much about personal responsibility or bootstrapping, and more a shorthand framing for making appropriate spending choices based on where you really are financially. A more concrete and actionable description than "poor" or "middle class" or "wealthy", or a dollar amount income that means very different things in different places. Do you look at the prices on a menu? Do you look at the price when buying a plane ticket? Do you look at the price when buying a house? There's your level of wealth, there's the tier of lifestyle you're in. Don't spend like you're in a different one.
posted by team lowkey at 4:05 PM on January 22 [5 favorites]


The math of that makes sense. The level above you requires you gain 900% of your current level, but the level below you only requires you lose 90% of your current level.
posted by RobotHero at 7:41 PM on January 22 [6 favorites]


23skidoo: "Sure, but the reason why you should spend on your level is that it's a good way to prevent yourself from moving *down* a level. Spending on your level doesn't seem to actually help you move up to the next level."

Yeah, I think you're right. It's misleading to say it's "the best way to climb the ladder". It's more a prerequisite to be able to climb up the ladder through other means.
posted by team lowkey at 9:34 PM on January 22 [2 favorites]


Just a recommendation not to spend beyond your means.

I will gently point out, as someone who has moved down from rung 2 to rung 1 in the past couple of years, that "spending beyond your means" is not necessarily something that is under everyone's control. In my case, repeated natural disasters have knocked me down. In others' cases, as folks have pointed out, medical expenditures in the US can knock people down from even the highest rungs.

Recommending that people act in ways that are within their control is to implicitly assume that anyone can control their motion up and down the ladder. That is not true. And it does a disservice to many, many people to insist that wealth is only or even primarily a function of virtue, rather than also pointing out that much of it is a function of luck.
posted by sciatrix at 8:00 AM on January 23 [9 favorites]


Yes, you're totally right. He's a financial planner and he's selling the idea that you can control your upward mobility by following his advice. I think that does a disservice to what I find is an interesting and useful tier model. I guess the "one weird trick" to financial success framing is the only way to publish ideas anymore.

I know that it's 90% luck that I'm at where I'm at. Maybe 100%. I was briefly homeless, then bounced around a bunch of temp jobs, factory and construction work, and fell into a tech job during the first boom (one of my seven roommates got me in the door). I was able to capitalize on it, but that too was just luck of upbringing, access to education and computers early on... gobs of privilege. After the crash, my brother's girlfriend got me in at my next job. I've been advancing at that company for 15 years, which in itself is unheard of nowadays. And luckily haven't met with any catastrophe along the way.

Now that I've been feeling comfortably level 3, I started dabbling at level 4. And accumulated a gross amount of debt that has me worrying about level 2 stuff again. Seeing things through this lens would have helped me realize that's what I was doing. I felt like I was doing well enough that I could splurge on vacations, not recognizing that as a whole nother level of wealth.

It also helps me re-assess things. If I left my comfortable job, worked really hard, prioritized work over family, and got *really* lucky, I could probably double my salary. Which wouldn't get me close to the next level. I'd have marginally nicer stuff, and have a stronger buffer from falling down a level, could maybe speculate with that money and hope to get really lucky again to propel myself up the ladder (but would probably just spend it on the marginally nicer stuff). My lifestyle would fundamentally be the same. Probably less happy.

So I got kind of the opposite message of personal virtue leading to upward mobility. More like, no amount of gumption is going to get me to the next level, and it's a lot further away than I think. The only thing that is within my control is to live within my means of where I really am, so I'm hopefully in a position to take advantage of a lucky opportunity if it comes along (and can maybe weather some bad luck). Avoiding decisions that actively send me down the ladder is the baseline for advancing up the ladder, and really the best I can do. Phrasing that as "the best way to climb the wealth ladder is to spend money according to your level" isn't great, but also isn't wrong?

If you're at level 1, you do need to pay attention to how much groceries cost to even start to get a leg up. It's not enough by itself, but if you don't do it, you're hindered from being able to move up. Those dollars matter at that level. That was my takeaway from this article... not a value judgement of "spend your money right, and you could be rich!", but a method of recognizing where you are financially and seeing what spending within your means actually looks like. If you are price conscious about groceries, you are not in a financial position to be blasé about restaurants. Or travel. If you spend within your level, you are hopefully accumulating wealth instead of debt and moving somewhat upward. The vagaries of a uncaring random universe will have their way with you, but in terms of what you can control, this is something.
posted by team lowkey at 1:07 PM on January 23 [6 favorites]


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