The 3 Levels of Wealth

The 3 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.

Butterfield’s three levels of wealth aren’t all-inclusive but I like the fact that he frames them in personal finance terms people can understand. It’s a tad depressing that we now have so many people reaching the top level but so many others who struggle to reach the first level of wealth.

Nick Magguili added this adjustment to Butterfield’s “Three Levels of Wealth” to include other lifestyle adjustments:

Climbing the Wealth Ladder

Level 1. Paycheck-to-paycheck: You are conscious of every dollar you spend. This includes people with crippling debt.
Level 2. Grocery freedom: How much specific grocery items cost don’t impact your finances.
Level 3. Restaurant freedom: You eat what you want at restaurants regardless of the cost.
Level 4. Travel freedom: You travel when you want, how you want, and stay where you want.
Level 5. House freedom: You can afford your dream home.
Level 6. Philanthropic freedom: You can give away money that has a profound impact on others.

Due to the diversity of life circumstances, it can be difficult to put an exact dollar amount on each of the above wealth levels. For example, a single 21 year-old with $1 million is very different than a 65 year-old retired couple with $1 million.



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.

 

Our wealth keeps increasing but our spending has tended to stay well below the level we could spend at.

Flash homes and cars have never appealed much at all. We only have the one vehicle being a Toyota Kluger which is over 15 years old. I dress like a hobo. We’re not frugal by any means but live way below the level we could given our wealth.

 

Wheres work freedom? Would have thought thats a big step.

 

$5M: Hourly labour prices matter less

 

this graph is not very accurate

 

Can you post your improved version?

 

I like the concept but I’ve met many a poor person on extravagant dinners or holidays thanks to the wonder of credit cards. I obviously think the purchase of cars is more in keeping with levels of effluents. (SIC)

My son 35 nets <$100,000 but is happy to dine at the world’s greatest and most expensive restaurants as he has ADHD and can’t plan ahead. He does own a cheap investment property but has no PPOR lives with Mrs Car tart and I for about 30 nights a year and his girlfriend in the UK for about 30. The rest of the time he travels the world with his fantastic but crap paying job.

 

Quote ..
Due to the diversity of life circumstances, it can be difficult to put an exact dollar amount on each of the above wealth levels. For example, a single 21 year-old with $1 million is very different than a 65 year-old retired couple with $1 million.

in some ways there would be no difference ,the 65 year old would be able to have some fine Bordeaux wine delivered to the hospital bedside ..The 21 years old could turn that one mill into what ever the person wanted or blow the lot very quickly as there is a difference growing up with wealth and bench-marking your achievements against those of the family that left the person in the hope it may shape the persons future identity..

 

Wasn't it Amartya Sen who described freedom of choice as freedom from poverty? I feel like this "ability to choose" discussion has been around a long time, but I especially like that blog post saying that the 1% of your net worth is how much choice you have, I love quantifying things!

He also describes how his millionaire friend didn't change his lifestyle, but had the freedom to do so if he chose to (ie the supposed "anomaly of rich but modest-living folk")

Personally I find it interesting to apply to my own personal net worth and how much "choice" I feel.

I disagree that you can't take actions above your level and also keep moving up. It's possible as long as you realize it's a deviation from your normal lifestyle and you don't keep doing it repeatedly. It might even be worth it if it spurs you to work to Level Up, or it keeps you sane in your current level.

 

And while I can and do go to any restaurant I want , I’m never going to spend $1000 + for the bottle of grange ( it’s silly ) , so does that mean I fail the restaurant test .

Cliff

 

This depends a lot on your priorities. I know people who buy their dream house but then don't travel and stress over grocery bills. That's their preference, not mine. For my part, I'd hit philanthropic freedom and work freedom before complete travel or house freedom. I have a pretty good house and pretty good travel opportunities, but I place deliberate limits on my spending in these categories because I want to donate meaningful money (currently $10k/year which may not be life-changing for you or me but definitely can be in the hands of the right charities) and I would eventually like to be able to keep up this lifestyle without needing to work.

 

Level 1. I’m not stressed out about debt: People who no longer have to worry about their credit card debt or student loans.
That's me but I still have mortgage and investment loans. I sleep well each night though.

 

dont see how a 1m guy can pay for business class and 5-6 star hotels with out thinking about it.

talk about family holiday, easily got about 100k a trip thats 10% her/his networth

 

Ideally $5 Million across both of us, but less could work too

 

Level 2 for life FTW...
I don't care about eating the most expensive thing on the restaurant as it usually isn't to my taste bud.
Vacation I do like to spurge a bit for what I like - on the second visit. Normally first trip is usually normal expenses.
House, as long as it isn't a slum, it is safe and comfortable. Living in the most expensive postcode means I pay more taxes, which I am not passionate about.

Maybe I might change my mind when I hit retirement age of 67 yo.
You are a by product of your environment.

 

what taxes are those?

 

Land tax
Insurance rates
Council rates

These are the things that comes to my mind right now. I am sure I have missed something.

 

Special price for you at the local supermarket!

Not to mention non mates rate for trades

 

No land tax for ppor.
Council rates are not a proportion of market value.

 

Depends where you are. In the ACT, rates are a function of your unimproved land value (ULV, i.e. the market value of the land).