海角大神

I鈥檝e been in the financial services world a long time. My wife says too long.

Over that time, I鈥檝e come to recognize that many of the people who come to me for help lack an understanding of some basic concepts that are necessary to make smart financial decisions. So I drew up a list of seven financial concepts that I believe every, every 401(k)/403(b) participant and every high school graduate 鈥� I know I鈥檓 stretching, but I鈥檓 hopeful 鈥� should understand. In no particular order:

1. Cash on cash return

This is the cash return on an investment as a percentage of the cash you鈥檝e actually put into that investment. It鈥檚 usually expressed on an annual basis, such as 10% a year. Comparing this figure among investments helps you evaluate performance and make decisions.

2. Effective tax rate

This is how much you pay in combined state and federal income taxes in a year. Start with the total tax calculated on your federal return, then divide it by the adjusted gross income on your federal return. Do the same with your state return (if your state has an income tax). Each calculation will produce a decimal result that you can convert to a percentage 鈥� 0.15, for example, would be 15%. Add the state and federal percentages together to come up with your effective tax rate.

3. Debt snowballing

This is a strategy in which you list all of your debts, the interest rate you鈥檙e paying on each and the minimum payment amount, then calculate how long it will take to pay them all off, one at a time. You can go in order from smallest debt to largest, or start with the debt with the highest interest rate, and then knock them out in descending order. There are many online calculators that can help you do this. Just search for聽聽and find out how soon you can get out of debt by snowballing.

4. 鈥淕uaranteed鈥�

罢丑颈蝉听can聽mean that something is risk-free 鈥� but it also might not. It all depends on who is making the guarantee and their ability to back it up. The federal government, for example, guarantees deposits at most banks up to certain limits, while insurance companies guarantee monthly payments from an annuity, usually over a lifetime. Use of this word should put you on alert to look at the famous 鈥渢erms and conditions鈥� that spell out the real rules that will apply.

5. Concentration risk

This is when you have too many eggs in one basket. It could be a single stock that far outweighs your other holdings, or a job that relies on a single skill set. It could occur with lots of聽聽all owning stock in the same companies, or even a 鈥渃an鈥檛-miss investment鈥� that involves many of your friends or family members. When risk is concentrated, failure or loss can take years to recover from. Always be on the lookout for this risk.

6. Expense growth

Knowing exactly where your money is going helps you determine whether you鈥檙e getting the real value you expect. Looking at expenses over time lets you see how much they鈥檙e increasing or decreasing, and sends you signals on when it鈥檚 time to change or eliminate an expense.

7. 鈥淔ree鈥�

Nothing is free. I once read that if something鈥檚 free, you鈥檙e about to become someone鈥檚 victim. I know that鈥檚 harsh, but 鈥渇ree鈥� is the big hook to grab you and pull you into something where someone can make money off you. Think about the stock brokerage giving you聽. They鈥檙e making money off you somehow, or they鈥檇 be out of business.

Learn more about Jim on NerdWallet鈥檚聽