Financial Literacy Reference

Concept	Description
Compound Interest	Interest on interest; A = P(1 + r/n)^(nt); start early — 10 years of compounding dwarfs late contributions
Rule of 72	Divide 72 by annual return to estimate doubling time; 8% return doubles in ~9 years
Emergency Fund	3-6 months of essential expenses in HYSA; 6+ months if single income or volatile industry
401(k) Employer Match	Free money; contribute at least enough to get full match before anything else; immediate 50-100% return
401(k) Traditional	Pre-tax contributions reduce current taxable income; taxed as ordinary income on withdrawal in retirement
401(k) Roth	Post-tax contributions; grows and withdraws tax-free in retirement; better if you expect higher future tax bracket
IRA (Traditional)	$7,000/year limit (2024); tax-deductible contributions (income limits apply); taxed on withdrawal
Roth IRA	$7,000/year limit (2024); contributions from after-tax income; tax-free growth and withdrawal after 59.5
Backdoor Roth IRA	Contribute to Traditional IRA, convert to Roth; bypasses Roth income limits; watch pro-rata rule
HSA (Health Savings Account)	Triple tax advantage: deductible contribution, tax-free growth, tax-free withdrawal for medical; best retirement vehicle
HSA Stealth Strategy	Pay medical out-of-pocket now, invest HSA, reimburse yourself decades later; no time limit on reimbursement
Debt Avalanche Method	Pay minimums on all debts; throw extra at highest interest rate first; mathematically optimal
Debt Snowball Method	Pay minimums on all; throw extra at smallest balance first; psychological wins build momentum
High-Interest Debt	Credit cards (15-30% APR) are emergencies; pay off before investing beyond employer match
Tax Brackets (Marginal)	Only income above the bracket threshold is taxed at that rate; misconception that all income jumps to higher rate
Effective Tax Rate	Total tax paid / total income; always lower than your marginal bracket; the number that actually matters
W-4 Withholding	Adjust to avoid large refund (interest-free loan to government) or underpayment penalty; target +/- $500
Standard Deduction (2024)	$14,600 single / $29,200 married; itemize only if deductions exceed this
Capital Gains Tax	Long-term (held >1 year): 0/15/20%; short-term: taxed as ordinary income; holding period matters
Index Fund Investing	Low-cost total market funds (VTI, VXUS); outperforms 90% of active managers over 15+ years
Asset Allocation	Stocks vs bonds ratio based on timeline; common rule: (120 - age)% in stocks; rebalance annually
Dollar-Cost Averaging	Invest fixed amount on schedule regardless of price; removes emotion; automate contributions
50/30/20 Budget Rule	50% needs, 30% wants, 20% savings/debt; starting framework, not prescription
Pay Yourself First	Automate savings/investment transfers on payday before discretionary spending
Credit Score Factors	Payment history (35%), utilization (30%), length of history (15%), new credit (10%), credit mix (10%)
Credit Utilization	Keep below 30% of credit limit; below 10% for best scores; per-card and overall
Net Worth	Assets minus liabilities; the single number that tracks real financial progress over time
FIRE Number	Annual expenses x 25; target net worth for financial independence (4% safe withdrawal rate)
I-Bonds	US Treasury inflation-protected savings bonds; rate adjusts with CPI; $10K/year limit; good inflation hedge

Concept

Description

Compound Interest

Interest on interest; A = P(1 + r/n)^(nt); start early — 10 years of compounding dwarfs late contributions

Rule of 72

Divide 72 by annual return to estimate doubling time; 8% return doubles in ~9 years

Emergency Fund

3-6 months of essential expenses in HYSA; 6+ months if single income or volatile industry

401(k) Employer Match

Free money; contribute at least enough to get full match before anything else; immediate 50-100% return

401(k) Traditional

Pre-tax contributions reduce current taxable income; taxed as ordinary income on withdrawal in retirement

401(k) Roth

Post-tax contributions; grows and withdraws tax-free in retirement; better if you expect higher future tax bracket

IRA (Traditional)

$7,000/year limit (2024); tax-deductible contributions (income limits apply); taxed on withdrawal

Roth IRA

$7,000/year limit (2024); contributions from after-tax income; tax-free growth and withdrawal after 59.5

Backdoor Roth IRA

Contribute to Traditional IRA, convert to Roth; bypasses Roth income limits; watch pro-rata rule

HSA (Health Savings Account)

Triple tax advantage: deductible contribution, tax-free growth, tax-free withdrawal for medical; best retirement vehicle

HSA Stealth Strategy

Pay medical out-of-pocket now, invest HSA, reimburse yourself decades later; no time limit on reimbursement

Debt Avalanche Method

Pay minimums on all debts; throw extra at highest interest rate first; mathematically optimal

Debt Snowball Method

Pay minimums on all; throw extra at smallest balance first; psychological wins build momentum

High-Interest Debt

Credit cards (15-30% APR) are emergencies; pay off before investing beyond employer match

Tax Brackets (Marginal)

Only income above the bracket threshold is taxed at that rate; misconception that all income jumps to higher rate

Effective Tax Rate

Total tax paid / total income; always lower than your marginal bracket; the number that actually matters

W-4 Withholding

Adjust to avoid large refund (interest-free loan to government) or underpayment penalty; target +/- $500

Standard Deduction (2024)

$14,600 single / $29,200 married; itemize only if deductions exceed this

Capital Gains Tax

Long-term (held >1 year): 0/15/20%; short-term: taxed as ordinary income; holding period matters

Index Fund Investing

Low-cost total market funds (VTI, VXUS); outperforms 90% of active managers over 15+ years

Asset Allocation

Stocks vs bonds ratio based on timeline; common rule: (120 - age)% in stocks; rebalance annually

Dollar-Cost Averaging

Invest fixed amount on schedule regardless of price; removes emotion; automate contributions

50/30/20 Budget Rule

50% needs, 30% wants, 20% savings/debt; starting framework, not prescription

Pay Yourself First

Automate savings/investment transfers on payday before discretionary spending

Credit Score Factors

Payment history (35%), utilization (30%), length of history (15%), new credit (10%), credit mix (10%)

Credit Utilization

Keep below 30% of credit limit; below 10% for best scores; per-card and overall

Net Worth

Assets minus liabilities; the single number that tracks real financial progress over time

FIRE Number

Annual expenses x 25; target net worth for financial independence (4% safe withdrawal rate)

I-Bonds

US Treasury inflation-protected savings bonds; rate adjusts with CPI; $10K/year limit; good inflation hedge