Stages of Wealth
Scarcity mindset is great. It helps us accumulate and be financially free early. The earlier we build a mindset of scarcity, the greater will be our rate of savings and the growth in our net-worth. Focusing on P&L early in life is important for success in life. It brings big advantages later in life. One big advantage of net-worth going up is that the petty stuff stops mattering.
I have been mulling over the idea of spending money at different stages of accumulated wealth. A stage at which a certain expenses do not matter. For example, if my net-worth goes up to $1 million (INR 7.5 crores), should I be real worried about the expensive dinner that the family wants to have once in a while or taking domestic flights by buying tickets on the same day. A $100 expense once in a while will not matter when a million dollar portfolio entirely invested in equities (just an assumption, not my real asset allocation) moves up or down by 1% ($10,000) every trading day.
A lot has been written about how to think about money as your net-worth grows. People like Stewart Butterfield, Nick Maguilli, Ramit Sethi have been quite vocal about spending money without worrying.
Stewart Butterfield summarised the three levels of wealth as follows -
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.
According to Stewart, it does not matter after level 3. More money does not change your life.
Nick Maguilli took it one step further to understand what constitutes trivial amount of money at any level of wealth. He took Jay Z’s example who does not care about $50,000. It’s trivial for him. This $50k is just 0.01% of his net-worth. Nick took this 0.01% as a benchmark to create six different levels as follows -
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.
The most important consideration here is that you must take your liquid net-worth into consideration. You cannot sell your real estate to take a vacation. Indians are obsessed with real-estate and gold. Despite holding all the wealth, we barely have the freedom to spend because it’s illiquid money. Liquidity is extremely important in living a good life.
You also need to be distinctive about income vs. assets too. You cannot use these ideas just because you have a higher income but no assets. You are poor if you have a million dollar salary and nothing to take home.
Ramit Sethi has written about the ladders of wealth where the first level is freeing oneself from $3 worries. A stage where you never have to worry about the latte or picking up a round of drinks for your friends. At level 2, you stop asking the $3 questions and start considering the $30,000 questions. For example. if you could spend $30,000 per year, what would it be? You need to get really specific. Ramit likes to spend on fitness by engaging a fitness instructor, a nutritionist and a personal chef. At level 3, it’s about having the ability to work from anywhere or live anywhere. At level 4, its the freedom to buy your time. Ramit engages a personal assistant who handles a lot of monotonous work for him.
These rules make sense irrespective of where you are in the world. In the Indian context, if you have a liquid net-worth of INR 1 crore, you can just go ahead and spend INR 1,000 or even INR 10,000 for that matter without blinking twice. For example, if you have been taking the bus to the airport all your life, it would make sense to upgrade yourself to cabs. A little extra expense is not going to impact your net-worth at all but is going to have a big impact on the amount of time you save. Start thinking in terms of life energy. It is all the hours that you are alive to do things. If you are spending an extra hour to save INR 500, you have just spent an hour of your life energy to save a little piece of paper.
Should We Even Draw A Line?
It’s important to know when to stop. A net-worth of $10 million or $100 million will not make too much difference to the way you live. You will be able to afford paying for private jets in both occasions. Mindless pursuit to spend all your life energy in accumulating little pieces of paper is not a life well lived in my opinion. Even Bill Gates stopped when he was young enough and started spending his money in a big way. Despite all the money he spent, his net-worth kept going up (a topic for some other day). Of course, money that is a by-product of the work that you love to do, go on and make all the money you want. You have my blessing.
