Understanding the language of money is the first step to financial success. The more you learn, the better you can navigate investing, saving, and wealth-building strategies.
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1. Asset diversification
Diversification involves spreading your investments across various asset classes to reduce risk.
A well-diversified portfolio helps cushion against losses in any single investment and can improve long-term returns.
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2. Health savings account (HSA)
A Health Savings Account (HSA) allows you to save for medical expenses while reducing your taxable income. You must have a high-deductible health plan (HDHP) to qualify.
Contributions are tax-deductible, and withdrawals used for qualified medical expenses are tax-free.
Pro Tip: If you have a high-deductible health plan, you should have a Health Savings Account. Check out Lively HSAs.
3. Debt-to-income ratio (DTI)
Your debt-to-income (DTI) ratio compares the total amount you owe each month to your gross monthly income.
It’s a key factor lenders use to determine your loan repayment ability. Lower DTIs often result in better loan terms.
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4. Credit utilization
Credit utilization refers to how much of your available credit you use. It’s expressed as a percentage. For example, if you have a $5,000 credit limit and you’ve charged $1,000, your credit utilization rate is 20%.
Generally, keeping your utilization below 30% helps maintain a good credit score.
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5. Compounding interest
Compounding interest means earning interest on both the principal amount and the previously earned interest.
Over time, this creates exponential growth. Starting early and reinvesting earnings can significantly boost your wealth.
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6. Passive income
Passive income is money earned with little active effort. Common examples include rental income, dividends, and royalties.
Building passive income streams can help you achieve financial independence over time.
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7. Emergency fund
Your emergency fund is a financial safety net. It’s the money you set aside to handle unexpected expenses like medical bills, car repairs, or sudden job loss.
Experts often recommend saving three to six months of living expenses in an easily accessible account.
Pro Tip: Earn as much as possible on your emergency savings. For example, SoFi Checking is offering 3.8% interest, plus a potential $300 signup bonus.
8. Risk management
Risk management means identifying potential financial risks and finding ways to mitigate them.
This includes having appropriate insurance, maintaining an emergency fund, and diversifying investments.
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9. Retirement contributions
Contributing to retirement accounts, like 401(k)s or IRAs, helps secure your future.
These accounts often come with tax benefits and can grow significantly through compounding interest (see above) over time.
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10. Home equity
Home equity is the value of your property minus the amount you owe on your mortgage.
It’s a valuable asset you can use to borrow against or fund future financial goals, like renovations or investments.
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11. Reverse mortgage
A reverse mortgage allows seniors to convert part of their home’s equity into cash.
This can be a helpful financial tool for retirees who need funds for healthcare, living expenses, or other needs.
Pro Tip: Struggling with payments in retirement? A reverse mortgage can turn your home equity into tax-free cash for seniors 62+, no house sale required.
12. Financial advisor
A financial advisor provides personalized guidance on wealth management, retirement planning, and other financial goals.
They can help tailor strategies to your specific situation, ensuring your money works hard for you.
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13. Additional revenue stream
An additional revenue stream is another source of income besides your primary job or business.
Extra earnings through freelance work, selling products online, or taking on part-time tasks can help you increase financial stability.
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14. Inflation rate
Inflation measures how much prices increase over time, affecting the purchasing power of your money.
Understanding the inflation rate helps you plan for long-term expenses and ensures that your investments outpace rising costs.
Pro Tip: Protect your wealth with an asset that can hedge against the damaging effects of a recession and financial calamity by opening a gold IRA.
15. Budget management
Budget management involves creating a plan for your income and expenses.
By tracking where your money goes and setting limits, you can make more informed spending decisions and achieve your financial goals.
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16. Insurance premiums
Insurance premiums are regular payments to an insurer that keep your coverage active.
The amount depends on factors like policy type, coverage level, and your personal risk. Comparing rates can help lower your costs.
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17. Estate planning
Estate planning involves preparing legal documents and strategies to manage your assets after death.
This ensures that your property is distributed according to your wishes, minimizes taxes, and provides for your loved ones.
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Mastering your money through knowledge
Mastering key financial terms helps you manage money wisely, spot opportunities, and avoid costly mistakes.
A strong financial foundation empowers you to make smarter, more confident decisions.
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