6 Levels of Climbing the Wealth Ladder

The best way to climb the wealth ladder is to spend money according to your level.

However, the path to wealth isn’t a meandering linear path but rather steps, with broad and narrow rungs. As such, we do not build wealth by merely slowly stacking money as we need to consistently account for the declining utility of every next shilling.

Thus, the question is:

How big of a step do you need to take?

How much more do you need to accumulate to experience a fundamental improvement in your life?

Is it more like a leap whereby we have to multiply our net worth by 10 for each upgrade in lifestyle?

In my experience, a reasonable approach would be to adopt a scale of measure, with a 3x multiple in each step.

Let me elaborate. Here is a breakdown of six steps or levels of the Wealth Ladder.

Step 1: Financial Foothold

How much do you need to get your first financial foothold? One million, ten million Kenyan Shillings?

The first, matters and it’s good to get it down and out of the way as soon as possible on your financial journey. As this is where you lay the basic financial foundations of wealth and build important habits like saving a significant portion of your income.

The simplest possible path to achieving your “Your First” is through income and high savings rates.

	Your First “Million”	Your First “10 Million”
Years	Ksh 1,000,000	Ksh 10,000,000
2 Years	Save Kshs 500,000 a Year	Save Kshs 5 Million a Year
5 Years	Save Kshs 200,000 a Year	Save Kshs 2 Million a Year
10 Years	Save Kshs 100,000 a Year	Save Kshs 1 Million a Year

Saving the first million or 10 is an important milestone and gets you a strong foothold at the start of the wealth ladder.

Related: 6 Big Risks to Your Financial Success

Step 2: Financial Security

What is financial security to you?

Is it having a level of wealth allow you to cover your basic needs?

What does this look like?

Is it having enough for the bulk of your mortgage, expenses and utilities?

Use the simple 4% drawdown rule for retirement withdrawals to estimate how much you might need to achieve financial security. The possible path to financial security (besides income and savings rate) is investment return, which plays a key role here.

Consider, the following estimate:

Let’s assume that your basic needs in life can be taken care of with either 10,000 a month or 100,000 a month.

Investment Milestone	Yearly Drawdown	Monthly Drawdown
Kshs 3,000,000	Kshs 120,000	Kshs 10,000
Kshs 30,000,000	Kshs 1,200,000	Kshs 100,000

Investment options and returns to hit that investment milestone:

Years to accumulate	Kshs 3,000,000	Kshs 30,000,000
1. 5-Year Investment	Ksh 500,000 a year at 12% p.a	Ksh 5,000,000 a year at 12% p.a
2. 10-Year Investment	Ksh 200,000 a year at 8% p.a	Ksh 2,000,000 a year at 8% p.a
3. 20-Year Investment	Ksh 100,000 a year at 5% p.a	Ksh 1,000,000 a year at 5% p.a

Building up your first Kshs 3 million or Kshs 30 million becomes a critical milestone and provides a secure safety net to reach higher up the wealth ladder.

Step 3: Financial Mobility

Financial mobility is essentially how your economic well-being changes over time and our goal is upward mobility. Using the 4% drawdown rule again, let’s move a notch higher by tripling the drawdown amount.

Let’s assume that with a Kshs 30,000 a month or Kshs 300,000 a month drawdown would grant you plenty of options and flexibility in your life. Whether it is downshifting your career, an extended sabbatical or travelling overseas for a few years, what is your number?

The possible paths for financial mobility, heavily depend on income and investment returns. Consider the following:

Investment Milestone	Yearly Drawdown	Monthly Drawdown
Kshs 9,000,000	Kshs 360,000	Kshs 30,000
Kshs 90,000,000	Kshs 3,600,000	Kshs 300,000

Investment options and returns to hit that investment milestone:

Years to accumulate	Kshs 9,000,000	Kshs 90,000,000
1. 10-Year Investment	Ksh 500,000 a year at 12% p.a	Ksh 5,000,000 a year at 12% p.a
2. 15-Year Investment	Ksh 300,000 a year at 8% p.a	Ksh 3,000,000 a year at 8% p.a
3. 25-Year Investment	Ksh 200,000 a year at 5% p.a	Ksh 2,000,000 a year at 5% p.a

Accumulating your first Kshs 9 million or 90 million is a momentous milestone.

Step 4: Financial Independence

What is your financial independence number?

On the same stance, let’s consider the 4% drawdown rule yet again. The figures may seem excessive for financial independence but let’s consider it all the same.

Let’s assume that with a Kshs 90,000 a month or Kshs 900,000 a month drawdown. This is more than enough for an individual and might even be enough to cover an entire household’s monthly expenses.

At this level, it’s all about optimizing your income, savings rate and investment returns. Consider the following:

Investment Milestone	Yearly Drawdown	Monthly Drawdown
Kshs 27,000,000	Kshs 1,080,000	Kshs 90,000
Kshs 270,000,000	Kshs 10,800,000	Kshs 900,000

Investment options and returns to hit that investment milestone:

Years to accumulate	Kshs 27,000,000	Kshs 270,000,000
1. 15-Year Investment	Ksh 700,000 a year at 12% p.a	Ksh 7,000,000 a year at 12% p.a
2. 20-Year Investment	Ksh 500,000 a year at 8% p.a	Ksh 5,000,000 a year at 8% p.a
3. 30-Year Investment	Ksh 400,000 a year at 5% p.a	Ksh 4,000,000 a year at 5% p.a

Racking up Kshs 27 million or Ksh 270 million in your lifetime is a remarkable achievement. That is financial independence and one might not need to earn a single shilling after that.

Related: How to Calculate Your Financial Independence Number

Step 5: Financial Freedom

Many of us might not get here or even come close to achieving financial freedom in our lifetime. At this stage, you’ll need to be an elite earning big and seriously optimizing with stellar investment returns.

What numbers would you be looking at here to regard yourself as financially free?

Consider these three paths:

1. 35 Years – Invest Kshs 3,500,000 a year at a 10% p.a. return, yielding over Kshs 1 billion.
2. 25 Years – Invest Kshs 6,000,000 a year at 12% p.a. return, yielding over Kshs 1 billion.
3. 15 Years – Invest Kshs 8,000,000 a year at 24% p.a. return, yielding over Kshs 1 billion.

Step 6: Financial Power

This is the unicorn territory. The UHNW (Ultra High Net Worth). At this level, one could also start yielding substantial influence and power in society. Price doesn’t matter anymore unless we are talking about status symbol items like yachts or “reasonably-sized houses”. The level of financial power is beyond paygrade, and realistically speaking revered only for super-successful entrepreneurs with legendary investment returns.

The following numbers are totally out there, perhaps in the stratosphere. It is quite difficult for the man on the street to achieve this.

1. 35 Years – Invest Kshs 5,000,000 a year at 12% p.a. return, yielding over Ksh 100 billion
2. 25 Years – Invest Kshs 8,000,000 a year at 18% p.a. return, yielding over Ksh 100 billion
3. 15 Years – Invest Kshs 10,000,000 a year at 35% p.a. return, yielding over Ksh 100 billion

With financial power, thoughts of legacy-building might start to dominate or you might start exploring options like reverse ageing or going to Mars.

Read More: 8 Financial Planning Rules of Thumb You Need To Know

Conclusion

Climbing the wealth ladder at a 3x increase in your net worth allows you to take great strides up the wealth ladder. This step will result in the ability to improve your standards of living for you and your family tremendously. As such, always try to aim one rung higher than what you think is realistically possible. It will push you to achieve remarkable things in the long run.

Good luck climbing!

Image credits: Top by Mikhail Nilov via Pexels.