Savings rate. This is the amount you save each year divided by your income. The savings rates advocated by financial experts are usually couched in terms of pretax income, but the official savings rate from the Bureau of Economic Analysis is expressed as a percentage of after-tax income.
Net worth. This is the value of your assets minus your liabilities. Assets could potentially include cars and collectibles. But it’s more typical to limit the definition of assets to your investment portfolio and the homes you own.

Emergency fund. One rule of thumb suggests you should keep six months of living expenses in conservative investments, in case you lose your job, need to make major home repairs or have to handle other unexpected expenses. You might hold a smaller sum if you have a secure job, your spouse also works or you have easy access to borrowed money.
Credit lines. To help pay for financial emergencies, you might set up credit lines.

Prepaid tuition 529 plans vs. 529 savings plans. A prepaid tuition plan is designed to let you lock in future tuition costs at today’s prices. Often, the tuition credits can only be used at certain colleges. Meanwhile, a 529 savings plan allows you to amass money for college costs by investing in the financial markets, typically through mutual funds. Both 529 savings and prepaid plans will give you tax-free growth if the money is used for qualifying education expenses.

Land vs. dwelling. As you contemplate the potential return from owning a home, it’s helpful to distinguish the dwelling from the land underneath it. You can be fairly confident the land will appreciate over time. By contrast, the dwelling itself will deteriorate, requiring regular maintenance and occasional upgrades if the property is to keep up with the broader housing market. The dwelling, however, also provides you with shelter—which is the key reason to own residential real estate.

Longevity risk. This is the danger that you will live longer than you’re financially prepared for, forcing you to cut back spending or take other drastic financial steps, as your savings start to dwindle.
Inflation risk. Over the course of a 20- or 30-year retirement, even modest rates of inflation can severely crimp the lifestyle of retirees who rely on income streams that are fixed in dollar terms, such as the interest payments from bonds,

Human capital vs. financial capital. Your human capital is your income-earning ability. Early in adult life, it’s your most valuable asset. Academic economists view the income from human capital as similar to the interest earned from bonds. To diversify your human capital “bond,” you might invest heavily in stocks when you’re younger. During your working years, your goal is to convert your human capital into financial capital—meaning a huge pile of savings—so that one day you can retire.

TO MAKE SMART MONEY decisions, you need to grasp some timeless but crucial financial ideas. In this chapter, you’ll find 135 key concepts divvied up among 11 categories. Arguably, all are critical to understanding the financial world.

Saving for Retirement
Retirement Income
Houses
College
Safety Net
Saving and Spending
Portfolio Building
Risk and Return
Taxes
Borrowing
Estate Planning

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WELCOME TO OUR financial life planner, which is designed to complement our portfolio builder. The life planner’s goal: Guide you through 13 financial steps that’ll help you navigate the journey from your early adult years to retirement.
The order of those steps is debatable. For instance, should we really build up an emergency fund before stashing money in our employer’s 401(k)? When we’re first out of school, we often muddle through, taking an often-modest income and—piece by piece—stitching together a secure financial life.

MUCH OF THE TIME, we’re inclined to neglect our finances. But every so often, we become intensely interested—because we’re at a turning point in our life. Maybe we’re having a baby, getting divorced or about to retire. In this chapter, we discuss specific steps you might take.
As you busy yourself dealing with these major life changes, keep an eye on the big picture. Moments of transition and turmoil are often a great time to reconsider all areas of your finances,

MOST OF US ASSUME that buying items for ourselves is a sure path to happiness. But research suggests that we get greater pleasure from buying gifts for others. In all likelihood, the same holds true when it comes to our wealth. Amassing money may be comforting. But there’s also tremendous pleasure in giving it away, whether to family members or to charity.
For gifts to family members, that’ll mean developing an estate plan, which might include making regular gifts during your lifetime.

DEBT IS SOMETIMES depicted as evil. That’s silly: Without borrowed money, many of us would struggle to pay for college, we’d find it tough to buy our first car and—if we were compelled to pay cash—we probably couldn’t afford to own a home until we were in our 40s or 50s.
Debt allows us to purchase items we can’t currently afford, thus smoothing out consumption over our lifetime. Indeed, borrowing in our early adult years should be viewed as a rational strategy.

HUNTING FOR STOCK market winners is fun. Managing taxes is tedious. Yet a few hours each year devoted to minimizing your portfolio’s tax bill will likely yield a far bigger financial return.
Imagine you invest $10,000 for 30 years and earn 8% a year. If you lost 22% of your gain to taxes every year, you would have $61,467 after 30 years, which sounds impressive. Now, instead, suppose you could defer all taxes for 30 years,

IN THE CHAPTERS on investing and portfolio building, we encourage you to keep things simple and not to be too clever with your investing. In this part, we discuss some of the ways that folks try to be clever.
We talk about what drives stock and bond returns, including the connection to economic growth and the importance of valuations. This is the basic return you should capture if you buy index mutual funds or exchanged-traded index funds.

INVESTING IS A TOXIC mix of fear and overconfidence that’s colored by the recent past and driven by unfounded forecasts. Want to introduce a bracing dose of rationality? Start by thinking about what you can control—and what you can’t.
Your investment performance has three components: There are the raw returns you earn, the risks you take to earn those returns and the costs you incur along the way. Most investors focus heavily on returns.

HERE’S SOME NEWS THAT isn’t news at all: Most Americans do a mediocre job of saving for the future. How can we get ourselves on the right track? As we’ll discuss in the sections that follow, we should consider the many advantages of saving a healthy sum on a regular basis—and then nudge ourselves to save more by employing a host of tricks.

Today’s Savings Rate
Today’s Spending
Save How Much?
Earlier Is Better
Saving Is a Bargain
Money Begets Money
Savers Need Less
Fixed vs.