Financial Planning Cheat Sheet
The core ideas of Financial Planning distilled into a single, scannable reference — perfect for review or quick lookup.
Quick Reference
Net Worth
The difference between total assets (what you own) and total liabilities (what you owe). Net worth provides a snapshot of overall financial health and serves as a baseline for measuring progress toward financial goals.
Emergency Fund
A dedicated reserve of liquid savings, typically three to six months of essential living expenses, designed to cover unexpected costs such as job loss, medical emergencies, or major repairs without resorting to high-interest debt.
Asset Allocation
The strategy of dividing an investment portfolio among different asset classes such as stocks, bonds, real estate, and cash equivalents to balance risk and return according to an investor's goals, time horizon, and risk tolerance.
Compound Interest
Interest calculated on both the initial principal and the accumulated interest from previous periods. Over long time horizons, compounding causes wealth to grow exponentially rather than linearly, making it one of the most powerful forces in personal finance.
Tax-Advantaged Accounts
Investment accounts that offer tax benefits to encourage saving for specific purposes such as retirement or education. These include tax-deferred accounts (traditional IRA, 401(k)) where contributions reduce current taxable income, and tax-exempt accounts (Roth IRA, Roth 401(k)) where qualified withdrawals are tax-free.
Debt-to-Income Ratio
A personal finance measure that compares total monthly debt payments to gross monthly income. Lenders use this ratio to assess borrowing capacity, and financial planners use it to evaluate whether someone is overextended. A ratio below 36% is generally considered healthy.
Dollar-Cost Averaging
An investment strategy in which a fixed dollar amount is invested at regular intervals regardless of market conditions. This approach reduces the impact of volatility by automatically buying more shares when prices are low and fewer when prices are high.
Risk Tolerance
An individual's ability and willingness to endure declines in the value of their investments. Risk tolerance is influenced by factors including time horizon, income stability, financial obligations, and psychological comfort with uncertainty.
Estate Planning
The process of arranging for the management and distribution of a person's assets after death or incapacitation. It involves creating legal documents such as wills, trusts, powers of attorney, and healthcare directives to ensure wishes are carried out and estate taxes are minimized.
Financial Independence
The state in which an individual has accumulated enough wealth that investment income and passive income sources cover all living expenses, making paid employment optional. It is typically measured as having 25 times annual expenses saved, based on the 4% safe withdrawal rate.
Key Terms at a Glance
Get study tips in your inbox
We'll send you evidence-based study strategies and new cheat sheets as they're published.
We'll notify you about updates. No spam, unsubscribe anytime.