Copyright Boulder Daily Camera
When clients first meet with me, there’s usually an event or change that drives them to reach out. While the reasons vary — an impending retirement, the sale of a business, or a sudden windfall — one question almost always comes up: Are we on track? Can they send their kids to college, and will they be all right if they stop working? A recent book, “The Wealth Ladder” by Nick Maggiulli, tackles this question by offering a framework for classifying your wealth level, understanding the advantages at each stage, and identifying how to move up to the next rung. The first wealth level ranges from $0 to $10,000, termed lower class, where the priority is to build a financial foundation by saving and paying off debt. Level 2, called working class, spans $10,000 to $100,000, with the focus on improving your earning power through education or training. The levels then continue by factors of 10 to Level 5, or upper class, which ranges from $10 million to $100 million and finally to Level 6. It makes for an interesting read, but one might wonder why this book has struck such a chord. In my mind, it’s because it provides a simple, tangible framework to answer a question that’s often taboo to discuss — how our finances measure up. It’s a fresh take, but the underlying idea isn’t new, as financial planners have long recognized that our priorities change as we move through different stages of financial life. Decades ago, financial planner Bert Whitehead — founder of the Alliance of Comprehensive Planners and author of “Why Smart People Do Stupid Things with Money” — outlined a remarkably similar progression he called the Financial Life Cycle. It remains one of the clearest ways to think about how our financial focus evolves over time, and it uses just three data points to determine your stage: net worth, income, and annual spending. Though simple, this model captures the essential milestones that mark financial progress and independence. You begin in the Building the Foundation stage when your net worth is less than your annual salary. The focus here is on the fundamentals: saving 15% of income, building a modest cash reserve, eliminating consumer debt, and investing in your earning potential. This stage sets the foundation for the rest of your financial life and mastering it early makes every later stage easier. When your net worth exceeds your annual salary, you reach Early Accumulation, where the emphasis shifts to diversification and investing beyond your workplace plan, such as through a Roth IRA or low-cost brokerage account. At this stage, your money begins to work for you instead of simply being stored in savings. You are also likely becoming more aware of how market cycles and investment costs can influence your long-term results. At around three times your salary, you enter Rapid Accumulation, when your investments begin compounding faster than you can save. This is the point where your financial trajectory takes off, as investment returns start to do the heavy lifting. Here, tax-efficient investing and thoughtful asset placement across pre-tax, taxable and Roth accounts become priorities that can have a lasting effect on your wealth. You reach Financial Independence once your investments equal about seven times your annual spending — enough that your portfolio could theoretically support your lifestyle. While you may not be ready to stop working entirely, this is often the stage where people reassess career choices or pursue new ventures. The security that comes from this level of financial strength can make work more enjoyable and life decisions less stressful. At 10 times annual spending, you move into Conservation, where work becomes optional depending on age, obligations and access to Social Security or a pension. People in this stage often turn their attention toward preserving wealth, simplifying portfolios and planning for family or charitable legacies. Finally, at 15 times spending, you enter Distribution, where your financial future is virtually assured so long as withdrawals are managed prudently. While the perfect model doesn’t exist, it offers a simple and motivating gauge of financial progress — and a reminder that true financial strength depends more on spending than on income. I especially appreciate how it puts wealth in context: A family with a $1 million net worth and $7,000 in monthly expenses is in a far stronger position than one spending twice that amount. It also highlights what I often call the “big denominator problem” — financial independence can be elusive if your spending rises as quickly as your wealth. The Wealth Ladder is the latest iteration of this timeless idea: a structured way to understand your financial progress and plan your next move. For my part, I still find Whitehead’s Financial Life Cycle a quick but trenchant method for tracking your march toward financial independence and beyond, offering useful guidance along the way. David Gardner is a certified financial planner in Boulder County and is admitted to practice before the IRS. As financial planning is only possible after knowing the client, the column is not intended to be personal financial or tax advice. Data presented is believed to be accurate at the time of writing.
