Time horizon
When you will need that money. It decides where it can sit: what you need in two years cannot be where it can fall 40%.
In the chapter
PPlan
The big decisions and the distant ones
From the same chapter
- Financial goalAn amount and a date. Without both it is not a goal but a wish, and there is no way to work out how much to set aside.
- Time value of moneyOne unit today is worth more than one unit a year from now, because today it can be put to work. Everything else follows from this.
- Compound interestWhen what your money earns starts earning too. Slow and boring for years, and then abruptly not.
- Simple interestAlways calculated on the initial amount. The gap with compounding is negligible in year one and vast by year twenty.
- Rule of 72Divide 72 by the annual return in percent to get the years it takes money to double. At 6%, twelve years.
- MortgageA very long-term loan secured on the home itself. The term matters as much as the rate: stretching it lowers the payment and raises the total enormously.
- Down paymentThe share of the price you put in yourself. The larger it is, the less you owe and the less the loan costs in total.
- Debt-to-income ratioWhat share of your monthly income goes to servicing debt. Above a third, any surprise turns into a problem.