21 Financial Terms you NEED to know if you want to be RICH:
1. Net Worth
Your net worth is the total value of all your assets and debts.
You can have a net worth that’s:
- Negative
- 0
- Positive
The goal is to build a positive net worth by:
- Saving
- Investing
- Paying off debt
Net worth = Assets - Liabilities
Your net worth is the total value of all your assets and debts.
You can have a net worth that’s:
- Negative
- 0
- Positive
The goal is to build a positive net worth by:
- Saving
- Investing
- Paying off debt
Net worth = Assets - Liabilities
2. Liability
Liabilities are debts you owe & count AGAINST your net worth.
Liabilities include:
- Car debt
- Mortgage
- Student loans
- Credit card debt
Not all liabilities are bad.
But make it a priority to pay off debts with high-interest rates (like credit cards).
Liabilities are debts you owe & count AGAINST your net worth.
Liabilities include:
- Car debt
- Mortgage
- Student loans
- Credit card debt
Not all liabilities are bad.
But make it a priority to pay off debts with high-interest rates (like credit cards).
3. Asset
Anything that has a positive value toward your net worth.
Assets can come in many different shapes and sizes:
- Gold
- Cash
- Patents
- Real estate
- Investments
There are 2 types of assets:
- Depreciating
- Appreciating
Build appreciating assets.
Anything that has a positive value toward your net worth.
Assets can come in many different shapes and sizes:
- Gold
- Cash
- Patents
- Real estate
- Investments
There are 2 types of assets:
- Depreciating
- Appreciating
Build appreciating assets.
4. Appreciating Asset
Appreciating assets increase in value over time.
Examples include:
- Real estate
- Collectables
- Precious metals
- Stock market investments
Invest in appreciating assets for long-term growth.
Appreciating assets increase in value over time.
Examples include:
- Real estate
- Collectables
- Precious metals
- Stock market investments
Invest in appreciating assets for long-term growth.
5. Depreciating Asset
Depreciating assets decrease in value over time.
Examples include:
- Most cars
- Clothing
- Electronic equipment
Most of the depreciation happens in the first year of buying the asset.
Depreciating assets decrease in value over time.
Examples include:
- Most cars
- Clothing
- Electronic equipment
Most of the depreciation happens in the first year of buying the asset.
6. Compound Interest
It can work for you or against you.
For you:
- Investing
You start earning interest on the money you’ve saved and the interest you earn.
Against you:
- Any type of debt
Unpaid debt can spiral out of control because of compound interest.
It can work for you or against you.
For you:
- Investing
You start earning interest on the money you’ve saved and the interest you earn.
Against you:
- Any type of debt
Unpaid debt can spiral out of control because of compound interest.
7. Simple Interest
Simple interest is not as good as compound interest.
Compound interest:
- Your initial savings & interest earn money
Simple interest:
- ONLY your initial savings earn money
- Any interest earned does not earn money
Compound is better than simple interest.
Simple interest is not as good as compound interest.
Compound interest:
- Your initial savings & interest earn money
Simple interest:
- ONLY your initial savings earn money
- Any interest earned does not earn money
Compound is better than simple interest.
8. Income
The amount of money you make.
Income can come from your:
- Job
- Side hustle
- Rental property
- Stock market portfolio
The average millionaire has 7 streams of income.
Start building yours today.
The amount of money you make.
Income can come from your:
- Job
- Side hustle
- Rental property
- Stock market portfolio
The average millionaire has 7 streams of income.
Start building yours today.
9. Budget
Budgets help you figure out how & where your money is going.
To create a budget, track every cent:
- How you made it
- How you spend it
Then categorize your spending as:
- Needs
- Wants
- Wishes
Spend on your needs and save/invest the rest.
Budgets help you figure out how & where your money is going.
To create a budget, track every cent:
- How you made it
- How you spend it
Then categorize your spending as:
- Needs
- Wants
- Wishes
Spend on your needs and save/invest the rest.
10. Fixed Expenses
Fixed expenses will probably fall into your “needs” budgeting category.
They are often non-negotiable expenses.
Examples include:
- Rent
- Utilities
- Internet bill
- Health insurance
Plan to make space in your budget for fixed expenses.
Fixed expenses will probably fall into your “needs” budgeting category.
They are often non-negotiable expenses.
Examples include:
- Rent
- Utilities
- Internet bill
- Health insurance
Plan to make space in your budget for fixed expenses.
11. Variable Expense
Variable expenses often fall into your “wants” or “wishes” category.
They often change from month to month.
Examples include:
- Vacation
- Dining out
- Gas money
If you don’t need it, then save it and invest it.
Variable expenses often fall into your “wants” or “wishes” category.
They often change from month to month.
Examples include:
- Vacation
- Dining out
- Gas money
If you don’t need it, then save it and invest it.
12. ROI
ROI is the return on your investment.
It measures how profitable an investment is.
ROI = (profit - cost) / cost
However, time is not taken into account.
An investment with a 50% ROI over 15 years may not be as good as an investment with a 20% ROI in 1 year.
ROI is the return on your investment.
It measures how profitable an investment is.
ROI = (profit - cost) / cost
However, time is not taken into account.
An investment with a 50% ROI over 15 years may not be as good as an investment with a 20% ROI in 1 year.
13. Dollar Cost Averaging (aka DCA)
DCA is investing a set dollar amount on a regular and recurring basis.
It’s automatic, like investing in your 401k every paycheck.
DCA helps you become a disciplined investor by removing your emotion from the picture.
DCA is investing a set dollar amount on a regular and recurring basis.
It’s automatic, like investing in your 401k every paycheck.
DCA helps you become a disciplined investor by removing your emotion from the picture.
14. Index Fund
Index funds track a market index and are either ETFs or mutual funds.
Market indices include:
- S&P 500
- Russell 2000
- Dow Jones IA
Index funds:
- Are low cost
- Give you diversification
- Won’t outperform markets
Index funds track a market index and are either ETFs or mutual funds.
Market indices include:
- S&P 500
- Russell 2000
- Dow Jones IA
Index funds:
- Are low cost
- Give you diversification
- Won’t outperform markets
15. Fiduciary
If you’re ready to hire an investment professional, look for a fiduciary.
Fiduciaries are required by law to do what is in your best interest.
They put your interests ahead of their own - even if it doesn’t benefit them financially.
If you’re ready to hire an investment professional, look for a fiduciary.
Fiduciaries are required by law to do what is in your best interest.
They put your interests ahead of their own - even if it doesn’t benefit them financially.
16. Asset Allocation
Asset allocation is when you diversify your money by investing in different asset classes.
Asset classes include:
- Cash
- Stocks
- Bonds
- Real estate
- Commodities
The riskier the asset allocation, the higher the reward (and possible loss).
Asset allocation is when you diversify your money by investing in different asset classes.
Asset classes include:
- Cash
- Stocks
- Bonds
- Real estate
- Commodities
The riskier the asset allocation, the higher the reward (and possible loss).
17. Asset Location
Asset location is a tax alpha strategy that minimizes taxes by holding certain assets in certain accounts.
Take advantage of different accounts:
- Taxable
- Pre-Tax
- After-Tax
Example: You may want to hold higher growth assets in tax advantaged accounts.
Asset location is a tax alpha strategy that minimizes taxes by holding certain assets in certain accounts.
Take advantage of different accounts:
- Taxable
- Pre-Tax
- After-Tax
Example: You may want to hold higher growth assets in tax advantaged accounts.
18. Risk Tolerance
You choose the amount of risk in your portfolio.
Ask yourself:
- How much upside do I want?
- How much value am I willing to lose in a recession?
- Can I sleep at night with a 20% portfolio drop? 50%?
Know yourself so you don’t sell when others are fearful.
You choose the amount of risk in your portfolio.
Ask yourself:
- How much upside do I want?
- How much value am I willing to lose in a recession?
- Can I sleep at night with a 20% portfolio drop? 50%?
Know yourself so you don’t sell when others are fearful.
19. Expense Ratio (EP)
This is often a hidden fee.
An EP is the fee you pay to invest in a fund.
A low EP is often less than 0.10%.
Don't let the "small" fee fool you.
A fund with a higher EP could cost you $100,000's over decades of investing.
This is often a hidden fee.
An EP is the fee you pay to invest in a fund.
A low EP is often less than 0.10%.
Don't let the "small" fee fool you.
A fund with a higher EP could cost you $100,000's over decades of investing.
20. Tax Advantaged Accounts
Accounts with tax benefits.
Pre-Tax - (aka traditional) your contributions are deducted/not taxed, but your withdrawals are taxed (in most cases)
After Tax - (aka Roth) your contributions are taxed, but your withdrawals are tax-free (in most cases).
Accounts with tax benefits.
Pre-Tax - (aka traditional) your contributions are deducted/not taxed, but your withdrawals are taxed (in most cases)
After Tax - (aka Roth) your contributions are taxed, but your withdrawals are tax-free (in most cases).
21. Gross vs. Net Income
You have to know the difference.
Gross - 100% of the money you make BEFORE you take out expenses, taxes, etc.
Net - The money that’s remaining AFTER you take out taxes, expenses, etc.
The number that matters?
Your net income = your take-home pay.
You have to know the difference.
Gross - 100% of the money you make BEFORE you take out expenses, taxes, etc.
Net - The money that’s remaining AFTER you take out taxes, expenses, etc.
The number that matters?
Your net income = your take-home pay.
Thanks for reading!
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If you enjoyed this thread:
1. RT the first tweet
2. Follow me: @The_MMW
Want more actionable advice?
Join 18,537+ others who receive my weekly newsletter, where I share the secrets to building modern wealth 👇
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