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
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
13. 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).
14. Asset Location
Asset location is a tax alpha strategy that minimizes taxes by holding certain assets in certain accounts.
15. 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.
Take advantage of different accounts:
- Taxable
- Pre-Tax
- After-Tax
Example: You may want to hold higher growth assets in tax advantaged accounts.
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