Am I Wealthy? Part 1: The 5 Levels of Wealth
Am I Wealthy?
Part 1: The 5 Levels of Wealth
“How am I doing?”
This is a question I hear regularly as a wealth manager. Today, Charlie happened to drop this question on me during one of our regular socially distanced walks at the beautiful park atop the Salesforce Transit Center. Charlie (not her real name) is a friend that I’ve been helping recently to get her personal finances in order. There are two things that get her excited - sunny weather and personal finance. It was a rare sunny afternoon in San Francisco, so I was anticipating an excited Charlie to ask me about investments, tax strategies, or something related to her stock options.
Instead she asked this generic, yet important question. It’s one of those questions that can surface anxiety typically stored in the well beneath the surface. You hope for good feedback but at the same time fear the worst. I could tell Charlie was nervous to hear what I would say.
“You’re doing great, Charlie.”
Charlie makes about $150,000 per year, which puts her close to the top 5% of income in the United States1. She saves a healthy amount and by most measures she is crushing it. But Charlie wasn’t satisfied with that answer. She knows she’s saving a good amount and that she is on a good path to reaching her financial goals. What she really wanted to know was, “How am I doing relative to my peers?”
Benchmarking yourself against your peers is difficult because you don’t know other people’s income. People are willing to share their sex lives, marriage woes, and STDs before they share their salary2.
One of the unique insights I have as a wealth manager is that I am privy to people’s income. Having worked with hundreds of clients over the past decade, I have a unique knowledge bank to benchmark your income against your peer group.
Let’s get this out of the way: it’s not healthy to compare yourself to your peers financially. Money is emotional, and learning that your friend or coworker makes more than you is likely to hurt you more than help you. You make more than some of your peers, and there are a lot of people that make more money than you. While this is a true statement, it’s a boring one. I get it.
If you really want to compare your income to others, proceed, with caution.
The obvious way to benchmark is by looking at spending power. The ocean front house, new Louis Vuitton bags, omakase at Japanese restaurants with $$$$ on yelp, and fancy vacations to Europe - how much your peers spend is visible everywhere, especially in today’s era of Instagram.
Since you can't see other people's income, it makes sense to use spending as a proxy to benchmark against your peers. The mistake I see many people make is that their perspective of wealth is too narrow, and the comparison is made within the same level of wealth.
Stewart Butterfield, the Canadian billionaire businessman best known for co-founding Flickr and most recently Slack, explained what he considers to be three levels of wealth.
Level 1. I’m not stressed out about debt: People who no longer have to worry about their credit card debt or student loans.
Level 2. I don’t care what stuff costs in restaurants: How much you spend on a particular meal isn’t impacted by your finances.
Level 3. I don’t care what a vacation costs: People who don’t care how expensive the hotel is or which flight they go on.
I took this concept a step further and broke it out into 5 levels of wealth on the subject of food.
Level 1. I buy groceries on a budget: People that add up the cost of groceries as they add it to the basket. If you can buy whatever you want at the grocery store, move onto level 2.
Level 2. I eat at restaurants on a budget: People that don’t know the cost of a tomato, but probably know the cost of a pizza. If you eat whatever sounds good at a regular neighborhood restaurant, move onto level 3.
Level 3. I eat at fancy restaurants on a budget: People that eat at neighborhood restaurants without a budget, but treat dinner at a 3 Michelin star restaurant as a special outing (and therefore have a budget). If you need to be reminded that restaurant menus not only have meals but also prices, move onto level 4.
Level 4. I don’t have a food budget: People that don’t look at the price on a menu. If you prefer restaurants come to you, move onto level 5.
Level 5. People that hire private chefs. What is money?
A person in level 1 is very conscious of how much groceries cost because they have to stay within a specific budget. Someone in level 2 is less aware of how much groceries cost, and someone in level 3 and up start to lose complete sense of the cost of groceries.
I used food as an example because we all eat, but it can be extended to other things, like clothes. I overheard a client once say, “Just buy him the t-shirt. How much could it possibly cost? $700?” Clearly a level 5 client.
If you are in level 1 of wealth, it doesn’t matter whether your grocery budget is $20/week or $100/week in the grand scheme of things. There is little to gain by comparing yourself to others on your own level.
For example, if you are a high school student wanting to go to Stanford, there is little to benefit from comparing yourself to other students in your own high school. Instead, you want to take a broader perspective and compare yourself to Stanford students to see what they did to get accepted. Likewise, if you want to get a promotion at work, don’t compare yourself to your colleague. Rather, comparing yourself to your manager and thinking like them is a much more effective way to get promoted.
If you want to benchmark your income to others, take a broader perspective and compare your income to people at different wealth levels. Comparing your income to people levels below you will give you a sense of gratitude for what you have. If you want to move a level up, observe people in that group and study what they did to get there.
After my walk with Charlie I went back to my apartment for a call with a prospect. The prospect shared that he earns over $1 million annually and saves over 30% each year. Charlie and the prospect are on different levels of wealth, but the desire to benchmark seems to be universal. After a 30 minute conversation, I asked what would be the most helpful question I can answer, and he asked in a nervous tone, “How am I doing?”
Did any of this resonate with you? If you would like to learn more about how I help my clients level up, and how I might be able to help you get to your good place, schedule a 15-minute discovery call with me.
