The modern idea of retirement was built on a bet that turned out to be wrong. It assumed people would spend most of their lives working and only a relatively short period of time retired. Instead, many Americans now reach 65 healthy, active, and with an entire third of their life ahead of them. Yet we’re still using a retirement model designed for a world in which old age was shorter and fewer people expected decades of life after leaving the workforce.

My guest says that outdated assumption creates some unfortunate unintended consequences. It causes people to stress excessively about money, postpone meaningful experiences with family and friends, and sometimes sacrifice the very things that make life worth living in the first place. He argues that by rethinking retirement — not necessarily eliminating it, but reimagining it — we can enjoy more of our lives now while actually feeling more secure about the future.

His name is Derek Coburn, and he’s a financial advisor and the author of Let’s Retire Retirement. Today on the show, Derek explains why the traditional retirement model came about, why it may no longer make sense for many people, and how working even a few years past 65 can dramatically change the math of retirement planning. We also discuss the surprising psychological challenges many people face after they stop working, why purpose matters more than leisure, and how thinking differently about retirement can free you up to spend more time on what matters most right now — whether that’s traveling, strengthening your marriage, or making the most of the limited summers you have left with your kids.

Connect With Derek Coburn

This article was originally published on The Art of Manliness.

Ask any marriage counselor what couples fight about most, and money will be at or near the top of the list. Research backs up clinical experience: disagreements over finances are one of the strongest predictors of marital conflict, chronic stress, and divorce.

Now take that already-volatile subject and add this to the mix: it pains one spouse to open their wallet, while the other spends with reckless abandon. One’s a tightwad; the other’s a spendthrift.

How do you handle a marriage where one of you hates spending money, while the other loves to splurge?

Scott Rick, a behavioral scientist, has spent his career studying this dynamic, and in his book Tightwads and Spendthrifts, he shares research-backed advice on how to navigate this relational rift.

The Spendthrift-Tightwad Scale

Rick’s developed something he calls the Spendthrift-Tightwad scale. It’s a spectrum, and where you land on it depends on how much spending money pains you.

Based on his studies, Rick estimates that about half of people reside in what he calls the “unconflicted middle.” Spending pains them enough to keep them from buying random stuff they see on Instagram, but not so much that their toes are poking through worn-out shoes. These folks don’t have much problem being too tight or too loose with the purse strings. If that describes both you and your spouse, count your blessings, stop reading, and go enjoy your reasonably priced lives.

But as to the other half of the population, about 25% land on the tightwad side of the scale, and 25% on the spendthrift side. Let’s take a look at what’s going on with these folks.

Tightwads: Spending Money Hurts

For tightwads, shelling out money for an optional purchase hurts. Literally. In fMRI studies, when shoppers saw a price their brain judged as too high, their insula lit up — the same patch of cortex that fires when you stub your toe. Buying plane tickets and stepping on a Lego run on some of the same neural circuitry for tightwads, which is why they’re so tightfisted. Spending feels bad. They don’t want to feel bad. So they don’t spend.

Sometimes tightwads gussy up their tightwadness by saying they’re just frugal. But Rick’s research shows there’s a difference between frugality and tightwadness. Frugal people get a kick out of saving — a little glow of satisfaction when they make their resources stretch and find new uses for old paper towel tubes. Tightwads don’t enjoy saving money. They just hate spending.

“Well,” they’ll say, “I’ve just got a lot of self-control.” Rick actually classifies extreme tightwaddery as a failure of self-control: the tightwad can’t override an irrational feeling of distress in order to make a purchase that would objectively improve their life.

So what turns someone into a tightwad?

It’s not about how much money is in their bank account. Rick has found plenty of incredibly rich people who can’t bring themselves to spend because it pains them so much.

Some tightwads are born — they just have a natural disposition to find spending unpleasant. Thank your ancestors for that. But many are made. Rick finds the disposition is common among people who grew up poor or in financially unstable circumstances. Because of their upbringing, they got keyed in early to the dangers of spending. They eventually get to a better place financially, but their brains don’t get the memo. They keep living as if they were poor, convinced their stable finances could collapse next Tuesday. Rick calls this “post-broke-ness stress disorder.”

On paper, tightwads look great. High savings, no consumer debt, good credit. But Rick’s research finds they’re measurably less happy than people in the middle of the spectrum, because all that security gets purchased with deprivation. The tightwad skips the family vacation because airfare hurts too much, never goes out to eat or to the movies, and takes cold showers because it’s too expensive to get the boiler fixed. 

Spendthrifts: Spending Money Doesn’t Hurt

Spendthrifts have the opposite problem: they don’t feel enough pain when they spend. Their psychological alarm over spending too much either goes off too quietly or too late. While the tightwad’s spending brake is stuck on, somebody cut the spendthrift’s brake lines entirely.

And the modern retail environment couldn’t be better designed to take advantage of someone without brakes. Spending used to take effort — you had to drive to the store, stand in a checkout line, and hand a cashier actual bills. Now Shopify keeps your card on file so buying a kayak takes about as much effort as liking a TikTok video, and if the kayak feels a little pricey, a Buy Now, Pay Later service will helpfully chop it into four installments so small you barely register them. Spendthrifts can do their damage from the couch, the carpool line, or even the toilet.

How do people become spendthrifts? Women are statistically a little more likely to be spendthrifts, but it’s a disposition that can be found in either sex. And like with tightwads, income isn’t the determining factor — plenty of broke people spend money they don’t have via credit cards and Buy Now, Pay Later services.

It seems some people are just wired this way; it’s a personality thing. But upbringing plays a role too. Rick finds spendthrifts often grew up in households where the parents spent freely and never set limits. Nobody ever told them “we can’t afford that,” so they never developed the sense that money runs out.

Being a spendthrift has its perks. Spendthrifts say yes to the last-minute lake trip, pick up the check at dinner, and buy the good seats instead of the nosebleeds. While the tightwad sits at home in their hole-ridden sweater, the spendthrift is out making memories. Yet Rick’s research finds they aren’t any happier. They carry a lot of credit card debt, save next to nothing for retirement, and feel plenty of pain about their spending — it just shows up after the purchase instead of before it. The spendthrift knows they have a problem and hates that they can’t get a handle on it. That makes them feel bad, so they buy something to cheer themselves up. Wash. Rinse. Repeat.

Why Tightwads and Spendthrifts Usually End Up Together

You’d think tightwads would marry tightwads and spendthrifts would marry spendthrifts. They don’t. Rick found that tightwads and spendthrifts are actually more likely to marry their opposites.

The reason is that neither type likes their own tendency.

Tightwads are wound tight by their inability to enjoy themselves, so when, say, a guy meets a lady who orders the appetizer and the dessert without a second thought, he finds it exciting. This gal knows how to live! The spendthrift, meanwhile, is stressed by her own spending chaos, so the tightwad’s stability is appealing. During courtship, each one is the other’s comforting counterbalance.

But then they get married, buy a house, and have to decide whether the Fast Pass at Disneyland is worth it. The traits that drew them together start to grate. His “stability” becomes controlling and joyless. Her “spontaneity” becomes reckless and irresponsible. And because every major life decision — housing, kids, retirement — runs through money, they end up having the same fight over and over.

But there is hope! Tightwads and spendthrifts can have a more harmonious marital money life if they do a few research-backed things. Here’s what Rick recommends.

Set Up “Translucent” Finances

Most financial advice for married couples recommends complete transparency. Both spouses should see exactly what the other spends. Anything less is “financial infidelity.”

Rick says that for a tightwad-spendthrift couple, this is terrible advice. The tightwad gets a line-by-line readout of every latte, every throw pillow, every scented candle his wife buys, and he’s going to have a discussion about it. She starts to feel like she’s living with an auditor. Pretty soon you’re having your fourth argument of the month over a $7 purchase, and the marriage feels less like a romance and more like the relationship you have with Bill in accounting going over your expenses.

Rick recommends something he calls, only half-jokingly, a “money-laundering device.” All income goes into a joint account. Everything that keeps the household afloat comes out of it: the mortgage, the utilities, the insurance, the kids’ braces, the food. Then every month, a fixed, equal chunk of fun money gets automatically dropped into each spouse’s own account, theirs to spend however they want. No questions asked, no receipts required. One spouse can blow their whole allowance on a new wardrobe; the other can let theirs pile up to be swum around in like Scrooge McDuck.

Rick calls this “translucency”: transparency where it matters, privacy where it doesn’t. The spendthrift gets to splurge without the fights; the tightwad has fewer accounting audits eating up their bandwidth.

What About Big Financial Decisions?

The allowance handles the day-to-day piddly stuff, but marriage still serves up big-ticket decisions you have to make together. New car or keep nursing the ’07 Honda Element along? Staycation or take the family to Yosemite?

Rick says the answer to these kinds of questions should be determined by what kind of purchase is being decided on.

With material stuff — a new car, a kitchen remodel — he recommends having the tightwad’s vote carry more weight. Happiness research shows that material upgrades don’t always deliver lasting satisfaction, thanks to a phenomenon called hedonic adaptation. The remodeled kitchen thrills you for about six months, and then the new granite countertops are just . . . the countertops. The tightwad’s reluctance, irrational as it can be, happens to point in the right direction here, so let his foot stay on the brake.

With experiences — vacations, concerts, and the like — let the spendthrift take the wheel. The joy of these doesn’t wear off the way material purchases do, because they turn into memories and stories the family draws on for decades. The spendthrift will book the trip the tightwad would’ve talked himself out of. Twenty years from now, nobody will remember what it cost. They’ll just remember the time Dad laughed like a little kid going down a snow-covered mountain on an inner tube.

If you’re the tightwad, here’s a trick for actually enjoying the trips your spouse springs for: pre-pay everything you can. Book the all-inclusive. When the whole thing is paid off in one lump sum before you leave, you take your hit once, instead of wincing through every menu and excursion price for a week.

Nudge Yourself Toward the Middle

You can also work to move toward the middle of the scale.

If you’re a spendthrift, add friction back into your spending. Rick suggests deleting your saved card info from Amazon and other retail sites. Having to get up and find the physical card every time you want to buy something can squelch the impulse-buy itch. Creating a “short budget” helps too; instead of a monthly budget, create a weekly one. Having a cap on your spending in the short term can make economic trade-offs feel more concrete.

If you’re a tightwad, take friction out. Reframing expenditures as investments seems to blunt the pain of spending. A vacation becomes an investment in your family, a good mattress an investment in your health, an upgraded wardrobe an investment in your career.

Accepting Who You Are and Working With What You’ve Got

It helps to remember that your wife isn’t splurging out of malice, and you aren’t pinching pennies out of selfishness. You’re just two people with differently wired brains bumping up against each other. Rick’s research suggests that while you can nudge yourself closer to the middle, you probably can’t turn your spouse into a different kind of spender, and you can’t fully rewire yourself either. So work with what you’ve got. Set up your accounts and your decision-making so your differences stop colliding every day.

And when her spending does drive you crazy, remember that her spontaneity, her free and easy way with money, was part of what attracted you to her in the first place; it’s just one side of the same coin of character, and the other side still delights you.

This article was originally published on The Art of Manliness.

How many streaming services are you paying for right now? If you had to write the number down from memory, could you get within five dollars of the actual monthly total? When was the last time you logged into that fitness app that’s been stealthily pulling $9.99 out of your checking account since 2022?

If you’re like most people, you probably don’t know exactly how many subscriptions you’ve got going, and when you check the numbers on them, you’re probably paying a lot more than you’d like.

I recently had David Bach on the podcast to talk about his book The Automatic Millionaire, and he made the case that finding small ways to cut your spending, and then investing that savings, will allow you to compound modest amounts of money into serious wealth.

One way to find these savings, Bach recommended, is to review your subscriptions — whether to apps or media — and cancel those you’re not using and really don’t care about.

My conversation with Bach nudged me to perform my own subscription audit; I’ll share the results of mine at the end of the article.

First, I’ll walk you through how to do an audit of your recurring subscriptions, cancel the ones you no longer need, and invest those savings to build your nest egg.

The Subscription Creep Problem

The average American household now juggles between 10 and 15 recurring charges a month. Streaming services. News subscriptions. Fitness and meditation apps. Cloud storage tiers you upgraded to when your phone filled up in 2020.

Consumer surveys suggest the average consumer loses about $204 a year to subscriptions they’ve completely forgotten about, and services that scan bank accounts for recurring charges routinely find between $180 and $400 in annual savings the first time they’re run on a new user.

Why does this happen?

Well, the subscription model is specifically designed to exploit behavioral inertia. Once you’re signed up, the friction of canceling feels greater than the $9.99 a month you’re paying, so you just keep paying. And paying. Some companies take this further with what researchers call “dark patterns.” They make it easy to sign up, but difficult to cancel. They hide the cancellation link or make it hard to see, and when you do decide to cancel, they may require you to call a retention specialist during business hours, chat with a bot, or, in the case of certain gym chains, mail a notarized letter to the home branch. It’s like the Hotel California: you can check in, but you can’t check out.

A lot of companies simply bank on you forgetting you have a subscription with them at all. Which is a safe bet: because each monthly subscription amount seems relatively small, your brain doesn’t register them as a big deal and prioritize remembering that they’re dinging your account in the background.

Yet the aggregate cost, projected over the decades you could have been investing that money instead, is not small at all. In fact, it can be yuge.

What the Compounding Math Actually Looks Like

Say you run an audit this Saturday and manage to cut $100 a month in subscriptions. $100 is a good chunk of change, but it’s not life-changing . . . in the short term.

Now take that $100 and automate a monthly transfer into a broad-market index fund — something like VTI or a standard S&P 500 ETF — averaging a historically reasonable ~7% annual return. Here’s what that turns into roughly over time:

• After 10 years of investing $100 a month: $17,309
• After 20 years of investing $100 a month: $52,096
• After 30 years investing $100 a month: $121,997

So if you’re in your 30s today and you run this audit tomorrow, over 30 years of regular saving/investing, you’re looking at six figures in retirement money that would have otherwise gone to apps and streaming services you’d practically forgotten about.

If you cut just one $9.99/month subscription, invest that $9.99/month for 40 years, and get a conceivable 10% interest rate, you’d end up with over $50,000.

Small cuts, invested consistently, turn into real money because compounding does the heavy lifting for you.

Ain’t compound interest grand?

How to Run a Subscription Audit

To run an audit of your subscriptions, you’ve got two options: app-assisted or manual.

The App Route

There are several apps on the market that will find and even cancel your recurring subscriptions for you. They make identifying and canceling your subscriptions more convenient, though the convenience will cost you.

Here’s a rundown of them:

Rocket Money. The most popular option. You link your bank and credit card accounts, and it pulls every recurring charge into one list. The free tier shows you what you’re paying for. For each charge you find, ask yourself one question: Did I use this in the last 30 days, and would I actually miss it if it disappeared tomorrow? If the answer is no, cancel it. Their premium tier, which runs $7 to $14 a month on a sliding scale, will actually call and cancel the services on your behalf, which is useful for the deliberately difficult-to-kill subscriptions.

If you don’t want to cancel a subscription outright, they’ve got a bill negotiation feature where they’ll work to reduce a bill for you, but they charge 35-60% of your first year’s savings as a success fee.

Hiatus. Like Rocket Money, Hiatus links to your accounts and scans for recurring charges, and like Rocket Money, it offers a concierge team that will cancel subscriptions and negotiate bills for you. The difference is the fee structure. Hiatus premium runs a flat $9.99 a month and doesn’t take a percentage of what they save you on negotiations — whatever they knock off your cable bill stays in your pocket.

Monarch Money. This is a cleaner, more privacy-focused alternative that picked up a lot of users after Intuit shut down Mint in 2024. It tracks your spending and groups recurring subscriptions into a single category for easy perusal. They don’t offer concierge cancellation services, but with the list of subscriptions, you can easily cancel subscriptions on your own. The privacy you get with Monarch Money will cost you $99 a year.

Copilot Money. A similar service to Monarch is Copilot. It automatically labels your expenses into certain categories so you can easily see your recurring subscriptions. It’s what I’ve been using lately. I check my subscriptions once a month and nuke any I don’t need anymore. It’s ad-free and privacy-first for $96 a year.

The Manual Route

If you don’t like the idea of signing up for another subscription in order to reduce your subscriptions, you can DIY your subscription audit:

Review bank account and credit card statements. Log into your bank and credit card accounts, download six months of transactions as CSV files, and dump them into a spreadsheet. Sort by merchant. The recurring charges cluster together. Search for terms like “subscription,” “monthly,” “Apple.com/Bill,” and “Google.”

Cancel the subscriptions you no longer want.

Review your Apple and Google Play App subscriptions. A lot of recurring subscriptions occur within apps on your phone. You can easily cancel these from your phone.

• On iPhone: Settings → your name → Subscriptions
• On Android: Play Store → profile icon → Payments & subscriptions → Subscriptions

Cancel the ones you no longer want.

Review PayPal recurring payments. There’s a good chance a lot of your recurring payments are happening via PayPal. Fortunately, they make it easy to cancel right from their platform. Log in to PayPal on desktop, click the gear icon, go to Payments, and click Manage automatic payments. You’ll see every merchant pre-approved to pull money from your account, and you can kill any of them with one click. This is often where the oldest forgotten subscriptions are hiding.

The upsides of the manual audit are that it costs nothing, doesn’t give third parties access to your data, and only takes about an hour.

But don’t delude yourself; if you’re not going to have the gumption to do an audit — and then follow through on the annoying work of actually canceling the unwanted subscriptions — pay for an app; it’s better to pay a little money to save a lot of money, than to save nothing and keep paying the inertia tax.

Don’t Forget to Invest It!

If you cancel $100 worth of subscriptions and then spend that same $100 at Bass Pro Shop on Saturday, you haven’t saved anything. You’ve just moved the money from one form of consumption to another.

If you want to get the most out of these savings, you gotta invest it. Bach recommends making your investing automatic, so you don’t even think about it. Set up a monthly transfer, scheduled for the day after payday, that moves whatever you’ve cut from subscriptions straight into an investment account. If you don’t have a retirement account, Vanguard, Fidelity, and Schwab will all let you open a Roth IRA online in about fifteen minutes. Need to learn more about IRAs? We’ve written about them.

If you’re already maxing your Roth, send it to a taxable brokerage account instead.

Do this consistently for years (along with regular retirement savings), and your 65-year-old self will have a nice little nest egg waiting for him.

My Subscription Audit Results

I used a combination of app-assisted and manual tactics for my subscription audit. I first looked at Copilot and filtered my transactions by “Subscriptions,” so I could see a list of all the transactions from the past year labeled as subscriptions. I found a few website/newspaper subscriptions that I barely used that were costing about $5 per subscription each month. Canceled those.

The big recurring subscription I found in Copilot was SiriusXM. It was $300 a year. Damn! Didn’t even know it was that much. It definitely wasn’t that much when I initially purchased it maybe five years ago. Guess they’ve been raising rates each year. I can’t even remember why we were once using SiriusXM enough to justify signing up once a free trial for it expired, but I do know we’ve hardly used it in the last several years, turning to our smartphones to stream music from Spotify or Pandora. Easy cancel.

The big payday for me came when I manually reviewed my Apple App subscriptions. I’d signed up for several apps’ yearly premium plans to unlock features that, at the time, I felt I needed. Each of these yearly subscription fees ranged from $50 to $100 a year. I used these apps for a few months, but then stopped. Forgot about them. If I hadn’t reviewed my Apple App subscriptions, these would have been automatically renewed for another year.

The other place where I found a lot of unused subscription fees was PayPal. When signing up for a subscription service, I’ll usually use PayPal to check out since it’s easier than pulling my credit card out of my wallet. I found several unused digital subscriptions there and canceled them right on PayPal.

When I tote up all the cancellations, I saved my family $1,323 a year, or about $110 a month. If I put that $110 into my retirement account for the next 22 years until I turn 65, and assume a 7% rate of return, it could turn into about $70K. Hot diggity! That’s a nice chunk of change.

I’m not anti-subscription altogether. I’ve actually gotten less stingy recently in ponying up for them in support of enterprises I genuinely enjoy; I don’t want the outlets I appreciate to die.

But moving forward, I’m going to be relentlessly ruthless about axing those subscriptions that don’t offer me value.

Do your own subscription audit, cut these finance vampires out of your life, and invest those savings.

Your future self will thank you!

For more simple ways to build substantial wealth, listen to our podcast with David Bach:

This article was originally published on The Art of Manliness.

Building substantial personal wealth can feel difficult and out of reach. But my guest says that even those with modest means can, with a few simple decisions and strategies, become millionaires, and even multi-millionaires.

David Bach is the author of the bestselling, newly updated personal finance classic, The Automatic Millionaire. Today on the show, we talk about the money management framework that will put you on the path to a free, secure, rich retirement. David explains his controversial “Latte Factor” principle, the astonishing power of compounding interest, how setting your finances on autopilot may be the most important financial move you can make, why he still believes in buying a home as an incomparable way to build wealth, the best way to pay down your debt, and more.

Resources Related to the Podcast

• investor.gov compound interest calculator
• AoM Article: What Every Young Man Should Know About the Power of Compound Interest
• AoM Article: Know-Nothing Investing — Index Funds For Beginners
• AoM Article: Build Your Wealth — Graduate from a Paycheck Mentality to a Net Worth Mentality
• AoM Article: A Young Man’s Guide to Understanding Retirement Accounts — IRAs

Connect With David Bach

• David’s website
• David on IG
• David on FB
• David on X
• David on YouTube
• David on LinkedIn

Listen to the Podcast! (And don’t forget to leave us a review!)

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Transcript 

Brett McKay:

Brett McKay here and welcome to another edition of the AoM podcast. Building substantial personal wealth can feel difficult and out of reach, but my guest says that even those with modest means can with a few simple decisions and strategies become millionaires and even multimillionaires. David Bach is the author of the bestselling newly updated personal finance classic, The Automatic Millionaire. In the show we talk about the money management framework that’ll put you on the path to a free, secure, rich retirement. David explains his controversial latte factor principle, the astonishing power of compounding interest, how setting your finances on autopilot may be the most important financial move you can make, why he still believes in buying a home as an incomparable way to build wealth, the best way to pay down your debt, and more. After the show is over, check out our show notes at aom.is/millionaire.

All right, David Bach, welcome to the show.

David Bach:

Thank you, Brett, it’s great to be with you. I’m really excited to do this show with you.

Brett McKay:

Well, it’s been two decades since the original release of your book, and I’m sure a lot of our listeners have read this or heard about it, The Automatic Millionaire. And in this book you lay out a personal finance philosophy that can help people save for retirement and have financial security automatically. But you adopted this or you figured this out when you were a young financial advisor and you had this experience early on in your career with a married couple that opened up your eyes to the fact that wealth isn’t about how much you earn, but how you manage what you earn. So what were these people doing differently from the other people you were advising at the time?

David Bach:

Well, so lemme tell you how I met this couple and the couple, I refer to them in the book as Jim and Sue McIntyre. I used to teach back in the day, this is like in the nineties, I taught a retirement planning course and people would come to my class. It was actually out of high school, it was adult education. And I would teach these classes at night, usually over four weeks, and we would talk about what you needed to do to prepare for retirement. And typically people who came to my class were in their late fifties. If someone was 55, it was early. So people would usually come to these classes right around when they’re getting ready to retire. And then often those people after a four week class would come into our office to have us do a financial plan for them to see if they were in good shape to retire.

And we would offer that to everybody as a complimentary thing. And that was how we got a lot of our clients. I used to work at Morgan Stanley and we would get clients from teaching a class on retirement planning and then doing these financial plans. So most people when they would actually come into my office and retire, they would be in their early sixties, somewhere between the age of 60 to 65. And that was very common. And we had people who worked at all the major companies. I lived in the Bay Area at the time and they worked at companies, everything from Safeway to Pacific Gas and Electric to Chevron and Pacific Bell. These were a lot of the major corporate companies in the Bay area of the kind of people we were working with. And they were really mid-level employees, people making between 50 to a hundred thousand dollars a year.

They worked the CEOs, they were just your average hardworking American, and they were able to come into our office and retire in their sixties. They had paid themselves first and they had bought a home and they had paid their debt down. But the McIntyres were different because the McIntyres came up to me in my class and they had told me in the class, because you get to know your students, Jim had told me he made a little over $53,000 that year. And he also asked me if he could come in my office and meet with me for a retirement planning meeting. And this was early in the week. And I said, absolutely. And he said, well, can we come in this week and meet with you? And I said, well, what’s the urgency? He is like, well, I really want to retire. You’ve got me really excited about retirement and I’d like to retire on Friday.

And his wife Sue was a beautician. She had really spiky blonde hair and she’s like, isn’t that great? He wants to retire on Friday. And I was like, how old are you guys? And they were in their early fifties. And so I said, well, sure you can come in my office, I’ll meet with you on Wednesday. And they came into my office and what I really thought was going to happen, Brett, is I thought I was going to have a really a hard meeting. I thought I would end up showing them that probably they weren’t ready to retire yet. I just assumed this. And so they showed up in my office with a Safeway bag. Actually, he didn’t work at Safeway, but he had a Safeway bag and all his statements and all of his stuff was in a bag and he basically dumped it out on the table and he said, well, I want to show you everything I’ve got.

And I had a yellow pad of paper and I started adding up what he had and I looked at his 401k plan, he had over $600,000 in it. And all of a sudden I noticed he had a home and his home was paid off and he had a rental house and the rental house was paid off and he had some money in saving accounts and investment accounts, and his wife had money put away. And as I’m totaling it all up, they had nearly $2 million and they were in their early fifties and their average income had been less than $50,000 a year over their lifetime. And it blew my mind away. And what happened, and the reason this meeting changed my life is what happened is I actually stopped the meeting and I said, I have to know how you did this.

I see a lot of people come to my office in their sixties and they can’t even afford to retire. You’re coming to my office in your early fifties with an ordinary income and you’ve got all this money sent aside. How did you do this? And they laughed and they’re like, well, David, we did a lot of what you talked about in your class. We paid ourselves first. We saved money automatically. And they basically walked me through what they did. And I ended up going back to my office super kind of in shock, almost depressed. And the reason I was depressed at the time is that I was earning twice what they were. I had now reached what I thought was a high level of success. I was a young kid making over a hundred thousand dollars a year, and I was still living paycheck to paycheck.

And that had been my experience when I came out of college. I thought if I made $50,000 a year, I would be rich. And then I spent more than $50,000. So I thought, well, it’s just not enough money. If I make $75,000, I’ll be rich. I’ll start saving money. And there wasn’t enough money and then a hundred was the same thing. And so when I met the McIntyres, they were my wake up call that it’s not what you make, it’s what you keep. And that moment, it’s not what you make. What you keep is what changed my whole life. And then I can tell you what I ended up doing. I changed everything in my life as a result of that. And then ultimately I went off and taught these lessons.

Brett McKay:

Yeah, we’re going to talk about these lessons because they’re simple stuff. It’s nothing complex. You don’t have to know anything about quantitative investing or anything like that. It’s just brass tax things. Let’s start with one of the fundamentals that you’re famous for. Something I’ve noticed in personal finance trends is there seems to be this pendulum effect. It’s interesting, a lot of people don’t know this. My very first blog that I started in 2005 was a personal finance blog. It was called the Frugal Law Student. And I remember at the time 2005, this is around when your book came out, there was a lot of emphasis on saving in small ways, looking for ways you can save money, just sort of nickel and dime it, make some small cuts so you can save more. Then it seems like recently there’s been this rise in this ethos of like, well, you don’t need to think about that nickel and dime stuff. It doesn’t matter. You need to focus on big savings. But you’re still a proponent of the idea which is encapsulated in what is perhaps your most famous. And sometimes I’ve seen people criticize this idea in the personal finance world, this idea of the latte factor. For those who aren’t familiar with it, what is it?

David Bach:

Yeah. Well, so a latte factor, again, go back to teaching my classes. I was teaching a class on how to save and invest and use your four one K plan and pay yourself first. And a young woman said in the class, this is a great idea in theory, but I can’t do it. And I said, what do you mean you can’t do it? You can’t save $5 a day, $10 a day. And she’s like, no, I can’t do it. And she was literally sitting there sipping out of a Starbucks cup of coffee, her latte. And so I stopped the class. There was a blackboard in the class, and I’m giving you the history of the latte factor. I said, what’s your name? And she’s like, my name’s Kim. I go, Kim, walk me through a typical morning. I see you’re holding a cup of coffee from Starbucks.

What did that cost? And back in the day, that was like $3.50. Today, if you go to Starbucks and you get yourself a big cup of coffee, you’re going to spend in New York City up to $10. So lattes aren’t $3 anymore. They’re now 5, 6, 7, 8, 9, $10 a day. So I just walked through her morning, she goes to Starbucks, she spends $5 a day at Starbucks between a coffee and a biscotti. Then she goes and has Jamba Juice and she spends $5 a day at Jamba Juice. She hasn’t even got to lunch yet. And I took the math and I showed her, look, Kim, she worked at the Gap. I said, Kim, I know the Gap has a 401k plan. I know the gap has a matching contribution to your 401k plan if we could get you to just save $10 a day. And this woman was in her early twenties, I said, and we took that out over 40 years.

Let me show you what the compound interest could look like. And we ran the numbers for her. We showed her 8% and we showed her 10% and we showed her 11%. We showed her all the different calculations and basically showed her that if she would just start paying herself first and got the match at her company, she could be a millionaire at least. And we ran the numbers for her and it was like at the time it was like $1.8 million. And she goes, are you trying to tell me my lattes are costing me $1.8 million? And a guy sits in the front of the room, turned around and goes, yes, that’s exactly what he is trying to tell you. And what happened is I left that class and every single person was talking about the latte factor, and they were talking about what their latte factor was.

And so the latte factor has always been a metaphor, not about the coffee. It’s a metaphor for how do you spend small amounts of money unconsciously, not thinking about it and then telling yourself you can’t afford to invest because if you don’t believe you have the money to start investing, you will never start. And so I became kind of famous for teaching this philosophy of fine, we’re spending small amounts of money so that you can get started. Start with $5 a day, start with $10 a day, start with $20 a day. So the latte factor has always had pushback, but nothing I’ve done has probably changed more people’s lives than the latte factor. Because what the latte factor is, the metaphor is a wake up call. People hear it. Some people, they get it and they’re like, he’s right. I do have this thing. It might not be coffee, it might be something else.

It might be cigarettes. I’ve had people tell me that they stopped smoking because they ran their cigarette factor and they realize that they literally had spent hundreds of thousands of dollars on cigarettes over their lifetime. And had they invested that money, they would be a millionaire. And I’ve had people tell me they stopped smoking because of it. Some people have stopped drinking, some people have stopped eating out every single meal. They actually brown bag their lunch. So it’s changing your behavior consciously instead of spending money unconsciously. And it’s helped a lot of people. And then I think those who like to hate on it, a lot of people have used hating on the latte factor to build their own personal brands. There’s people who go around creating cups, say you and your latte factor basically, but whatever. You want to keep drinking your coffee, drink your coffee, you want to drink your bottle of water, drink your bottle of water.

But if you’re not saving five to $10 a day and you’re spending $10 a day going out to Starbucks and having water and coffee, I don’t know what else to tell you, it’s your life. You want to turn around and be 60 with no money and hope the government can help you. That’s your decision. But I can tell you, looking into the future, the government will not be there to help you. All the things that we have been dependent on thinking we’ll have social security, Medicaid, Medicare, ultimately all the safety nets that are in America today are going to shrink and they’re shrinking. And so you have to build your own financial security. You have to build the mote around your house. And my message has always been, you can do it. You just need to get started. And the key to getting started is to start, if you have to start small, five to $10 a day can be a great place to start and then work your way up and then make sure you’re doing it automatically. So you’re not needing to use discipline, you don’t need to think about it. It’s the money moves for you in the background while you sleep. That’s what the automatic millionaire is about. Set it and forget it. And I teach you in this book how to literally put your financial life on autopilot in less than an hour.

Brett McKay:

Yeah, we’re going to talk about how you can set it and forget it. But I think it’s interesting. In the past 20 years, there’s definitely more things out there that could be a latte factor. I mean, think about all the things that we have now that didn’t exist 20 years ago, DoorDash, Uber, in-app purchases, subscriptions, streaming services. So I’m sure everyone can find their own latte factor. They just got to look at what they’re spending and be like, okay, do I really need this thing? And if I got rid of it, how could I invest that money so it pays for my retirement in the future? So if someone who is 30 saved and invested $10 a day until they were 65 and got a 10% return when they were 65, they’d have a million dollars. So as you were saying, I mean it really adds up. And as I was reading the book, the thing that really hit home to me is that in order to really I think understand the power of the latte factor, saving just five bucks, 10 bucks a day, how it can make you lots of money in your retirement is that you have to understand the power of compounding and finances. And I think compounding is one of those things that people think they understand, but they don’t really understand just how powerful it is. So help us understand compound interest.

David Bach:

Compound interest. Einstein said this was the miracle he called the eighth wonder of the world is compound interest. Compound interest should be taught in high school. You shouldn’t get out of high school without understanding the miracle of compound interest and what that looks like and what it works. One of the things you need to understand is what’s called the rule 72, how long does it take to double your money? So first, let’s start with the rule of 72 and then we’ll kind of go into compound interest. So the rule of 72 is you take 72 and you divide that 72 by an interest rate. Let’s say it’s 10%. So basically if you take 72 and you divide it by 10%, if you’re going to earn 10% annually and you divide it by 72, you will double your money in a little over seven years. And if you’ve earned 1%, you’re going to double your money in 72 years, right?

So at first you have to understand that the rate of return has a huge amount to do with how much your money will compound. Some people don’t even understand that. They go, well, if I save $10 a day, I’m saving, what is that? That’s $3 a month, that’s $3,650 a year. That’s $36,500 over a decade. How is he getting the math? Where is he coming up with this is going to be worth millions of dollars. They’re not factoring in the interest rate. What you earn on your money and how do you earn that interest rate? Are you putting in stocks? Are you putting in bonds? Are you putting it in real estate? Are you sticking it in an index fund? Are you in the stock market? Those things determine the rate of return on your money. And so what happens is a lot of people just base, they’re fundamentally financially illiterate and they don’t understand all these basic things.

So a simple thing you can do, I’ll give you a website you can use that’s free. You can go to investor.gov. They have a very basic compound interest calculator and you can run numbers. You can go in and put down, okay, I’m going to save $300 a month. If I save $300 a month and I save it for 10 years at 10%, what could it be worth? And it will show you the calculation. Then you run in again. You go, what if I save $3 at 10% for 20 years? What could it be worth? What would it be worth in 30 years? What would it be worth in 40 years? And what you’ll see is that money grows like a snowball astronomically once it gets into the second, third, and then the fourth decade, it just starts to compound and compound and grow and grow and grow and grow. The first decade you don’t see a lot of movement, but by the fourth decade it’s just crazy. Your money’s making you money for every dollar that you spend today that you don’t invest, if you take a dollar today, no way of saying this, you take a dollar today and you invest it 40 years from now, that dollar is going to be worth $20 depending on how you invest it.

People go buy cars, they come into money and the first thing you do is buy a car. You take $50,000 and you buy a car. That car is worth, if you’re lucky, $35,000 the moment you buy it, after you drive it off the lot, it’s gone down in value. You take that same $50,000 and you invest it in a simple index fund. You use a Vanguard fund, like a Vanguard total stock market fund. The symbol is VTI 3,600 stocks in that fund. And you take that out over 30 years and you run well, what could $50,000 be worth 30 years from now, you can go to investor.gov, run the calculation, you’ll see what it’s costing you to spend the money. So we’re not raised and taught often when we’re young, how important the decisions we make around our spending is. And one thing I will tell anyone who’s listening is go open up your, most of you have Apple phones.

Go open up your iPhone, go over to the settings and then go search subscriptions and go see how many people have attached themselves already to your paycheck. You’ll be shocked. I did this on a podcast and one of the hosts, he went through it and he had 24 subscriptions I think, and he had over $500 in subscriptions. And he realized, I’m only using three of these. And that happens all the time. Now that’s maybe an extreme example, but my normal experience when I’m doing a money makeover for somebody is that the average person is spending a couple hundred dollars minimum a month on subscription services. They don’t really need, I just can’t get over it sometimes. A friend of mine was in town and I know he doesn’t have a lot of money in savings. He doesn’t have a retirement account. And he was asking me, he was telling me about a bunch of different shows, and I’m like, what do you watch that show on?

He’s like, oh, I’ll watch it on HBO. I’m like, you have an HBO subscription? He’s like, yeah. And they told about another show. We watched that on. I was like, oh, Hulu. Like, I mean the Hulu, you have a Hulu subscription. Yeah. He’s like, we have all the subscriptions. This guy’s got 10 different subscriptions for television shows and he’s not using his retirement account. So I don’t have any of those subscriptions and I have plenty of money in my retirement account, but people just don’t think, they don’t think about the fact that they’re doing all this hard work and they’re just giving their money to everybody else. And all I want to do is help people kind of free themselves financially so that they don’t give all of their money to everybody else. At least keep 10 cents out of every dollar the churn.

Brett McKay:

Yeah, so just put the example you used. So let’s say instead of paying $50,000 for a car, you take that 50,000 and invest it. So I did this on investor.gov. If you estimate a 10% return in 30 years, you’ve almost got a million dollars. And I think you can think about house costs the same way too. So if you buy a $600,000 house instead of a million dollar house and you only need to put down a hundred thousand dollars down payment instead of a $200,000 down payment and you invest that $100,000 saved in 30 years, it’s almost $2 million. And then in 35 years, I think it’s, it’s $3 million. So choosing the more affordable house, it’s like you just made yourself $3 million automatically. I mean, it’s really cool. And I think the big takeaway for me on compound interest is that it starts off a snowball.

That first decade, you’re not going to see much and you’re probably going to be thinking, why am I even doing this? But in the second and third decade, that’s really when things start picking up. And by that fourth decade you’re looking at the numbers, you’re just like, wow, this is crazy. And the book gives this great hypothetical with three different people that really brings us home. So you’ve got three different people. Person one starts investing $3,000 a year at age 15 and does it for five years and then stops. So total amount invested $15,000 by age 65. That $15,000 has grown to 1.6 million. Person two doesn’t start investing until age 19 and they invest $3,000 a year for eight years. So $24,000 total. So this is more money than person one, but at age 65, they end up with 1.5 million. So they put in more money but got out less because they were in the market for fewer years.

Then person three doesn’t start investing until age 27 and invest $3,000 every year until they retire at age 65. So that’s $117,000 total. So it’s way more than the other two, but their ending balance is 1.3 million. So it’s the lease they put in the most money over the most years and ended up with the lease. And it’s simply because the person that invested just $15,000 earlier, even though it was less money and it was earned over just five years, they gave their money more time to compound their interest was compounding on interest year after year after year.

David Bach:

That chart that you’re talking about, Brett, that’s another chart that changed my life. That chart was given to me in a training class at Morgan Stanley by an advisor who was retiring, and he said, guys, you’re all going to be hopefully successful financial advisors and you do a great job for your clients. Make sure you do a great job for yourself. And he showed us this chart and he said, I’m telling you so many financial advisors, so many people in our office who have made a lot of money who’ve done a great job for their clients have not done a great job for themselves. They haven’t paid themselves first. They haven’t used their IRA accounts. They haven’t funded their 401k plans. So at a minimum, make sure you do this. And that was one of those moments too. It’s like sometimes a chart can change your life where you look at this and you’re like, oh my God, I have to do this.

And it’s interesting, the book I wrote before, well the last book I wrote before The Automatic Millionaire update was a book called The Latte Factor. And it’s the first book that my kids really read cover to cover because it’s a shorter book and it’s a parable. And my kids are like, well, dad, I want one of these IRA accounts, how do we get ’em? And I opened up a Roth IRA for my 12-year-old and he’s now 16. And so we’ve been funding his Roth, we put him on the payroll and he’s been funding his Roth IRA now fully funding it for three years, and he’s already got a $32,000 Roth IRA and he’s going to have, if we keep funding helping him, and then eventually he does it on his own, his Roth IRA could be worth over $10 million tax free money by the time he’s in his sixties, $10 million.

Brett McKay:

That’s crazy.

David Bach:

And it is crazy. And that’s why Trump just, they’re rolling out these Trump accounts to get kids started really young at birth, and that’s all about compound interest. That’s why Michael Dell came in and said, Hey, we’ll help with this because if we can get families starting off their kids at birth, it’s just a game changer. So we need to be doing more to inspire young people to save and invest.

Brett McKay:

Yeah, this chart is something you want to show to a young person, be like, look, you can be basically financially set if you start investing early. And so we’re clear on these charts and these estimates we’re assuming a 10% annual return. Of course that could change. Every year is different. There’s going to be downturns, but even if there’s a downturn, compounding is still happening. You might not get the same returns as a 10% return, but it’s better than just putting your cash in a mattress or a bank account.

David Bach:

Well, and also Brett, you know what? You said something is really important, right? Because always people that are like, yeah, but, but in 40 years, $4 million won’t be worth that much. It’s worth a whole lot more than not having $4 million.

The pushback on the automatic million people are like, well, a million dollars won’t be worth that much when I turn 60. Well, it’s worth more than zero. If you don’t get going, you won’t have anything. People go, well, I can’t earn 10%. Great. So you don’t think you can earn 10%. Put in a balance fund. Go look up the Vanguard Balance Fund. One of the most generic balance fund is 60% stock, 40% bonds. Go look at the returns of the balance fund. Look at it from inception, you’re going to find it’s like 8%. Use that number. Okay, well that’s not going to get me the same place you were talking about. Guess what? Then you need to save more. So people throw out, come up with all these excuses, it won’t be worth that much because inflation, I’m going to have to pay taxes. I can’t earn 10%.

And then you show ’em. Okay, well, so if you don’t think you can earn 10%, what do you think you can earn? I think I can only earn five. Great. Then you need to save 20% of your income. Well, I can’t save 20% of my income. The question you have to ask yourself is are you going to make excuses or are you going to take action? And as I wrap my career up here, I decided to update The Automatic Millionaire book one more time to reach the next generation. I wanted to book for my kids and my kids’ friends and all my friends’ kids and another generation. And I think the younger generation, it is probably more financially literate than my generation even was, but in some cases they’ve also been super misled. Young people have been super misled down the social media road of get rich quick. And the truth of the matter about getting rich quick is it doesn’t work. I’m 59 years old, I haven’t met too many people who’ve gotten rich quick. I’ve met a whole lot of people who spent their whole life trying to get rich quick and they’re still broke.

Brett McKay:

When I look at social media and how young people talk about personal finances, they’re definitely talking about it more than I was talking about it when I was their age. But I notice a lot of pessimism about it. And yeah, I can see where it’s coming from. Houses are more expensive. We’ll talk about that job prospect. It might seem a little, but I don’t think it’s helpful to think, well, everything’s crappy, so I’m not going to do anything.

David Bach:

I think if that’s your plan, that’s a tragic plan. And I actually think the next 10 years is going to be the greatest opportunity to build wealth in our lifetime. And I think if you miss this opportunity, I don’t know what’s coming behind it, but the next 10 years, we’ve just gone through a phenomenal 10 years, right? People said you couldn’t make 10%. When I put the book out 20 years ago, they said, you can’t make 10% annually in the stock market. Well, you’ve made much more than 10% annually the last 10 years you’ve made in many cases, 12, 13, 14, 15% annually depending on what index fund you put it in, because the market has been so strong. If you’ve been in real estate, I mean between real estate and stocks, it’s just housing prices have gone up fourfold and stock market’s gone up sixfold since the book came out 20 years ago.

And so the two primary asset classes that matter to be an investor in is real estate and the stock market. And yet young people are still looking at cryptocurrency, option trading. They’re pretty much done with NFTs. But the amount of things that people would ask me about five years, what do you think about NFTs? What do you think about this cryptocurrency? What do you think about that meme coin? What do you think about GameStop like, oh my guys, you’re just going to get wiped out financially. I can’t remember the name of the car that was the truck that was going to be the electric truck right now I’m blanking . . . I had young people coming up to me telling me they were investing in that truck company and it was going to be the future, and that whole thing was fraud and they lost everything. And so young people are told You should take risk when you’re young. And I completely disagree. I think when you’re young and you’re working really hard, take risk in your career, go for your dreams. But you don’t want to be risking your money in your twenties and your thirties because what will happen is you’ll turn around and you will have lost everything and you will believe the system is rigged against you and you will never get going. And that’s happened for a lot of people.

Brett McKay:

So yeah, the power of compounding interest, it’s time. The more time that money is in the market, the more time it has to grow. And eventually that second, third, fourth decade, it’s just going to start growing exponentially. But what if you’re a listener and in your thirties, forties, fifties and you haven’t really saved much for retirement, they might be thinking, oh geez, I’m hosed. Is their retirement hosed because they missed those early years of compounding, or are they able to still take advantage of compounding even if they got a late start?

David Bach:

It’s harder if you start late. When I sit in a room with people that are over the age of 50, I asked, how many of you wish you had started when you were younger? Almost every single hand will go up in the room. It’s a universal regret that people have. They didn’t start investing when they were younger, and when there’s young people in the room, I’m like, look at these people over the age of 50 and learn from them right now because you’re going to blink your eyes and you’re going to be 50. Now when you’re in your twenties, you see somebody who’s 50 and you think, oh my God, they’re so old, I’m never going to be there. And the next thing you know, literally snap your fingers and you’re 50 and then you’re 55 and then you’re 60. So do for your future self, you may not want to do it now, but I was doing an interview with somebody else, Chuck Jaffe, he was a very famous reporter and he said he did everything right for himself and now he’s getting to, I think he’s almost 60, and he said, when I was in my twenties, I didn’t want to show up at 60 and have my 6-year-old self say, dude, what were you thinking?

Why didn’t you save any money? I wanted my 6-year-old self to be like, dude, good job. And he’s like, and I’m there. So to somebody who’s in their fifties and they’re not there, I would say, this is your day to show up for yourself now and it’s never too late. The secret is to start, the beauty of being in your fifties is that usually the kids are out of the house and now it’s just you and maybe your significant other. You can start to buckle down and focus on really using the next 10 to 15 years to start to build wealth. And I would again, go to investor.gov, run the calculations. Well what if I save a thousand dollars a month? What would that look like in 15 years? What if I save $500 a month? What could that look like in 15 years? Run the calculations and then immediately look at what can you cut expense wise so that you can start to save more money as fast as possible on an automatic basis and that will change your life.

Brett McKay:

Yeah, and you talk about there’s some of these retirement accounts they allow for as you get closer to retirement to invest more tax free. So kind of make up for maybe lost investment opportunity that you had. So it’s never too late. It’s going to be harder, but it’s not too late. Alright, so what we’re doing, we’re looking for small ways we can save finding our latte factor, whatever that is, so we can invest in our retirement. But as the book title is, it’s The Automatic Millionaire, your approach is that the investing needs to be automatic. So you advocate that people pay themselves first each time they get a paycheck. So how much do you think people should set aside for retirement from each paycheck before you pay any other bills or even before you pay the government?

David Bach:

So the Millionaire Formula, we know exactly what the numbers look like. It’s at least you want to save one hour a day of your income. So if you work a 40 hour work week, whatever you earn an hour, the first hour a day that you go to work should go to you, you should keep it. You need the money that you make to flow directly to you first. Not pay taxes, not pay your mortgage, not pay your rent, and not pay your car payments, not go to Starbucks. It needs to go to you for the future. One hour a day of your income is 12 and a half percent of your gross income. And I say we know the formula because there are now over a million millionaires in 401k plans. Fidelity’s got probably the most of ’em. I think it’s over 650,000 millionaires now are in the Fidelity 401k plan.

And they’ve looked at the numbers and what is their savings rate. And on average, their savings rate is 14% in their 401k plan. They got there because they paid themselves first one hour day of their income and their employer had a match on top of that. And it took about, I think the number is 27 years to get to Millionaire status doing that. And their portfolios were typically 70% stock and 30% bonds. So they weren’t even a hundred percent stock. So I would tell you your goal should be to save one hour day of your income. Now, a lot of people are, average American who is saving is maybe saving three or 4%, and that is just remotely not enough money. You have to save more. One of the things that’s changed since I wrote the Automatic Millionaire is that it used to be you went to work for a company, your company gave you an enrollment package to sign up for your 401k plan.

By the way, that enrollment package, the companies that still do that, that meeting the day that you are given an enrollment package or that you’re sent an email to sign up for your 401k plan, the decision you make at that moment in time, what percentage you will put in your 401k plan will be the single most important financial decision you make in your life. It is a decision that determines if you’ll have wealth or not have wealth. And tragically, many people don’t pay attention. They talk to their person they’re sitting next to in their cubicles. They asked a friend over lunch, what do they do? They might have a stupid friend who said, oh, you don’t want to use the four one K plan. It’s a terrible way to make money. Or they might have a friend that says, oh, just do the minimum. That’s what I did.

Not putting anything more in that plan, I’m only putting in the minimum. That’s the absolute worst decision you could ever make. But the ones who go ahead and actually max out their plan, put away 10, 12, 13, 14, 15%, those people will be financially secure and ultimately financially free. Now, what’s happened with the new tax, with the new laws like Secure Act 2.0, companies are starting to automatically enroll you in 401k plans. So you get a job, they enroll you, but they enroll you at 3%. So if you don’t go into the plan now and yourself increase it, you are now at the wrong rate. So you have to be proactive. You have to go look at your plan and go, what percentage am my saving? And then I’m telling you, I’d rip off the bandaid and I would try to get to 10% minimum, ideally more than that, even 12, 13, 14, 15%.

If you don’t think you can do it, move it 1% a month until you hit those goals because you won’t notice a change of your money if it’s 1%. But here’s the thing, people change jobs a lot more now when you change your job. If you’re smart, you’re going to move this money from one 401k plan to the next 401k plan or you’re going to move it into an IRA if you move it in your next 401k plan, or you just simply go get a new 401k plan. We’ve seen people that we’re saving 10, 11 or 12% and then they go to the next employer and the next employer ops them in at 3% and they never get around to bumping it back up again. Vanguard just did a study that says that that single mistake changing jobs and having the savings rate go back down to the bottom and not increasing it again is costing retirees $300,000 in retirement money at retirement.

So when I wrote the book, there was like 7 million millionaires and there’s now 24 million millionaires in America, and most of these millionaires have become millionaires by saving money automatically. The bulk of wealth has been built in two buckets, real estate and stocks. It’s people who own homes. It is people who’ve used automatic saving investing in their retirement accounts. And so a lot of this stuff is really simple and it’s simple to listen to, but the key is to take action. It’s timeless advice that works. The tax laws have changed, the investment vehicles have changed slightly, but the advice is timeless. The McIntyre is, what did they do? They bought a home. They lived in San Leandro, California. The couple in the book, they bought a home in a blue collar neighborhood and they focused on paying the mortgage down early. And then they turned around and they rented that house and they bought another house on their street so that when they came into my office, they had two homes paid off for and clear.

One had been paid off by the renter that they put in it, and then they owned their second home free and clear. One thing they said to me is like, we could have moved, we could have sold the house and bought a bigger home and moved out of our neighborhood. We made a decision not to do that. And again, this is over 25 years ago when they told me this story. They said, we used to have mortgage burning parties in our backyards and we made all these friends in our neighborhood and we all agreed that our goal was going to be to retire in our fifties when our kids were off in college or out of college, and we would celebrate each other, paying off their mortgages. We’d have these mortgage burning parties where you burn your final mortgage statement because you’re done. And the timeless advice of like buy a home, pay your mortgage off, be debt free, your overhead goes down.

That stuff was old school 25 years ago. It’s still old school and it still works. I’ve never seen what I’ve seen people, why would I want to pay my mortgage off? Well, because people who pay their mortgages off on average, in my experience, having done this for 33 years, people tend to retire five to 10 years earlier when they have no debt and their overheads have gone way down. They realize they don’t need as much money to retire and should you retire early if you can afford to, I mean everybody’s different. But I will tell you that most people run out of life before they run out of money. We’ve got people focusing so much on how much money they’re going to have and are they going to run out of money. And really what ends up happening often is people run out of health.

I talk about health expectancy. Health expectancy is the actual age in every country that the World Health Organization knows that the average person will get an illness that fundamentally changes their life. And in the United States, it’s age 63 and having now lived longer, I’ve seen it. Average age of widowhood is 59. I talked about that in Smart Women Finish Rich, my first book that women, you have to know what’s going on with finances because chances are it’s all going to be in your hands eventually. And if you don’t know, you don’t go, it doesn’t go well. So you have to know what’s going on with finances. But I’ve had three best friends pass away and they didn’t get to 57, they passed away in their mid fifties. So I think this game about money, money is a freedom tool. And the sooner you get serious with your finances and you automate and you do all the basics, then you can go back to all the other stuff you do in your life. The thing about the automatic millionaire approach is it doesn’t take a lot of time. Once you have an automatic investment plan, I dunno if you spend but five to 10 minutes a month just looking at it and then you’re done. You don’t need to do anything.

Brett McKay:

Yeah. Alright, so the takeaway there, make it automatic. If you have a job with a 401k, you can set up a system so that whenever you get your paycheck, it automatically invests 10% even more if you want, before you even get your paycheck. And then some of those companies, they have matching. So if you invest a certain amount, they’re going to match that up to a certain amount. And this is all tax free. It’s going into a 401k. It’s a retirement account. If you’re self-employed, you might have to set this up by yourself, but it’s easy. You can set up a system with your bank account so that every month, a certain amount of your income goes into an investment account. And then your big proponent, once you get that money into a retirement account, keep it simple, your big proponent of the target investment funds.

So these are funds designed for if you’re going to retire in 2032, well here’s what the stock and bonds makeup will be, and then it’ll shift as you get closer to retirement. Or just a simple index fund like the VTI, the matches that. So just keep it simple. It’s all about keeping it simple. You’re not wanting to check the stock market. You’re not doing option investing or any of that crazy stuff you see on Wall Street bets on Reddit. Super simple. You don’t want to even think about it. I want to talk about this home ownership thing. So you said that the biggest past to wealth are stocks and real estate and home ownership. Lately, I’ve been seeing this sentiment online that home ownership is a bad investment compared to just sticking to the S&P 500. So it’s like why would you buy a home because you would earn more in investments than you would pay in interest on your mortgage. So why are you losing out on that? But like you said, you still believe that the home is one of the ultimate investment tools for the middle class. So why is that?

David Bach:

Well, okay, so let’s just look at the facts. And interestingly enough, the facts haven’t changed that much over 20 years except that home prices have gotten even more and more and more and more expensive. So anybody who bought a home 20 years ago has done phenomenally well, right? Even the last five years, they’ve done phenomenally well. So the reason people are against home ownership right now is as extremely hard to buy a house. It’s expensive. There’s 50 markets in the United States where the average person can’t afford to buy a home and it’s cheaper for them to rent than buy. The problem is renting’s a trap. So when you rent, if you rent in your twenties and you rent in your thirties and you rent in your forties, you’re literally going to turn around your pitches in your sixties having not probably built any net worth unless you’re paying yourself first automatically.

But even if you pay yourself first automatically and you use your 401k plan, it’s like a boat with one engine or two engines, you have one engine and you’re saving 10% of your income, great, that’s phenomenal. But you didn’t buy a house, you didn’t get any of the opportunities. Of all the wealth and equity that comes from building a home, there’s like $40 trillion in America in home equity. Again, it’s the second amount of money. The most amount of money that’s in the average American’s net worth statement is in home ownership. And the thing about home ownership is that you have to live somewhere as long as you’re alive, as long as you’re alive, you got to live somewhere. You can’t live inside a mutual fund. So people go, oh, well you can just buy an s and p 500 fund. You can buy the index fund.

It’s going to close up 10% annually. First of all, it doesn’t always go up 10% annually. Second of all, you can’t live inside a mutual fund. You have to live somewhere. Well, it’s cheaper for me to rent right now than to buy a place. That might be true. But guess what? Rents are going to go up. Rents have gone up so much. I mean, in New York City right now, go look up the average cost of rent in major cities, New York, Chicago, Los Angeles, San Francisco. It’s 3, 4, 5, $6,000 a month for one bedrooms, not even two bedrooms. It’s unbelievable what rents are costing. And I promise you where those rents are going in the next 10 years is higher and in 20 years it’s higher. So the cost of renting’s always going to go up. Why is that? Because everything’s more expensive with inflation. You have taxes and you have insurance and you have maintenance.

And the people who own the home or the apartment building that you’re renting are not doing it for charity. They did it for an investment. So they pass on all of their expenses to you so they can get rich. So you just have a choice. Are you going to make your landlord rich or are you going to make yourself rich? Now, is it harder for the average person to buy a home in major cities? Absolutely. You know what? When people are doing who really want to own, they’re moving to the next 50 markets where it’s affordable. I was a co-founder. I’m technically still a co-founder of a registered investment advisor called a wealth management huge company based in Topeka, Kansas. And it’s interesting, I just heard from one of my partners, my co-founder, Cody Foster, he just sent me a message yesterday and he is like 10 years ago, we were talking about the fact that Topeka, Kansas, just giving you an example, he said 10 years ago I came out and I did an automatic millionaire talk to all of our employees.

And it was so interesting because in our office, I’d say the average age of people in our office was between 25 and 35. So millennials and I had hundreds of people in the room. I’m like, how many of you want to buy a home? All the hands went up. How many of you already own a home? And interestingly enough, here in Topeka, over half the room, average age was like 27, had already bought a home, 27 years old, they already own a home. Now why could they own a home in Topeka? Because Topeka housing prices are affordable. I don’t know what they are today, but back then the average housing price was like $65,000 for a home. So they were able to the, I said, Cody, the American Dream in Topeka, Kansas is totally available. You can go get a great job at a company like we have here and people can get married, buy a home, go to church on the weekend, take their kids to baseball.

The American dream’s still here. And the interesting thing about that is the American dream all over the Midwest and in lots of places, and the average homeowner in America is worth 43 times what an average renter’s worth. Average renter has a net worth in the United States of less than $10,000. And an average homeowner has a net worth of over $400,000. I mean the number’s and the data. And so I just think it’s tragic. It’s one thing to say, I just can’t afford to buy a house right now. I don’t have enough money for down payment. Mortgage rates are too high. That can be true. But to tell yourself it’s going to be cheaper for you to rent over the next 10, 20, 30 years than to own something and pay the debt down and be debt free one day, it’s just not true. And so I hope for a lot of young people, here’s what’s going to really happen.

There’s 125 billion in wealth transfer that’s going to take place in the next 20 years, and it’s an enormous level of wealth transfer that’s going to go from one generation to the next. And you know what? The first thing these people are going to do to haven’t bought a home when they inherit money from mom and dad or grandma and grandpa, they’re going to buy a house and the families that actually will have inheritance to pass down why they have an inheritance passed down because they bought a home. So when you look at demographics and you go, who has money in America? It’s families that own homes, because that’s the thing that determines wealth gets transferred from one generation to the next. That’s how generational wealth gets created. So I feel for a generation of young people that I think are really being, in many cases by financial influencers, really led astray,

Brett McKay:

And if you own a home, you encourage people to pay it off faster. And there’s a simple approach. It doesn’t mean you have to pay it down super fast. It’s as simple as making an extra payment or two a year. And that can really add up because saving money, that would’ve gone to interest instead.

David Bach:

Yeah, one of the simplest ways to do is biweekly mortgage. You can keep your mortgage, but you just split your mortgage payment in half and you pay half every two weeks. That trick allows you to actually make one extra payment a year and making one extra payment a year takes a 30 year mortgage and pays it down in 25 years, typically.

And that will save you for the average mortgage over a hundred thousand dollars in interest payments. Getting a 15 year mortgage is another. It’s harder. But getting a 15 year mortgage is another phenomenal way to get home paid off early. Now when rates were low, this was much easier. Today with rates being six point a half, 7% gotten much harder. But rates will come back down again and you’ll be able to refinance and hopefully get a lower rate. But even at 7% right now, rates are still on a historical basis. It’s actually, people don’t realize it, but 7% is a pretty decent rate compared to where it’s been. There’ve been years where it was over 10, 11, 12%. So only a home. It requires you to make lifestyle changes. A lot of people when they buy their first home, you can’t buy the dream home. You will probably buy something that’s not as nice as what you can rent, and you may have to move into a neighborhood that’s not where you actually want to live right now at first just to get your feet in the door of buying your first home.

Brett McKay:

Last thing I want to talk about before we end our conversation. So we’ve talked about you’re finding small ways to save. You’re going to invest that money automatically take advantage of the power of compound interest, so that can grow into wealth over time. Home ownership can be a part of that as well. But a lot of people today might have a lot of consumer debt. So it could be credit card debt, car loans, student loans. How do you balance paying that stuff off while still saving for retirement?

David Bach:

It’s a great question. So in the automatic millionaire books, there’s an entire chapter. It’s a section on how to pay your debt down. And one of the biggest myths or things that I don’t believe to be true is that is that you should pay your debt off first and then you should save and invest. And what I’ve seen is when people do that approach, they get depressed and they don’t see themselves making enough progress. And so they kind of give up. And so I teach the approach that you should put whatever you can save. Let’s say it’s a hundred dollars a month. You should put $50 towards the future investing in a retirement account and you should put $50 towards your debt to pay the debt down. So you’re doing both at the same time. And the reason that’s important is if you can see yourself starting to build a nest egg and pay your debt down a little bit each month, you’ll see yourself shrinking your debt and saving for the future.

And that combination will be a winning combination. Now there’s all kinds of strategies on how to pay your debt down and I teach you how to go and get your rates lowered on your debt because it’s not the debt that kills people, it’s the interest rate. And so you’ve got to get the interest rates refinanced. You have to get these cards down. If you’re paying 20% interest rate, it’s really hard to pay a credit card off. So you have to play the game of getting the interest rates lowered. And then I teach approach that is, I call it done on last payment, that you take your smallest debt. So let’s say you have five credit cards. You start with your smallest card, you make minimum payments on everything, and you focus on getting the smallest card paid off. You get that one paid off, then you go the second smallest card, you get that one paid off. And that process is like a snowball approach to paying down your debt. Just like the snowball approach to building wealth. Instead of snowballing to build wealth, you’re snowballing to shrink your debt.

Brett McKay:

Gotcha. And so you’re doing this at the same time as you’re investing. You might not be able to invest as much as you’re paying down this debt, but what’s nice about it, if you do the snowball thing, this adult thing, once you make that last payment on your consumer debt, whether it’s a car loan, credit card, student loans, all that money you were paying towards paying off your debt can now go into investments.

David Bach:

Exactly.

Brett McKay:

Well, this has been a great conversation. Where can people go to learn more about the book and your work?

David Bach:

Well, Brett, thank you. I really enjoyed our time together. They can come visit me at davidbach.com, and the book again, the new book is The Automatic Millionaire. And by the way, you go to my website, front page of the website, I have a podcast, The David Bach Show. I put the first three chapters of the book on the podcast. You can go listen to it for free and see if you enjoy it. And we’ve got a whole bunch of great resources. And we’ll have your podcast on our website later. And yeah, I’m also on social media, Instagram and Facebook and X. So come find me. And I’m constantly putting out free content. I don’t have anything to sell. So you can get my book in the library too if you can’t find it. If you don’t want to get in stores, you can go get in the library, go get on the waiting list. I know they’re backed up right now.

Brett McKay:

Fantastic. Well, David Bach, thanks time’s been a pleasure,

David Bach:

Brett, thank you. Have a great day. I appreciate you.

Brett McKay:

My guest here was David Bach. He’s the author of the book The Automatic Millionaire. It’s available on amazon.com and bookstores everywhere. You can find more information about his work at his website, davidbach.com. Also, check out our show notes at aom.is/millionaire. Until next time, this is Brett McKay reminding you to not only listen to the podcast, but to put what you’ve heard into action.

This article was originally published on The Art of Manliness.

Your wallet is an essential part of your EDC. It carries your identification and your means of payment. In the past few decades, wallet profiles have been getting thinner and thinner. Men don’t want to sit on a George-Costanza-sized lump all day. Moreover, carrying too much stuff in your wallet can be a security risk: if you lose your wallet and it contains sensitive information, you put yourself at risk for identity theft. 

So what should you put in and leave out of a wallet to ensure you have the essentials, while also keeping things streamlined and reducing your security risk?

Below we share the items you should sometimes, always, and never keep in your wallet. 

Sometimes

Some items should only be kept in your wallet on an as-needed basis. Keeping them in your wallet all the time creates a higher security risk, and they needlessly take up space.

Health insurance cards/Medicare cards. A thief can use your health insurance card or Medicare card to get procedures done in your name, potentially sticking you with the bill, messing up your health records, or even increasing the cost of your insurance. You only need to bring your health insurance card to your medical appointments. You usually don’t even need it then, as the doctor’s office keeps a copy of your card on file, but every once in awhile they update their records and want to see your card again, so it doesn’t hurt to always bring it. 

You might think that you need to always carry your health insurance cards on you in case you end up making an unexpected visit to the emergency room. Not so. A hospital will still treat you if you don’t have your insurance card. You’ll just need to get the hospital your insurance info later.

Save space in your wallet and reduce your fraud risk by carrying your health insurance cards only when needed.

Medical debit card. Your medical debit card is another sometimes item for the same reasons your health insurance card is: to avoid medical fraud and reduce your wallet profile.

Gift cards. You might keep a gift card in your wallet just in case you decide that today’s the day you’re finally going to hit The Cheesecake Factory for dinner. But, you’re probably not, so it’s just taking up needless space in your wallet. What’s more, gift cards don’t need IDs to be redeemed, so if your wallet gets stolen, a thief could use that $100 gift card from Grams to treat themselves to a cheesecake-crowned feast. Only put a gift card in your wallet when you know you’re going to use it in the immediate future.

Always

Driver’s license. Got to have this on you by law when you’re driving. Getting pulled over when you don’t have your license may just lead to a “fix-it ticket” where if you later show proof of your valid license, the citation will be dismissed. But you definitely want to skip having to show up in traffic court to get that taken care, so always keep your license with you.

Credit card. Don’t carry multiple credit cards. Just keep one in there that you use the most. Stick with a credit card accepted at most retailers, like Visa or American Express. Not only will this reduce bulk in your wallet, but if you lose your wallet, you won’t have to cancel multiple cards. 

Debit card. Debit cards are essential for making payments from your checking account and withdrawals from ATMs. Ensure you have fraud alerts and daily spending limits to reduce debit card fraud.

Cash. A man should always have some greenbacks on him. Carry $100-$300; enough to cover most cash-only transactions that may arise, but not so much that you’ll lose big if your wallet gets stolen. 

Never

Social Security card, birth certificate, passport card. No brainer. You rarely need these documents for identification purposes, and they can all be used for identity fraud. Keep them at home.

Passwords. Don’t be a dummy and store passwords for personal or work services in your wallet. You’re just asking to become a fraud victim. Protect your online privacy. 

House key. If your wallet gets stolen, the thief will now have both the key to your house and (thanks to your driver’s license) its address. Bienvenidos thief! Mi casa es tu casa!

Blank checks. If your wallet gets stolen with blank checks, you risk being a victim of check fraud. 

Receipts. Because federal law prohibits businesses from including identifying/sensitive information on receipts, it’s highly unlikely that they could be used by criminals who get ahold of your wallet. But they pointlessly take up space, so get in the habit of discarding those you’re sure you don’t need for returns or for your records, and filing away those you do. If there is any chance the receipt does contain sensitive information, shred it.

With our archives 4,000 articles deep, we’ve decided to republish a classic piece each Sunday to help our newer readers discover some of the best, evergreen gems from the past. This article was originally published in March 2023.

This article was originally published on The Art of Manliness.

We usually think of money as something very practical, concrete, and secular; we earn it, save it, spend it, and crunch the numbers behind it. But money is never just about money: it reflects our values, our priorities — and even our spiritual life.

My guest today, Tom Levinson, knows this well. He’s a financial advisor who studied religion at Harvard Divinity School and thought about becoming a rabbi. Now, he helps people navigate not just their portfolios, but the deeper questions that come with them.

In today’s conversation, Tom shares the greater meaning around money, what the Jewish, Christian, and Islamic religions say about it, and how financial practices like budgeting can be spiritual disciplines.

Resources Related to the Podcast

• All That’s Holy: A Young Guy, an Old Car, and the Search for God in America by Tom Levinson
• AoM Article: The Spiritual Disciplines — Simplicity
• AoM Podcast #363: Budgeting Doesn’t Have to Suck

Connect With Tom Levinson

This article was originally published on The Art of Manliness.

A few months ago, we published an article on 11 personal finance goals for your 20s. Today we take a look at 7 personal finance goals for your 30s. While many of the goals you should set during this decade of your life are simply a continuation of those you hopefully started on in the previous one, your thirties bring some unique personal finance challenges that didn’t exist when you were a relatively carefree 20-something. As a friend once put it, “In your 30s, you’re just running.” You’re likely married, have small children, and your career is starting to take off — everything’s launching and/or accelerating at once. And with these new responsibilities come new personal finance goals.

As you read the suggested personal finance goals for your 30s, keep in mind that everyone is in a different place, so naturally everyone is going to have different objectives. But if you’re feeling confused and overwhelmed about money, it’s sometimes helpful to see suggestions for milestones to hit at certain points in your life. You can then take those broad suggestions and refine them so they fit your personal circumstances.

(In your 40s? We also have a guide to finance goals for that decade of life.)

1. Save six months of income in your emergency fund. 

Hopefully by now you’ve started an emergency fund. In your 20s, the goal was to get at least $1,000 in your savings account before you started paying off your debt. This provided a small cushion to prevent your financial life from derailing in the face of unforeseen expenses. In your 30s, you likely have more on the line than you did in your 20s — like a wife and kids to take care of and a mortgage. While having $1,000 in savings will certainly help, you’ll want even more security than that in the event you lose your job due to a layoff or injury. To that end, make it a goal to save at least six months of income in your emergency fund while in your 30s. Why six months? Studies have shown that after you lose a job, it takes around that amount of time to get a new one. Having six months’ worth of income in your savings account will ensure that you can continue to support your family while you’re hitting the pavement looking for a job.

And besides protecting you from negative events, having six months of cash in the bank gives you a bit of freedom to take some risks. Maybe you finally want to start that business you’ve been dreaming about or perhaps an opportunity comes up to travel for three months. Your emergency fund can help you take advantage of those opportunities.

In short, six months of cash in the bank is one very effective way of becoming more antifragile.

For extra personal finance points, try to save one year’s worth of income by the time you turn 40.

2. Pay off all-non mortgage debt. 

In your 20s, you paid off all your credit card debt and started a debt repayment plan for your student loans. In your 30s, the goal is to stick to that plan — keeping credit card debt at bay and paying off all your non-mortgage debt. Be aggressive with it. Slash your expenses with frugal living, earn extra money through side hustles, and divert as much of your savings and income as possible towards eliminating your student loans and any other debt. If you don’t think it’s possible to pay off your debt while trying to support a family with an average income job, just read the experiences of folks who followed Dave Ramsey’s Total Money Makeover program. You’ll find several examples of families of five or six, where the husband was the sole full-time income earner, who still managed to pay down down six-figures of debt in just a few years. It just takes dedication and sacrifice.

3. Increase retirement savings to at least 15%. 

Hopefully by now you have some sort of retirement account set up and are making regular contributions to it; you won’t be one of the 40%(!) of Baby Boomers who have nothing saved for their golden years. As you pay off more of your debt, start shifting some of the money that’s no longer going to loans to your retirement account. Most personal finance experts agree that in your 30s you should be saving at least 15% of your income for retirement. If you want to make sure you have plenty, aim for 20%. Don’t know what to invest in? Check out our post on index funds — the best stock market investment option for just about everyone.

4. Get your estate planning in order. 

You’re going to die someday. Could be in 50 years or it could be tomorrow. Whenever it happens, your estate will have to be set in order and distributed to your survivors. If you want to control how your stuff gets doled out when you’re gone and make the process as hassle and conflict-free as possible for your loved ones, you’ll need to have a will or a trust in place. Wills and trusts are particularly important if you have children. If you and your wife both die, who do you want to take care of them? How do you want the money in your accounts spent to raise them? In addition to a will or trust, your estate plan should have documents like an advance directive and durable power of attorney. Instead of your family arguing about whether to pull the plug on you when you’re in a coma, make that decision yourself with a living will and a health care surrogate designation (the person who gets to call the shots when you’re incapable of doing so).

For more information, see our article on estate planning.

5. Consider term life insurance. 

When you’re in your 30s, you’re starting to build up a financial foundation that permits you to give your family comfort and security. But what would happen if you died tomorrow? Would your family still be able to live comfortably or would they be scrambling to figure out how to make ends meet because you’re no longer around to provide for them?

Take a step to ensure your family is taken care of by purchasing term life insurance.

It’s key that you make sure the life insurance policy you get is term life insurance. There’s another type of life insurance out there called cash value or whole life policies that are much more expensive and confusing; it lasts for your entire life, and you have to pay into it until you die. With term life insurance, on the other hand, you pay a monthly premium for a set term (could be 10, 20, or 30 years). If you die within the term, the insurance company will pay out a specified amount to your beneficiaries. So for example, if you bought a $500,000, 20-year term life insurance policy, if you kicked the bucket 10 years after purchasing the policy, your wife (or whoever you set as the beneficiary) will get $500,000 from the insurance company.

Most people don’t buy life insurance because they think it costs too much. But as financial planner Jeff Rose wrote in a previous post:

Not true! A healthy 35-year-old man can get $500,000 of term insurance for 20 years for the price of 6 Double-Doubles per month at In-N-Out Burger. While you won’t get the same immediate gratification when making the payment, you can rest assured that your family is taken care of.

And what if you outlive the term of the policy? Well, congratulations! You’re still alive. That’s great news. Hopefully, you’ve been saving enough during that time that you’ll have so much money that you won’t need another insurance policy to take care of your loved ones after you die of old age.

6. Start a 529 plan for your kids. 

I don’t know what the future of higher education is going to be. Perhaps in the next 15 years, people will be able to get a college education for free online, or maybe college tuition will keep increasing at a rate of 5% each year. I’m hoping for the former, but banking — quite literally — on the latter. As soon as each of my kids were born, I set up a 529 college savings account for them to which I now make regular monthly contributions. While you can’t write off the amount you contribute to a 529 on your taxes, the interest the account generates is tax free. So if Junior’s plan earns $10,000 in interest, you don’t have to pay taxes on that $10,000 when he starts withdrawing money to pay for school.

If your child decides not to go to college, you can re-assign the account to another child and pass along the tax-free earnings. If that’s not an option, you can cash the account out but pay a 10% penalty on the earnings accrued.

7. Get an accountant (if your finances are complex). 

When you were in your 20s, your finances were probably rather simple. You may have had just a checking and a savings account and maybe a few bills. When you get into your 30s, your finances start getting more complex — mortgages, homeowners insurance, multiple retirement accounts, college savings plans, maybe even a side-hustle business. All these additions to your financial picture will definitely make taxes more complicated. While you can use software to guide you through the process, a certified personal accountant can make sure you’re not paying more in taxes than you should be and will save you a ton of time — especially if your finances are a little more complex than the average joe’s.

Up until a few years ago, I did my own taxes with TurboTax. With expanding business and financial complexities, taxes took me forever, and I was definitely leaving money on the table. So I decided to hire an accountant, and it is easily one of the best decisions I’ve ever made. She quickly found places where I was overpaying on taxes. Best of all, I hardly spend any time on my taxes myself. Just a few minutes gathering forms for her and then reviewing them before I send them in.

Listen to our podcast with Nick Maggiulli about the 6 levels of wealth and how to reach them:

With our archives 4,000 articles deep, we’ve decided to republish a classic piece each Sunday to help our newer readers discover some of the best, evergreen gems from the past. This article was originally published in November 2015.

This article was originally published on The Art of Manliness.

You’ve heard the advice that to build wealth, you need to earn more, spend less, and invest consistently. But what if there was a clearer way to understand exactly where you stand financially — and what steps you should take to reach the next level?

My guest, Nick Maggiulli, offers just such a framework. Nick is the creator of the Of Dollars And Data blog, the Chief Operating Officer at Ritholtz Wealth Management, and the author of The Wealth Ladder. Today on the show, he unpacks the Wealth Ladder concept, taking the complex, often overwhelming concept of personal finance and distilling it into six easy-to-understand wealth levels, each tied to specific net-worth milestones and financial freedoms.

Nick walks us through each rung of the Wealth Ladder, from getting out of financial instability to achieving restaurant and travel freedom, and eventually reaching upper levels of significant financial independence. We discuss the distinct strategies you should utilize on each rung to make the most of that level and move on to the next. And we get into why your spending decisions should be based on your net worth rather than your income, how wealth allocation changes dramatically as you climb the ladder, and why increasing your earning potential becomes more important than penny-pinching as you progress.

Whether you’re just getting started or well on your financial journey, this episode provides actionable insights and practical wisdom for climbing the Wealth Ladder and securing a life of greater freedom and fulfillment.

Resources Related to the Podcast

• Nick‘s previous appearance on the AoM podcast: Episode #836 — Data-Backed Answers to Personal Finance Controversies
• Nick‘s previous book: Just Keep Buying: Proven Ways to Save Money and Build Your Wealth
• Nick‘s article: What is Coast FIRE? The Ultimate Guide to Semi-Retirement
• The Missing Billionaires: A Guide to Better Financial Decisions

Connect With Nick Maggiulli

• Of Dollars and Data blog
• Nick on X
• Nick on LinkedIn
• Nick on IG

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Read the Transcript

Brett McKay: Brett McKay here. And welcome to another edition of the Art of Manliness podcast. You’ve heard the advice that to build wealth, you need to earn more, spend less, and invest consistently. But what if there was a clear way to understand exactly where you stand financially and what steps you should take to reach the next level? My guest, Nick Magiulli, offers just such a framework. Nick is the creator of the Of Dollars and Data blog, the chief operating officer at Ritholtz Wealth Management, and author of the Wealth Ladder. Today on the show, he unpacks his wealth ladder concept, taking the complex, often overwhelming realm of personal finance and distilling it into six easy to understand wealth levels, each tied to specific net worth, milestones and financial freedoms. Nick walks us through each rung of the wealth ladder, from getting out of financial instability to achieving restaurant and travel freedom and eventually reaching upper levels of significant financial independence. We discuss the distinct strategies you should utilize in each rung to make the most of that level and move on to the next. And we get into why your spending decisions should be based on your net worth rather than your income, how wealth allocation changes dramatically as you climb the ladder, and why increasing your earning potential becomes more important than penny pinching as you progress.

Whether you’re just getting started or well on your financial journey, this episode provides actionable insights and practical wisdom for climbing the wealth ladder and securing a life of greater freedom and fulfillment. After the show is over, check out our shownotes at AOM/Wealthlad. All right, Nick Magiulli, welcome back to the show.

Nick Magiulli: Thanks for having me on, Brett. Appreciate it.

Brett McKay: So I had you on last time to talk about your book, Just Keep Buying, which is all about, you just got to keep buying and investing in the stock market. Don’t stop. You got a new book out called The Wealth Ladder, Proven Strategies for Every Step of Your Financial Life. Really good book. I really enjoyed it. Your book is based on this idea of the wealth ladder that you’ve created. What is the wealth ladder and how and why did you come up with it?

Nick Magiulli: Yeah, so Stuart Butterfield, who’s the founder of Slack, had this three levels of wealth framework. Level one was, I don’t stress about debt. Level two was, I don’t stress about how much things cost at restaurants. And level three was, I don’t stress about how much vacations cost. And so I heard about this, oh, that’s a cool idea. At the same time, Jay-Z, you know, that he had this lyric in one of these songs. I’m not going to say the full lyric because it curses and stuff, but he just basically said, what’s 50 grand to someone like me? Can you please remind me? At the time, he had a net worth of $500 million. And so, you know, 50,000 over 500 million is 0.01% of his wealth. And so I realized, hey, that’s like a trivial amount of money to someone. So given that, I kind of came up with this levels framework, which is based on Butterfield’s three levels, but I made six levels and I actually put net worth values to them. So I’ll just walk through those just briefly. So, and just for the record, your net worth, that’s all your assets, everything you own, your cash, your stocks, your house, et cetera, minus all your liabilities. That’s everything you owe to others.

So your mortgage debt, student loans, credit card debt, et cetera. And so once you know your net worth, you’re somewhere on the wealth ladder. Level one is a net worth of less than $10,000. Level two is a net worth of 10,000 to $100,000. Level three is 100,000 to $1 million. Level four is 1 million to $10 million. Level five is 10 million to $100 million. And then level six is over 100 million. Now, once you have these levels, it’s actually funny. It actually maps up with the data and for United States household wealth, it actually maps up decently. About 20% of households are level one. So that’s less than 10,000. 20% are level two. That’s 10,000 to 100,000 in wealth. 40% of households are level three. That’s 100,000 to a million. That’s what I would call your typical middle class. And 18% of households are level four. That’s one to 10 million. That’s like upper middle class. And then over 10 million, that’s like the top 2% of households. That’s level five and six. And the nice thing about these levels, I’ve heard a lot of people do levels of wealth and do all this before.

I like this because it’s a log scale. You know, you divide by 10 or multiply by 10 to move up and down the levels. So if you know one of the levels, you can figure out the rest. So I just tell everyone, memorize level three. That’s the middle, middle class. That’s 100,000 to a million. If you know that, you can back out all the rest. And then even within that, going back to Stuart Butterfield’s three levels framework, level one was not stressing about debt, et cetera. I’ve applied spending freedoms to each level. So in my case, I said, hey, I don’t worry about what it costs at the grocery store. That’s called grocery freedom. That’s level two. So level two is grocery freedom. Level three is restaurant freedom. You don’t worry about what it costs at a restaurant, which is 100,000 to a million dollars in net worth is level three, et cetera.

Brett McKay: You can get the appetizer. You can get the Southwest egg rolls at Chili’s.

Nick Magiulli: Yeah, exactly. You don’t have to worry about any of that stuff, right? And then by the time you get to one to 10 million, you can start to have travel freedom. That’s where you can like sit in the nicer seat on the airplane. You can, stay at a nicer hotel, et cetera. You can’t really fly private yet because that’s a little too expensive. Maybe if you got to the very end of level four, I think private or travel is really reserved for people in level five. But, putting this all together is a very long answer. But putting this all together, you get the wealth ladder, which is just a new framework for thinking about money and how you make various money decisions. You can help with spending decisions, income decisions, investment decisions and more.

Brett McKay: One of the interesting things you do with the wealth ladder is you argue that this is a better way to think about how you spend money. So I think typically when people think about how they spend money, they think about their income. Well, if I’m making more money this year, I can spend more money. You argue that we shouldn’t be doing that. Instead of spending money based on our income, you say we should spend based on our net worth, which you call wealth. Why is that? Why should we base our spending decisions on our net worth slash wealth?

Nick Magiulli: Well, I think the issue is that wealth is generally less fickle than income. I mean, you can lose your job at any moment. And now, okay, I’m assuming that’s how most people earn their income. So if you lose your job, your income basically goes to zero. It’s unlikely your wealth is just going to go to zero out of nowhere. Even during the financial crisis, as bad as it was, people were seeing their homes drop by 25%, their stock portfolio get cut by 50%, which is still bad at the worst moment, but it didn’t go to zero. So it’s a little bit more stable. As a result, I think your marginal spending decision should be based on your wealth, not your income. And then what we talked about, like just the example you gave, oh, I’m at Chili’s, I want to get these egg rolls. They’re going to cost me an extra 15 bucks. Can I buy those? And I say, yeah, if you’re in level three, which is anywhere from $100,000 to $1 million in net worth, you can afford that, quote, splurge or that marginal choice to spend the $15 on egg rolls.

I don’t think it’s a big deal. And so where does that come from? It comes from what I call the 0.01% rule. And that’s kind of comes from that Jay-Z thing where it’s like Jay-Z could drop 50 grand like nothing. Well, if you have a net worth of $100,000, you can drop 10 bucks like nothing. That’s the equivalent difference, right? Obviously, we’re not Jay-Z, so we can’t drop 50K, but he also had 500 million at the time. So that’s where I start thinking about this. Like, hey, how much can I just drop as like a, you know, this is trivial to me. And so that number goes up over time. And so I think a lot of personal finance experts tell you, oh, you can’t spend more money, you know, don’t allow lifestyle creep. And I don’t think that’s accurate. I think you should have some lifestyle creep, but it should be based on your wealth, not your income. Because you’re right, your income could go up. And if you start spending more of it, you’re not necessarily saving anything else. You’re not building wealth. So my whole idea with this rule, the 0.01% rule, which is 0.01% of your net worth, or take your net worth and divide by 10,000, it’s the same thing.

That’s how much you can spend every day and your wealth will stay stagnant, at least on that amount. And so I think thinking about that is very helpful because that’s where you can start to realize, oh, hey, I can spend more over time, but only after I’ve built the wealth. The wealth ladder framework plus the 0.01% rule allows you to spend more over time after you’ve demonstrated financial discipline. And I think that is very important because I want people to be able to spend more money. I want people to be able to enjoy their lives more. And this is a slower way of doing that. And it’s a much better framework, in my opinion.

Brett McKay: Yeah, I love the 0.01% rule. It completely changed how I think about how I spend my money.

Nick Magiulli: That’s great.

Brett McKay: Yeah. So when you say this 0.01% rule, you spend 0.01% of your net worth, you mentioned earlier net worth is your assets minus liabilities. But some assets, like your home, is not liquid. It’s not tied up in cash. So should you spend the 0.01% rule, like including the value of your home, or should it just be like liquid assets?

Nick Magiulli: Yeah, so I think in general it should be liquid assets. I just use, you know, when I talk about the wealth ladder in general, I use total net worth. But you’re right when we’re talking about spending decisions, like you can’t eat your home equity necessarily. Like, yes, you can get something called a HELOC, a home equity line of credit, and you can borrow against your home and do all that stuff. So technically you can pull some of that money out, but I don’t recommend it necessarily. So I think the thinking is, yeah, what’s my liquid net worth? That’s the more conservative thing. So if like, oh, if my liquid net worth, if I have like, let’s say, I don’t know, $100,000 on a brokerage account, then you’re in the beginning of level three. That doesn’t mean you can go and splurge everything at a restaurant, but you can start to spend a little bit more at a restaurant. And where that 0.01% comes from, it’s just, obviously I just came up with this as a trivial amount, but if we assume your wealth is earning 0.01% per day, over the course of a year, if you do that, 365 times, that’s 3.7% a year, which is a conservative return.

That’s basically the assumption. I’m assuming all wealth is growing at 3.7% after inflation, like on average. I don’t think it’s a crazy assumption. And because of that, I’m just assuming your wealth can throw that off just indefinitely.

Brett McKay: Yeah, what I love about the 0.01 rule about spending on your wealth is that it’s actually kind of encouraged me to spend a little bit more. I tend to be tight-fisted and very frugal. I still think I’m a law student, broke. And it’s a good paradigm for helping me loosen up a bit. So you have a chapter about how you earn your way up the wealth ladder. So in order to accumulate wealth, you have to make money. So what does that look like? I mean, what I love about your work too is on your blog, Dollars in Data, within your other books you’ve done as well, is you’re very data-intensive. So you’re looking at all these obscure economic reports. When you look at the data, how do people on the different rungs of the wealth ladder earn money to get to that point?

Nick Magiulli: Yeah, so in general, across the wealth ladder, people in levels one to three, so that’s anywhere from less than $10,000 all the way up to $100,000 to a million, they basically earn all of their money through work. That’s how most people earn their money, right? It’s through their labor. It’s once you start to get into level four, and that’s $1 million to $10 million, and obviously you have some money invested, but we start to see a shift where assets are producing more of their income. And then by levels five and six, it’s even higher and higher. People in levels five and six get most of their income from some sort of business or assets they own, not necessarily their actual labor that they do, like the work they do. And so I think that’s the big mindset shift, and it takes time too, by the way. Like, I’m going to, we can talk about this a little bit, but the median age of a household in level four, once again, level four is one to 10 million, the median age is 62. So if we put every household in America in a room that had one to 10 million, and we just took like the middle age, basically, they’d be 62 years old.

So this is not something that’s going to happen overnight. It takes a lot of time in general or a lot of work. You know, there’s a lot of other ways you can do it, but, less than 1% of households in level four or above are under 30. So that is not the case. That’s a very, very rare thing. So when you look at how people earn money, for most people, it’s just, you know, they work and they earn money and that’s it. But as you kind of move up the wealth ladder, you start to see that those people are earning money off of their assets and not just their labor. And so that’s the big kind of mindset shift I think you need to have. And it’s what I wrote about in Just Keep Buying, right? It’s the continual purchase of a diverse set of income producing assets. That’s the mantra, Just Keep Buying, and that’s kind of what I push for. But it gets even more extreme at the higher levels of wealth.

Brett McKay: Yeah, I think that’s a good point to make. Most people don’t make it to millionaire status until their 60s. I mean, I think the problem with social media is that bias, that recency bias where you see, oh, these people who are in their 30s and 40s, just tons of money. And like, well, that’s not me. And what’s wrong with me? It’s like, well, nothing’s wrong with you, actually. You’re probably doing just fine.

Nick Magiulli: Exactly. Yeah. I think the media does a really bad job of hiding. But then again, that’s the point, I guess, is they want to show exceptional stories. They don’t want to show the ordinary things. Like, oh, yeah, I worked for 30 years and saved my 401k and now I’m a millionaire. That’s not as exciting for people, even though that’s more realistic.

Brett McKay: Another point you make in this earning up the wealth ladder is, okay, we talked about wealth is more important than income, but you show the data that income is pretty correlated to wealth. You had that really interesting chart there. Can you walk us through that?

Nick Magiulli: Yeah, so basically the idea is that within each wealth level, the median income is just increasing across each wealth level to the point where it’s the strongest relationship in personal finance. And if you really think about it, it’s like a flywheel. Your income creates wealth, and then if you obviously save and invest that, that can create more income, and then it just keeps happening over and over. It’s like the snowball. And so if you just look at the median income within each wealth level, it just goes up. So in level four, $1 to $10 million in wealth, the median income is almost $200,000. And so that’s a big piece of this, right? And then by level five, I think it’s like $750,000 or something like that, something close to that. So it’s just like it goes up, and then level six is $4.3 million. So the people in level six that have $100 million in wealth, it’s just their incomes are just super high because they’re earning so much off their assets.

Brett McKay: Yeah, I think that’s an important point because I think oftentimes personal finance advice that you see out there, popular personal finance advice, it’s geared more towards reining in spending as opposed to increasing income. And we’ll talk about this later. I think we’re going to talk about each individual rung on the wealth ladder and your different strategies to take towards it. Early on, if your net worth is less than $10,000, then yeah, you need to be concerned about how much you spend. But once you reach a certain point, it’s not so much your frugality that’s going to get you to the next level. It’s just you got to increase the amount of money you’ve got coming in.

Nick Magiulli: Exactly. I think cutting spending is a short-term decision. It can help, but the long-term solution is to raise your income, and that’s what all of the data has shown me.

Brett McKay: Yeah, I often fall back to when I’m feeling like, oh, I need to do something. It’s like I want to cut spending. I think people fall back to that because it’s easy. It’s like I can do something right away. I can stop the streaming service. I can stop going out to eat. Trying to figure out how to make money, that can be intimidating for a lot of people.

Nick Magiulli: I agree. It’s much tougher. I mean, it’s a much longer-term process. You’re thinking about, oh, do I need to learn new skills? Do I need to start a side hustle? Do I need to get some sort of credentials or education? And those are much bigger lifestyle decisions than just, yeah, I cannot go out tonight or I can kill my Netflix.

Brett McKay: Okay, so to go up the wealth ladder, you need to earn more money, and there’s different ways you can do that. We’ll get into the specifics here in a bit. At a certain point in your wealth journey, hopefully you’ll be starting to save money. That’s how you build wealth, and you’re going to put that savings into assets that make money, like investments and stocks and things like that. Talk to us about the research that you did. That was really interesting. How asset allocation changes as you move up and down the wealth ladder. What does the research say there?

Nick Magiulli: Yeah, so the data suggests that those lower on the wealth ladder, so those in like let’s say levels one to three, tend to have more of their assets in cash, their vehicle, and their home. And those higher on the wealth ladder, so that’s like those in let’s say levels four to six, tend to have more of their total assets in income-producing assets, so that’s things like stocks, bonds, real estate, and their own businesses. And so, in other words, like those lower on the wealth ladder own fewer income-producing assets than those higher on the wealth ladder. And on average, it’s like, if I remember correctly, those in levels one to three have less than 25% of their assets in income-producing assets, but those in levels four to six have over half of their assets in income-producing assets. So that’s like the main difference between those lower and higher on the wealth ladder. Obviously like, there’s other factors that can be correlated with that, but once you have wealth, the people that have wealth tend to invest that in assets that produce more income for them, which allows them to have even more wealth, et cetera.

Brett McKay: Yeah, we can talk about your story a little bit. I mean, I know you grew up, I think like middle class, lower middle class, and you had kind of a rough childhood, but my experience dealing with people who, you know, are in that level one rung of the wealth ladder, you’d see that their assets are tied up in like physical stuff, like car, house, and in extreme cases, you see like a lot of hoarding. Like, why do you got like this like junker car, in your backyard? Like, just get rid of that. That’s what I would think. But like to them, it makes sense because it’s like, well, I don’t have cash. I don’t have any income-producing assets. I can use that junker car one day to pull a part off so I can fix my car. And you see this, they’ve done studies about this, about individuals who grew up during the Great Depression. They tend to hoard more stuff because like they grew up in a time of scarcity. I guess they couldn’t really shake that mentality, even though, they’re 80 years old and they might have a pretty substantial net worth. Like they still can’t shake that scarcity mindset.

Nick Magiulli: No, yeah, I completely get that.

Brett McKay: All right, so as you move up the wealth ladder, your assets typically should shift to income-producing assets, such as stocks, could be a business, et cetera. Let’s talk about the different, like the individual levels and talk about the strategies for it and then some of the pitfalls of these different rungs and then what you can do to, get up the next rung. Let’s start off with level one. Let’s say you’re on level one of the wealth ladder. What should be your focus in order to climb to the next rung?

Nick Magiulli: Yeah, I think you have to get to some form of safety. If we’re talking about financial safety, that either means an emergency fund. There’s other types of financial safety, like you could find people you can trust and rely on to help you get out of level one, whether that’s friends or family. So like wealth is not just financial. I think especially in level one, I think you’ve got to think about the other types of wealth you have and how you can use those to get out of level one. And the reason I say this is because, something’s amplified on every level of the wealth ladder. And I think in level one, the thing that’s amplified is bad luck. Like take someone who gets a flat tire, like for someone in level three or four, like that’s an annoyance. Oh, I have to go get my tire repaired. But for someone in level one, it could send them into a financial tailspin. If they don’t have, a way of getting to work, they could lose their job, then they have to take out debt, et cetera. Like all sorts of bad things can happen just from that one flat tire.

I mean, it’s funny you brought up the junker car. That junker car could actually be that emergency lifeline. Oh, my car broke down. I have a junker I can take for a week while that one gets repaired or while I have to wait to save money so that one could get repaired. So I actually, I understand the hoarding a little bit because it is a form of safety if you really think about it, right? And so I think if you actually look at the data, like just not getting into a financial tailspin, a hole, whatever you want to call it, is like the most important thing in level one. Because over, if you look at the data, over half of the financial distress events, like bankruptcies, delinquencies, et cetera, is committed by just 10% of the U.S. Households. So it’s a very small percentage of households that are getting caught up in the same financial problems over and over again, and it’s very difficult to get out once you’re in there. So the whole point is to avoid that as much as possible. So once again, goal in level one is to get to safety.

Brett McKay: Yeah, I’ve seen that play out in my church congregation. There’s a lot of individuals who’ve just got a hard time financially, and you see like a messed up car, it just disrupts their life completely because they can’t get to work, and then they end up getting fired. And then in order to fix the car, they got to take out a payday loan because they don’t have the emergency fund to pay for the repair. And so they’ve got this crazy loan with this insane interest rate that just puts them more and more into a hole. And you got this great quote about poverty from William Volman. It says, “Poverty is wretched subnormality of opportunity and circumstances. Like, man, that’s true.

Nick Magiulli: Exactly. No, I love that quote from him, and I just think, you know, I didn’t grow up in level one, I would say. Even though my parents declared bankruptcy like twice before I was 18, I think I was in level two. I mean, just from, we had family, we had people we could rely on and stuff, so I’ve never been in true poverty. But like, yeah, we just never had a lot of money going around. So I kind of know what it’s like to grow up like lower middle class to middle class depending on what time in my life.

Brett McKay: Okay, so level one, this also sounds like where you should think more about your spending. This is when cutting spending would be the most useful strategy if you’re in level one.

Nick Magiulli: Yeah, if you can’t, obviously, raise your income is the long-term solution. But like, when you’re in a, you know, I think the tagline for that chapter in the book is, atypical results require atypical actions. And when you’re in level one, that is not normal. And so you need to get out of that. Of course, everyone’s quote, default level. And if you have an education and you’re like, oh, I just graduated college, I’m making good money, you’re going to be out of level one before you know it. It’s just a matter of like time. So that’s what happens for most people. And I would argue you’re not even in level one if you already have a good education and everything. That’s why I said I’ve never been in level one, though my net worth obviously was zero dollars when I graduated college. So yeah, I think that’s the thing to think about there.

Brett McKay: All right. So I like that. When you’re level one, your mental framework, atypical results require atypical actions. You have to cut spending and then think about ways you can boost your income. I’m curious, like, what do you do? Let’s say you’re fine financially. Say you’re level three, level two, but you got friends and family members from that level one, you see them struggling. In your experience, what can other people, what can we do to help people get out of level one?

Nick Magiulli: I think you have to first make sure that the person wants to get out of that level, like they have a real desire. Because of course, like everyone wants more money. Like everyone like, oh, of course I’d want that. But like, if they’re not going to take any steps or actions to try and move in that direction, whether that’s like, oh, I’m trying to raise my income, I’m trying to learn, get an education, I’m trying to, if they’re not doing a lot of that stuff, then like what you can do to help is be supportive and say, “Hey, is there anything I can do to help you?” And of course, if they just, you know, oh, just give me a bunch of money, that’s not going to really solve the problem. Because if they don’t have the means to help themselves at all, they’re going to end up back in that spot eventually, right? You can give someone, you know, here’s five grand or 10 grand even, get them there. And if their income is not enough to support themselves, they’re just going to draw down on that 10 grand until they’re back at level one again, right?

So you have to, I think it’s more about thinking about finding ways to help them help themselves. But at the end of the day, they have to help themselves. You can’t force someone to try and better themselves. They have to want to do it for themselves. And so you’ll notice, I guess, when I, you know, I’ve, you know, family members, friends and stuff like this who have been in this position, and there’s a big difference between someone just asking for money and someone who’s like, I need money, but I need it because I’m trying to do all these things to try and improve my life. And you’ll know, it’s more of, you’ll know it through the relationship. So I think that’s the kind of the big thing there is to strike that balance as best you can.

Brett McKay: Yeah. All right. Let’s talk about level two. So this is, you’re making, your net worth is 10,000 to 100,000. This is grocery freedom. You can buy the Dunkaroos without worrying about it. What are the big challenges when you reach level two?

Nick Magiulli: Yeah, I think the thing to think about in level two is the trajectory you’re on and what level that’s going to get you to. Because there’s two groups of people in level two. There’s people in level two who are going to probably be there most of their life, or they might barely get into level three by the, you know, later in their life. And then there’s people in level two who are just there temporarily. They’re making good money and they’re kind of on their way to deep into level three or level four. And I think the big difference there is education and what skills you have. This is, you know, level two is the level where getting those skills can really kind of change that. You can imagine your trajectory is like a slope on a line, and that slope can be pushed upward and change your income, your career, et cetera, based on that. So it doesn’t always have to be a college degree, but I think you need something that allows you to grow your income in a big way, whether that’s, a skill that’s very useful. I think, for example, sales. If you’re a good sales person, you can make very good money, easily six 

Figures and, you know, there’s some sales people out there that make seven figures or more at the higher end, you know, they’re selling a luxury good, like high-end real estate, things like that. And so you can make really a lot of money in sales. And that’s something that AI is not going to be able to replace. I don’t think we’re going to have robot realtors or anything like that. So there are still skills out there that you can learn and you can make a lot of money that don’t necessarily require a degree, but they definitely require a lot of work.

Brett McKay: We’re going to take a quick break for a word from our sponsors. And now back to the show. Okay, so level two, your goal is just like figure out the education, the training, the skill acquisition you need in order to make more money so that you can accumulate more wealth. That’s the key there. All right, let’s talk about level three. So this is when you move to 100,000 to 1 million in your net worth. What are the big stressors there when you reach level three?

Nick Magiulli: I think the stressors are more about if you’re overspending. And the reason I say that because if you look at people and I did, there’s some data from the University of Michigan has something called the Panel Study of Income Dynamics, which just looks at the same set of households over time. So we can follow people’s career trajectory, their income, all their spending over time, we can follow it. And in that data, I said, okay, let’s look at people in level three today and look at those that made it to level four and compare it to the people that are in level three today that stayed in level three. And so what are the differences between those two groups? Like the people that went from three to four and the people that stayed in level three, let’s say over a decade. And so if you look at that information, the difference is income. That’s a big piece of it. So those that made it to level four generally earned more. But I think the bigger thing I noticed was the spending. The people that stayed in level three over time spent almost as much money as the people that made it to level four from level three.

So the people that made it to level four from level three did spend a little bit more, but not that much more than the people that stayed in level three over time and those people that made it to level four at a much higher income. So it’s like, I think the issue, the stressor in level three is that people are trying to do the keep up with the Joneses thing. They’re overspending on housing, cars, whatever to portray a certain lifestyle when they don’t necessarily have the money for it. And so they don’t have the income for it. So I think that’s the thing to focus on is like, hey, make sure I’m not overspending in this level. And then once again, I don’t think cutting spending is the way to build long-term wealth. I do think it can be something, especially on the big ticket items like housing in particular, I think is very important. You have to think about your spending there. And then in terms of what to focus on in level three, I think it’s really about your income and specifically your income from investments. That’s where as you start to invest, by the time you have a portfolio in the six figure range, that’s throwing off real money.

You know, if you have $10,000 invested and you get a 10% return, that’s a thousand bucks. That’s not really going to change your life. But by the time, you know, you have 100,000 invested or more, now it throws off that same 10% return throws off $10,000 is a much more significant change in wealth. And so I think that’s where you start to see, hey, the flywheel really starts to grow in level three and by level four, it gets even bigger. But I think that’s where you should focus, spend more time focusing on is investing in income producing assets in level three.

Brett McKay: In your research, what’s the average age for someone who’s in level three?

Nick Magiulli: So yeah, the median age in level three in the United States is 54 years old. So it’s still like, I say that’s middle class, but it’s also people who’ve been spending their life, buying their home, saving their retirement account, et cetera. It doesn’t happen overnight. And just for reference, the 25th percentile age is 40. So that means one in four households in level three are 40 or younger. So a lot of people can get to level three before 40, but it’s still rare. It’s only one in four people that get into that level are younger than 40. So something to keep in mind.

Brett McKay: Yeah. And so the tactic there is when you reach level three, your focus should start being spent towards how can I have more of my income come from income producing assets. So that’s investments. And the mental framework there is just keep buying. That’s from your first book, like just start socking away as much money as you can in your investments, because that’s going to add up over time.

Nick Magiulli: Yeah, exactly. And that’s why it’s the perfect book for someone in level three going to level four, or even kind of level two going into level three. But it’s really made to shift your mindset from just, oh, I go and I save money. I work and save money to, oh, I go and I save the money. I invest it in assets that then pay me money. And then that money can be reinvested. And it just goes from there.

Brett McKay: All right. So let’s move to level four. This is when you get to 1 million to 10 million. That’s a big range. But the point you made, though, is once you go higher and higher up the wealth ladder, an increase of just one isn’t going to be that big of a difference. If you have a million dollars and then you increase your net worth by another million, that’s a lot of money. But in the grand scheme of things, it’s not that big of a jump, really. One of the things you talk about in level four, this is the place where a lot of people, this is where they stop. This is where they stop the trek up the wealth ladder. And to remind people, meeting age for this is like 62. So this is like you’re end of your working career. And, you know, if you get to this range, like you’re probably, you’re good for retirement. Why do people get stuck on level four, though? Why don’t they continue to go up the wealth ladder?

Nick Magiulli: They get stuck in level four because the actions that get you into level four aren’t the ones that get you out of level four. There’s this Marshall Goldsmith book called What Got You Here Won’t Get You There. It’s a career book. It’s about career strategy. Now you have to change your career strategy over time to get promoted and stuff. But I think it’s the same idea. You need to change your strategy if you want to keep climbing the wealth ladder. And once again, getting stuck in level four is not a problem necessarily. I think there’s a lot of people that like, great, I’m never going to get out of level four. It’s not a problem. Realize that, accept it, be happy. The simplest way I can say it. But if you do have aspirations to go beyond that, you really are in why we can get into the psychology of that. But if you do, then you have to kind of change your strategy. And for most people that get into level four, you can get into level four with a few things. You have a decent job making a good money, you’re saving that money, you’re investing it and reinvesting all that income, and enough time.

 So like job, good job plus investing plus time, and you get to level four in the United States. But to get to level five, which is 10 million plus, it’s a whole nother thing. You’re going to basically have to either start a company and basically own all the equity and sell it for a decent amount of money. Or you join a startup early, get a good amount of equity, and that company sells for a lot of money, right? You either own a small piece of something that’s very big or a big piece of something that’s decently sized, let’s say. So that’s where I think the difference is. And we can even run the math on this. I do this in the book where I’m like, hey, let’s say today you made it to a million dollars. And let’s just say you have a portfolio, just to keep it very simple. You have a million dollar brokerage account that’s earning 5% a year, and you’re saving $100,000 a year after tax. That’s a considerable amount of money. Assuming that’s all true, how long would it take you to get to 10 million?

 The answer is 28 years. It’s crazy. So if you imagine the typical person gets there, let’s say it’s in their mid-50s or early 60s, do you want to grind it out for three more decades just to get to 10 million? No, you don’t want to. You’re not going to do that. No rational person would do that. They would say, hey, I’ve done enough, and they stop. Even if you’re saving $300,000 a year, which means you’re probably making close to a million bucks pre-tax and everything, you’re saving $300,000 a year earning 5%, you start with a million, it still takes you 17 years to get to 10 million. So the math is not friendly to you once you get into level four. That’s why I call it the no man’s land on the wealth ladder. Because once you get in there, it’s hard to get out. And then succession has that joke, five to 10, five to 10 is a nightmare, right? Because it’s true. There’s no real incentive to keep working because your income is not going to really move the needle anymore.

Your wealth is throwing off so much wealth on its own. So you’re in this weird spot where you’re like, hey, I don’t know what to do here. And I think for most people, the rational response is, hey, take your foot off the gas, enjoy life more, do like a type of coast fire thing, find work you just find enjoyable and not just for money and go from there and stop worrying about getting to level four.

Brett McKay: Yeah, be okay with level four. Level four sounds pretty awesome. You mentioned coast fire. What is that? You wrote an article about that. What is coast fire for those who aren’t familiar with that phrase? 

Nick Magiulli: Yeah, sorry. I try not to use so much semantics, but coast fire, I’m assuming most of your audience heard of fire, which financial independence, retire early. Coast fire, the idea there is you save up just enough for your retirement. We’re like, hey, I have enough money now where if we assume it grows at a conservative rate, let’s say you assume it grows at 4% a year. So you say between now and when I retire, let’s say you retire at 65. So I’m 35 now, I’ll just use myself as an example. So let’s say I have enough money now where if I assume it grows at 4% a year between now and when I’m 65, 30 years from now, I’m going to have X dollars. And then at that point, I can then pull from that money and use that money to live off in retirement. That means you’ve hit coast fire once you don’t need to save any more money for retirement. That’s the point where coast fire lives. And so does that mean you don’t have to work anymore? No, because you still need to cover your current consumption.

You’re not supposed to use your assets to cover your current consumption. You’re supposed to use any income you have to cover your current consumption, but it means you don’t have to save more for your future. That’s kind of the big difference in thinking here. And so I think coast fire is actually the exact place for it is level four, because people will get there and say, hey, and especially if you get there like relatively younger, like let’s say in your 40s or something, you might be like, hey, this is a time for me to like, I can take my foot off the gas, I can chill out a little, and I can work on something that’s maybe more meaningful to you or maybe doesn’t make you as much money. And you don’t have to worry about saving as much. You just need to cover your current expenses. And the rest will take care of itself, basically.  

Brett McKay: Yeah, or I mean, even if you get there when you’re in your 60s, so you have a long, productive working life, you save for retirement, and you don’t have to work full-time anymore. But you could still get a part-time job if you wanted in your 60s. My dad, he did that. He had a government job, forced retirement in his early 50s because he was in law enforcement. And he’s got a pension. He didn’t have to work, but he kept working. He took contract work, and he’s still working. He’s like 70. I think he’s like 75. Still works, and he enjoys it. But I think it covers my parents’ consumptive costs.

Nick Magiulli: Yeah, that’s great. That’s how I think a lot of people should do it. And I think we always look at work as like, oh, wouldn’t it be great if I never had to work again? People idealize that. At the same time, I think a life without any work or any… Work doesn’t necessarily have to mean paid work, by the way. But a life without any work, I think, is a difficult life if you do it for a very long time. I think it’s very tough mentally to do that. Of course, you may reach a point in your life where you’re like, you know what, I’m happy to do that, and some people are okay with it. But I think a lot of people want to have some sort of purpose or something they’re working on. And so I’ve looked at all the research and the data on this, and overwhelmingly, people do find a lot of positive benefits from work. Now, of course, if you’re in a job you hate, you want to get out of that as quickly as you can. But for most people, you want to do something you enjoy working on, whether that’s a creative endeavor, whether that’s volunteering. The options are very numerous.

And so it’s just figuring out what you want and then building your life backwards from that.

Brett McKay: Okay, and so level four, again, this is the 1 million to 10 million range. This is achievable through increasing your income, through acquiring new skills, increasing your education, asking for raises, investing, and then just time, like the time factor. 

Nick Magiulli: Time’s a big piece of this. Once again, the median age is 62.

Brett McKay: Yeah, I think that’s an important thing. If you’re in your 30s or 40s right now, you’re like, I’m not in level four. It’s like, okay, you’re fine. You’ve got 20 years to make that happen.

Nick Magiulli: Yeah, just for the record, less than 1% of households in their 20s are in level four. Less than 5% of households in the 30s are in level four. So only like 1 in 20 people in their 30s are in level four. 15% of people in their 40s are in level four, and et cetera. And this is in the book. It breaks down by age cohort, by decade, 2029, 3039, et cetera. It shows the percentage of people within that cohort that are in each wealth level.

Brett McKay: What are the biggest risks or stressors once you reach level four, you think?

Nick Magiulli: I think the money stressors in level four are similar to level five, and I think the stress is usually from a lack of diversification. It’s like concentration, that’s the issue. As really the only way to lose wealth quickly. Obviously, there’s divorce and other things, outside factors, but if we’re just talking pure monetary factors, it’s really going to be concentration. So it’s like, how is your wealth allocated, and how concentrated are you? Because the more concentrated you are, the more likely you could lose wealth quickly. Of course, that’s also how you can build wealth quickly, but it’s a double-edged sword. And I think realizing that it’s a double-edged sword is what’s important here.

Brett McKay: All right, so diversify 

Nick Magiulli: Yeah. Yeah.

Brett McKay: Is the key there. And then, yeah, move to level five. Like you said, what got you to level four is not going to get you to level five. You’re going to have to do something radically different. And for a lot of people, that might not be rational. What causes people to, like, they reach level four, they’ve got the vacation money, they can just take a nice vacation whenever they want, life’s good. Why would someone want to make that leap to level five based on your experience interacting with people who’ve made that leap? 

Nick Magiulli: There could be a lot of different reasons. One, some people want to create really big generational wealth for their families. Some people want to fly private. Some like the ego boost of being like, oh, I’m not just upper middle class, I’m upper class, right? I’m really wealthy. I can go and buy supercars and all these other things that you see the stereotypically rich people do, which, funny enough, most rich people don’t even own supercars, right? People with that level of wealth, they don’t spend money like that. So it’s only really the media’s depiction of it that makes it look like that. So why do people do it? I mean, in the book, I say, the most expensive thing some people own is their ego. So if the most expensive thing some people own is their ego, that’s why. You know, that’s the answer, the short answer for you.

Brett McKay: Yeah. So we talked about rungs one through five on the wealth ladder. Rung six is $100 million plus. And that’s going to apply to just a very small amount of people. There’s only 11,000 households in the U.S. Who are on rung six. And these are basically people who’ve sold their businesses for huge amounts of money or, you know, like athletes or entertainers. But even very few of those people reach that level. Let’s talk about mobility up and down the wealth ladder. Let’s talk about how often people fall down the wealth ladder. Let’s say someone gets to level four. How often do they stay there?

Nick Magiulli: It’s usually pretty rare how people fall down. So for example, over a 10-year period, 11% of households fell down one wealth level and 2% of households fell down two wealth levels. This is based on the historical data where I’m following the same set of households over time. We can actually control for by level, and it’s actually a little bit more interesting because you can say, okay, hey, if I started in this wealth level, what’s the probability I’m going to be in another wealth level in the future? So for example, going to what you just asked, if you start in level four, after 10 years, there’s a 23% chance you’ll be in level three and there’s less than a 1% chance you’ll be in level two or one. So it’s very unlikely. 72% of households that start in level four are still in level four after 10 years. And that’s like the highest out there. And we can look over 20 years and it’s roughly the same. That’s why after 20 years, if you start in level four, there’s a 64% of those households are still in level four after 20 years. Only 8% make it up the wealth ladder to level five.

So it’s very rare to see that kind of mobility switching, but it does happen.

Brett McKay: What about mobility going up on those lower rungs, like from one to two to threes? That’s still happening? You hear all this talk about like the American dream is dead. There’s no income mobility or wealth mobility. What does the research say about that?

Nick Magiulli: So this research is historical. So it’s going backward looking from like, 1980s when we first had the wealth data through 2021. So the question is, is it still happening now? And will it happen in the future remains to be seen. But in general, like there is mobility. So for example, let’s just look over 10 years. If you start in level one, after 10 years, there’s a 54% chance you will be out of level one. There’s a 30% chance you’re going to be in level two. There’s a 22% chance you’ll be in level three, et cetera. So there’s a decent chance that you can kind of get out of level one and get higher on the wealth ladder. 46% of households stay in level one after 10 years, but the rest don’t. So there is mobility and there’s some healthy mobility. And it’s just, I think a lot of it’s time as well, because people get older and so they save money and they age out.

Brett McKay: Let’s talk about mobility across generations. There’s that phrase, shirt sleeves to shirt sleeves in three generations. So there’s a generation that got a lot of wealth. And then by the third generation, that generation, like the money’s just gone. There’s actually, I think there was a book that came out a couple of years ago, like where are all the billionaires? 

These guys looked at the Vanderbilt family. So like Vanderbilt, he left an inheritance, I think it was like $100 million. It’s almost like $3 billion in today’s money. But if you look at the descendants, like there’s like no more billionaires in the Vanderbilt family. What goes on there? Like why is it so hard to maintain a family on a rung in the wealth ladder?

Nick Magiulli: Well, I think there’s a lot of reasons why this is, I mean, I can talk about the Vanderbilt specifically or just like level six wealth, let’s just call it, and then compare it to other wealth levels. But in level six, so most people that have that much wealth, it’s usually concentrated. And so unless they diversify, it’s very unlikely that that’s going to last. This is why I think Bill Gates and Warren Buffett are so smart because of all the billionaires out there, they may not be the richest on the list, but they’re the most diversified. They’re the ones that are least likely to see their wealth just, disappear or see a massive change in their wealth because they’re very diversified. Like Bill Gates is the largest private landowner in the United States. He owns more US land than any other individual. So he owns a lot of different assets and things that are going to allow him to have wealth for multiple generations. And I think if you’re like an Elon Musk, even though he’s richer on paper, if something happens to Tesla, that’s like the majority of his wealth. So he could easily fall below Gates at any moment.

And so that’s a piece of it. I think if you look at like the growth of families, like they’re growing faster than the wealth is. So like, let’s say you have two kids. Now they have two spouses. That’s now four people. And then each of them have two kids, right? And so now four people is now eight people. And then those kids get spouses and they have kids, right? You can just see how it’s growing at such a fast pace and your wealth is not keeping up. So it makes sense why the Vanderbilts couldn’t do it. At just some point, like the math doesn’t make sense, So that’s another piece of it. But I think just if we’re talking about lower wealth levels, like I think succeeding generations can find it difficult to stay in the same wealth levels or parents because like economic conditions change. They may not want to work as hard. Like, oh, I don’t want to work like my parents did to get to that level. I may just realize, I don’t need to work as hard because I know I’m gonna get an inheritance so I can just chill a little bit more.

They may have different feelings about money. Like all these are very case specific, but just a few reasons that make sense to me.

Brett McKay: So we’ve talked about the different rungs of the wealth ladder. They all have their opportunities and their risks. How do you figure out like where you’re fine at? What other things should you consider besides your net worth in deciding that, I’m okay where I am at financially? What are things you consider in order to figure out if you have a rich life or not?

Nick Magiulli: I think it really depends what you want out of life. I mean, this is the most difficult part of being a human in modern civilization is like, we’ve been debating this idea since the time of the ancient Greeks. You know, it’s like why, you know, know thyself is such an important concept. And it’s because you need to know what you really want. And so once you can solve for that, then it’s much easier to figure out, okay, well, how much wealth do I need to support that? Oh, I want to, I can imagine your dream life or whatever it is, like how much wealth do you need to support that? Because once you know what you want, then you can figure out all those things. And for most people, I think it’s lower than they think. I mean, it’s always easy to justify needing more, but yeah, you have to kind of get past that or figure out what’s the things that really matter. So it’s like your time, how much free time do you have or time you can use, time wealth is what we would call it. You can think of mental wealth. You can think of physical wealth. You can think of social wealth.

All these different things, right? Sahil Bloom has a book called The Five Types of Wealth where he talks about all these. And I use that as a framework in the wealth ladder to think about these types of, you know, a rich life and what does that mean? And it also depends where you live too. Like I said, you know, 1 million to 10 million is upper middle class. Well, it kind of depends where you live. You know, if you’ve got 8 million bucks and you’re in a low cost of living area, you’re upper class. You’re actually very upper class. But if you’re in New York City, maybe not So it really depends where you live, the type of lifestyle you want, et cetera. So those are the things I would say to take into account.

Brett McKay: Yeah. Whenever I go to San Francisco, like, man, this place is beautiful. I could see myself living here. And then you look at the cost of housing. You’re like, no, I can see why housing is so expensive because it’s so beautiful. But I’ll stay in Tulsa next to the Arkansas River and take the sunsets, I guess, in Oklahoma. Well, Nick, this has been a great conversation. Where can people go to learn more about the book and your work?

Nick Magiulli: Yeah, so you can find the book everywhere books are sold, Amazon, Barnes & Noble, bookshop.org, et cetera. And you can find out more about me. I write every week at ofdollarsanddata.com. You can also find me on Twitter/X at dollarsanddata. I’m on Instagram at Nick Magiulli, and then I’m on LinkedIn at Nick Magiulli. I answer every DM. So if you have any questions or anything, feel free to DM me.

Brett McKay: Yeah, and of dollars and data, plug for that. It’s one of my favorite financial blogs out there. It’s a lot of fun to read. Well, Nick, thanks so much for your time. It’s been a pleasure.

Nick Magiulli: Thanks for having me on again. Appreciate it, Brett.

Brett McKay: My guest here is Nick Magiulli. He’s the author of the book, The Wealth Ladder. It’s available on amazon.com and bookstores everywhere. You can find more information about his work at his website ofdollarsanddata.com. Also check out our show notes at aom.is slash wealth ladder. You can find links to resources and we delve deeper into this topic. Well, that wraps up another edition of the AOM Podcast. Make sure to check out our website at artofmanliness.com where you can find our podcast archives. And while you’re there, sign up for our newsletter. We got a free newsletter on Art of Manliness. There’s a daily and weekly version. It’s the best way to stay on top of what’s going on at AOM. And if you haven’t done so already, I’d appreciate it if you’d take one minute to give us a review on Apple Podcasts or Spotify. It helps out a lot. And if you’ve done that already, thank you. Please consider sharing the show with a friend or family member you think of something out of it. As always, thank you for the continued support. Until next time, it’s Brett McKay. Remind you not to listen to the AM1 Podcast, but put what you’ve heard into action.

This article was originally published on The Art of Manliness.

You’re hunched over the kitchen table, flipping through your job’s benefits packet. You see something about a Health Savings Account. Looks like a boring place to stash medical cash. You shrug and skim past.

That could be a big mistake — not marking that little checkbox could cost your future self a six-figure windfall.

If you’re looking for an easy way to maximize your money, allow me to introduce you to a stealth wealth builder: the health savings account or HSA.

I’ve had an HSA since Kate and I first got married. But it wasn’t until fairly recently that I started to realize what an underrated finance tool this thing is.

Today, I’m going to walk you through the benefits of a health savings account and why you might consider opening one up.

HSA Basics

A Health Savings Account is a special kind of savings account designed for medical expenses — but it does a lot more than that. An HSA lets you set aside money tax-free, grow it in the stock market tax-free, and use it for healthcare costs now or decades down the line (yes, tax-free!).

To qualify for an HSA, your health plan needs to have a high deductible — the amount you pay out of pocket before your insurance starts covering costs. As of 2025, the IRS defines a high deductible as at least $1,650 if you’re single or $3,300 for a family. The out-of-pocket max can’t exceed $8,300 or $16,600, respectively.

You can use HSA funds to pay the deductible and any other qualifying medical expenses your insurance doesn’t cover.

You can contribute up to $4,300 a year to your HSA as an individual or $8,550 for a family. If you’re 55 or older, tack on another $1,000. The IRS updates these numbers every year.

HSAs often get confused with FSAs. FSA stands for flexible spending account. FSAs let you set aside pre-tax money from your paycheck to cover qualified out-of-pocket healthcare costs, like copays, prescriptions, and medical supplies. Because the money isn’t taxed, it lowers your taxable income and saves you money. But here’s the catch with FSAs: most FSAs have a “use it or lose it” rule, so you need to spend the funds within the plan year or risk forfeiting what’s left.

This is a big difference between HSAs and FSAs: with HSAs, the money doesn’t vanish if you don’t spend it. It’s yours; it rolls over forever, and you can invest it in the stock market.

Why the HSA Is an Awesome Wealth-Building Tool

The tax savings are huge. The big reason the HSA is such an excellent wealth builder is that it functions like a legal tax shelter.

It offers three big tax benefits:

First, contributions you make to the account are deductible. When you put your money into an HSA, you lower your taxable income. So if you invest $8,550 into your HSA, you reduce your taxable income by $8,550 for the year.

Second, the investments you have in your HSA grow tax-free.

Third, if you use the funds in your HSA for medical expenses, the withdrawals aren’t taxed. So you can pay for braces, doctor appointments, and prescriptions tax-free with money that hasn’t ever been taxed.

All those tax savings really add up and keep money in your pocket where it belongs.

It is possible to use the money in your HSA for non-medical expenses, but that’s not an advisable move, as you’ll have to pay taxes on the amount you used and pay a 20 percent penalty. So, for example, it you withdrew $3,000 from your HSA to pay for a car repair, you’d have to pay income tax on that $3,000 plus an additional $600 (20% penalty). Don’t do that!

The HSA is an inflation-busting healthcare savings builder. An HSA can be a great tool to save on taxes on your immediate healthcare expenses. But where it becomes really powerful is in its ability to help you pay for healthcare expenses decades down the road, when they will likely be higher.

If you’re young and healthy, you probably won’t have to tap into your HSA all that much. This means the money invested in your HSA can take advantage of the power of compounding and grow tax-free for years. This allows you to build an inflation-proof (an HSA can be invested, and investments typically grow faster than inflation) healthcare war chest for the period in your life when medical expenses rise the most: elderhood. Fidelity estimates that a 65-year-old couple will spend $330,000 on medical costs in retirement. That doesn’t even count long-term care. An HSA gives you a way to prep for that monster bill using pre-tax dollars and tax-free market returns.

You can turn an HSA account into a stealth retirement account. An HSA can provide immediate tax savings and help you grow your money for long-term healthcare costs tax-free.

But here’s another cool thing about HSAs: you can turn them into a retirement account when you turn 65.

Once you reach that age, the 20 percent penalty that normally applies to non-medical HSA withdrawals disappears. At that point, you can tap the account for anything — travel, groceries, a new fly rod — and the distribution is simply added to your ordinary income for the year, just like pulling money from a traditional IRA.

The tax-free treatment for qualified medical expenses, however, still applies, so it’s usually smartest to keep using the HSA for healthcare and let other accounts fund your lifestyle. But it should give you some peace of mind knowing that you have another retirement account you can tap into in your golden years.

An HSA is portable and inheritable. You can’t lose your HSA if you change jobs or health insurance plans. It stays with you no matter where life takes you.

When you die, your spouse can take it over tax-free. If it goes to someone else (like a child or grandchild), it’s taxed but not penalized — same as an inherited IRA.

How to Get the Most Out of Your HSA

I hope by now you can see how awesome HSAs are. If it’s an option for you, I definitely recommend opening one up. You can do so through a provider like Fidelity or your employer’s chosen custodian and start contributing funds either directly or through payroll deductions.

Once you’ve got an HSA going, you can get the most out of it as a wealth-building tool by doing the following:

Invest the balance once you’ve cleared the provider’s cash threshold. Most HSAs require you to have a minimum amount in cash. Once you hit that minimum, invest the rest in index funds. This will help your money grow faster.

Do all that you can to leave the money in your HSA alone. That means paying for as many of your medical expenses as you can out-of-pocket. If you’re young and healthy, that likely won’t be too much of an issue. If you or a family member has a chronic health condition, it will be harder. Do what you can based on your situation.

The reason you want to leave the money in your HSA alone is that it allows your money to grow tax-free.

When you do pay for medical expenses out-of-pocket, hold on to those receipts. You can reimburse yourself (tax-free!) from your HSA decades later.

So if you paid $1,000 out-of-pocket for an ER visit in 2025, you can reimburse yourself that $1,000 expense from your HSA tax-free in 2045. During that time, the money in your HSA has been growing tax-free. That $1,000 you would have spent in 2025 from your HSA might be worth $3,000 in 2045 — letting you keep the investment gains and still get reimbursed, effectively turning a medical bill into a wealth-building opportunity.

Hopefully, by now, you can see that an HSA is more than just an account to pay for this year’s doctor’s visits. When used strategically, it’s a long-game wealth builder that saves you in taxes and gives you options down the road.

This article was originally published on The Art of Manliness.

Years ago, we published articles on personal finance goals to strive for in your 20s and in your 30s.

Now that I’m in my 40s, I decided to revisit this series to see if I needed to update my financial goals in my first decade of midlife.

Your 40s are an interesting time, money-wise. Many men enter their peak earning years during this decade. Yet their expenses often increase significantly at the same time. High-school-aged kids may need cars, and those same teenagers may subsequently need help paying for college. Your parents are retiring and aging into their 70s, and you’re starting to think about what financial support they may require in the last decades of their lives. Meanwhile, your own retirement shifts from a distant abstraction into an approaching reality.  

During this decade where you’re both starting to enjoy the fruits of your labors, but feeling the pressure of additional demands, you want to make moves to ensure you’re on stable ground now and in the future.

Below are 10 goals, backed by research and the advice of personal finance experts, that will help you not just survive your 40s, but thrive in that decade and in the decades to come:

1. Consider Consulting a Financial Advisor

With higher income and more responsibilities, your financial life is more complex in your 40s.

So consider hiring a fee-only financial advisor to help you navigate these complexities. Fee-only financial advisors don’t make money from selling financial products like insurance or mutual funds, reducing conflicts of interest.

You can pay a fee-only financial advisor by the hour to get advice on planning for retirement, paying for college and potential weddings, updating your estate plan, and reviewing insurance.

If you’re looking for more comprehensive guidance, you can set up an arrangement where the financial advisor gets a percentage of the assets they manage for you.

You can find fee-only financial advisors in your area by searching https://www.napfa.org/.

2. Maintain a Robust Emergency Fund (6–12 Months of Expenses)

By now, you should have a solid emergency fund. In your 40s, the goal is to increase its balance to match the expenses you likely have as a middle-aged man.

Aim for at least six months of essential expenses, or up to a year if you’re in a volatile industry or single-income household. Job hunts for people in their 40s often take longer than for those who are younger. If you were to lose your income, a six-month cash reserve ensures you can keep paying the mortgage and feeding the family while you find your next role. It also prevents you from raiding retirement accounts or going into debt.

Keep this fund in a liquid, low-risk account. Don’t touch it unless it’s a true emergency; replenish it as soon as possible if used.

3. Maximize Your Income

For many men, their 40s are the highest-earning decade of life. The median annual salary for men usually peaks between 45 and 54. Make it a goal to leverage these years as much as possible to set yourself up for true financial security.

To make the most of this decade, you’ll want to maximize your income.

Raises won’t usually fall into your lap. You’ll need to ask for them proactively.

If your boss won’t budge on giving you a raise, consider switching roles or even companies. Changing jobs mid-career can often substantially increase your salary, but so can moving up the ranks at your current job; be sure to check out our podcast on getting a promotion for some solid advice on how to continue to work your way toward the literal or metaphorical corner office.

Additionally, look into creating extra income streams through side businesses or freelancing. At this stage in your career, you probably have valuable expertise others will pay for. Consider moonlighting as a consultant. The extra income you earn now could even evolve into part-time work after you retire.

It’s worth noting that your 40s are not only peak earning years, but may be the last years you have your kids at home. You don’t want to be so focused on maximizing your income that you miss out on maximizing the time you spend with them before becoming an empty nester. It’s a tough line to walk, but strive to strike a balance between filling up your financial treasury, and your memory bank.

4. Avoid Lifestyle Creep

It’s natural to want to reward yourself as your income rises — to finally get that dream car, upgrade to a bigger house, or take more vacations. And you should allow yourself to start splurging a little more in your 40s; you’ve earned it by grinding through your 30s.

But don’t go overboard; every dollar spent on upgrading your lifestyle is one less dollar available for debt reduction or savings. Remember, too, that the cost of another car or a bigger house isn’t just the initial purchase price, but what it will cost you in maintenance, insurance, etc.

Start enjoying yourself more in your 40s, while saving enough to ensure that the next four to five decades are enjoyable as well.

5. Double-Down on Retirement Savings (Aim for 3X Your Salary)

In your 40s, retirement is no longer the abstract-seeming thing it was in your 20s. It will potentially be a concrete reality for you in twenty or so years.

Experts suggest having about three times your annual salary saved by age 40. Don’t worry if you’re not there yet — many aren’t — but use that benchmark to motivate you.

In your 40s, strive to save at least 15% of your income (ideally 20% or more) for retirement. As you save for retirement, take full advantage of tax-advantaged accounts like 401(k)s and IRAs.

How should you allocate your retirement savings in your 40s? When I put this question to personal finance expert Nick Maggiulli, he suggested that for many, it might mean reducing risk due to the increased liabilities they likely have in midlife: “In your 40s and 50s, you should consider reducing this risk to fit your liability profile better. For example, you could consider going from an 80/20 stock/bond portfolio to a 70/30 (or something similar). The key here is not maximizing your net worth, but maximizing your chance of long-term survival.”

6. Eliminate Non-Mortgage Debt and Work Toward Being Mortgage-Free

Ideally, you’ll have paid off all non-mortgage debt in your 30s. If you haven’t, make that a priority in your 40s. Aggressively tackle any lingering debts, like car loans and student loans.

Once you’ve eliminated all non-mortgage debt, start focusing on your mortgage. While you don’t necessarily need to pay it off during your 40s, you should have a clear plan for eliminating it as soon as financially feasible.

If you can swing it, start making extra principal payments. Even one extra payment a year (or adding, say, $200 extra each month) can knock years off a 30-year loan. Check with your lender that extra payments go toward the principal.

7. Bolster Kids’ College Funds (But Not at the Expense of Retirement)

In your 40s, your children may be in high school, and college costs are looming. Ideally, you started a 529 account for your kids in your 30s; if not, start one now. With 529 accounts, gains and distributions/withdrawals for education aren’t taxed.

As you save for your kids’ education, don’t do so at the expense of your retirement. Your retirement should always be the priority when saving. Your kids have options for education financing, but you don’t have one for retirement.

8. Plan for Aging Parents and Family Care Responsibilities

More than half of 40-somethings are either raising children under 18 or financially supporting adult children, and have at least one parent aged 65 or older. About a quarter of adults in their 40s and 50s actively provide financial assistance or regular care to their aging parents — a percentage that only increases as members of this “sandwich generation” and their parents grow older.

Prepare for a future with aging parents by talking to Mom and Dad about their financial health. Do they have sufficient retirement savings, a will, power of attorney, or healthcare directives? Knowing this upfront can prevent surprises during a crisis.

Second, discuss future care preferences. When their health declines, would your parents prefer living with family or moving into an assisted living facility? Clarifying this sets expectations and shapes future plans. If you have siblings, hold a meeting to define roles and discuss shared costs.

Finally, consider preparing financially by creating a “parent fund” for predictable expenses like medical bills or housing.

Check out the book Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. I thought it had a lot of good advice.

9. Do an Insurance Check-up

If you bought term life insurance in your 30s (as we recommended), revisit your coverage. Major changes — like more kids, a bigger mortgage, or a higher income — might require additional coverage. A common guideline is 10–15X your annual salary, ensuring your family could replace your income if needed. Term policies are still affordable in your 40s (though premiums rise), so lock in coverage until kids graduate college and your mortgage is paid off.

Also consider umbrella insurance to protect accumulated wealth from liability lawsuits, and disability insurance to replace your income if you can’t work.

10. Do an Estate Plan Check-Up

You should have started your estate planning in your 30s; in your 40s, it’s time to do a check-up.

• Revisit and update your will to reflect current realities, like new assets or guardians for your kids.
• Double-check beneficiary designations on retirement accounts, insurance, and investments; these override your will, so accuracy is crucial.
• Ensure you have durable powers of attorney (for financial decisions) and healthcare proxies, naming people you trust.
• Explore advanced strategies like trusts or charitable giving if your estate is sizable.
• Communicate with your spouse and estate executor about your plans and where key documents are stored.

11. Plan Your Next Chapter of Life

Having a clear retirement vision guides your financial choices today. Outline your ideal retirement. When will you retire? Where will you live? How will you spend your time? Cruising? Volunteering? Working part-time? Answers to these big-picture questions will shape how you save in your 40s.

Next, calculate your retirement “number.” Most aim for savings that generate 70–80% of pre-retirement income annually. Use retirement calculators or a financial planner to check your progress, adjusting your savings or expectations if needed.

Finally, prepare for potential healthcare costs. You might live into your 90s, so your savings could need to last over 30 years after you retire.

Your 40s are a busy and sometimes stressful decade, but with thoughtful planning and strategic actions, you can balance today’s demands with tomorrow’s dreams. Use these goals as your financial roadmap, and you’ll enter your 50s with confidence and clarity, knowing you’ve laid a strong foundation for the years ahead. I’ll see you in 10 years with an article on financial goals for that decade of life!

Listen to our podcast with Nick Maggiulli about the 6 levels of wealth and how to reach them:

This article was originally published on The Art of Manliness.