Brothersmoney is a general personal finance blog and we seek to give advice, offer insight, and expose underlying rules that may affect our readers. A major problem with giving advice is that everyone’s financial situation is different. What may be good advice for one person, could be harmful to another. We at brothersmoney want to continue offering sound advice to all our readers, regardless of their situation. To help accomplish this, we’ve developed a new framework for all discussions of personal finance and wealth:
Financial Orders of Magnitude, or “Orders of Finance”
Before you can plan where to go, you need to know where you are. It’s easy to say “I want to be debt free”, or “I want a million dollars”…but the strategy to get there depends on your starting point. To help figure out the optimal strategy to financial security and wealth building, start by asking yourself:
“What is the biggest financial event I could experience without it significantly changing my life?”
…where ‘financial event’ is one of the following numbers:
- If you found $100 on the street, would it be a nice surprise…or the answer to prayers?
- If you got hit with a $1,000 car repair, could you pay it without too much hardship?
- If your workplace had a great year and gave you a $10,000 bonus (tax free), would you buy a couple luxuries and put the rest into savings…or use it all to pay off bills and finally become debt-free?
Each ‘financial event’ on the scale is 10x the previous event, the same as the scientific concept of orders of magnitude (which it was named for). Orders of magnitude is a useful way to talk about large differences between 2 amounts, and there is robust theory behind it that will make this “orders of finance” scale a very powerful tool for discussing personal finance.
The usefulness of these categories should be made clear with a few examples. Consider two different people: a poor high school graduate struggling to pay rent every month, and a 40-year-old entrepreneur who’s worked hard and made their first million.
“Stop spending money on lattes” is good advice for the poor graduate, since the yearly price of daily lattes (generously, $5 x 365 = $1,825) represents a significant portion of their available assets. But for the entrepreneur, looking to double their net worth in the next 5 years, saving $1,825 per year sure isn’t going to get them there. The advice is useless to them.
“Stop spending money on lattes” is $100 advice. It is not really useful for people who can weather a $1,000 event without it significantly changing their life.
On the flip side, “take out a loan and start a business” is great advice for the entrepreneur, and has a realistic shot of earning them that million dollars over a 5-year period. But for the poor graduate, that advice is unrealistic and unhelpful – their priorities should be staying OUT of debt, building their employment and credit history, and saving up an emergency fund.
“Take out a loan and start a business” is $100,000 advice. It is helpful for people who want to get to the order of finance where $100,000 is no longer a life-changing amount of money. It is a stretch goal for people 1 order below. However, it is probably too risky for people 2 or more orders away from the $100,000 level.
You get the idea. We at brothersmoney believe that using this new orders of finance framework for our financial philosophy will allow clearer, more relevant analysis and advice to all readers of our blog, and are excited to develop this idea in future posts.