80/20 rule – It states “80% of outcomes can be attributed to 20% of the causes”

Some examples:

  1. 80% of household budget is spent on 20% of the items
  2. 80% of the time spent at traffic signals happens at 20% of the signals
  3. 80% of stock market capitalization is done by 20% of the corporations
  4. 80% of clients use less than 20% of software functionality
  5. 80% of the sales come from 20% of the clients
  6. You wear 20% of your clothes (favorites) 80% of the times
  7. 80% of wealth is owned by 20% of people
  8. 80% of the gains/ losses in a portfolio can be attributed to 20% of the investments

    Asset Allocation

Asset Allocation – An asset class is a group of ‘investments’ that share riskiness and return. Asset Allocation is simply the ratio (proportion/ percentage) in which your total portfolio is divided into the various asset classes.

Asset allocation is based on the principle that different asset assets perform differently in different economic conditions BUT all ‘instruments’ present in the same Asset Class perform similarly.

For example – IBM and MSFT (Microsoft) both belong to the Asset Class “Domestic Large-cap”. They are both likely to have similar risk and similar return over long-term which is likely to be different than the returns of ‘Alibaba’ that belongs to “Foreign Large-cap”.

Capitalized cost (cap cost)  – a term frequently used in leasing vehicles. It is the equivalent of the selling price (if you were buying), hence this is the number you want to get down as low as possible.

Since you are paying ‘cap cost minus residual value’ over the lease period, your monthly payments are determined by these two numbers, technically by the difference between these two numbers plus an interest charge (money factor). Raising the residual value will benefit you; so will lowering the capitalized cost or the money factor.

Critical Path – a term originally derived from ‘Project Management’ terminology but is more and more frequently used in any management situation.

Here is a text book definition “Critical path is a sequence of project network activities that determine the shortest time possible to complete the project”. This implies that any delay in any of the activities on the critical path will delay the project.

Contrary is also true – a delay in any of the activities that are not on critical path will not delay the project. You should immediately ask – what if that activity gets delayed forever, then the project will never be complete, how can you say that it will not delay the project?

I say that because ‘The activity not being on the critical path today does not mean it will never be’. In your example, once the “non-critical path” activity gets delays for 3 days, then it becomes a part of the critical path and the delay starting with the 4th day will delay the project.

Let us take an example – you are building a house, it is a complex process but for our simple example, we say that the process consists of these steps:

  • Building the walls (Needs 11 weeks to build)
  •  Painting the walls (Needs 1 week to paint)
  • Planting grass in the backyard (Needs 4 weeks to grow before the house can be sold)

What is the total project duration? 12 weeks…. why? Assuming the walls cannot be painted until they are built BUT the grass plantation can go on in parallel.

You start the project on Jan 1… planning to finish it in 12 weeks, say on Mar 25th. Your plan looks like this:

Wall building – Jan 1 – Mar 17th
Wall painting – Mar 18th – Mar 25th
Grass plantation – Feb 15 – Mar 15

You start the project on Jan 1, everything is going on fine till Feb 1 when the landscaper who was supposed to start planting the grass on Feb 15th calls you ‘Sir, is there a way I can start on Feb 20th as compared to Feb 15th?’

Does that impact your project delivery? Project is delivering a complete house….. No, it does not – because grass is not on the critical path -> it will be done Feb 20th – Mar 20th (you need the grass done by Mar 25th).

Feb 20th comes and the landscaper does not show up, your calls are not returned. You wait a couple of days – on Feb 22nd grass is still not on the critical path. BUT on Feb 25th, the grass comes on the critical path, why? Because the walls/ paint will end on Mar 25th but the grass won’t be ready by Mar 25th. So now every day the grass is late, your project will get delayed by a day!

You find a new landscaper and start the grass plantation on Feb 28th – now the earliest your project can finish on is Mar 28th. (You are 3 days delayed).

Now building the wall and painting the wall are NOT on critical path. Those 2 tasks together were supposed to get over by Mar 25th, even if they together take 3 more days you are still on track to finish by Mar 28th.

Dividend Reinvestment Plan (DRIP or DRP) – Sometimes also known as Dividend Reinvestment Program is nothing but a feature that allows dividends to be automatically reinvested.

Let us say you own shares of company XYZ (currently trading at $1 market value) and you get a dividend of $2. In stead of depositing this $2 as cash in your brokerage account, you will see 2 extra shares of the company.

You may ask ‘What is the advantage? I could have bought the shares myself’. There are 2 advantages – you do not pay commissions (with most brokerage firms) when you acquire stock through DRIP. Secondly, the money is invested as soon as it is received (no time value of money is lost).

Note: Not all brokerage firms have this feature. I know TD Ameritrade and Merrill Edge do. I know for a fact that Interactive Brokers does not have this feature last year, they do now, but they charge their regular commission for DRIP (their regular commission is usually $1). Trade King has this feature but there is no way for you to know using the user interface (but if you call and insist that you want to do it, they will be able to do it for you).

Dollar Cost Averaging (DCA) is the opposite of ‘Lump Sum Investing’. These concepts are specially relevant when you have a ‘one time cash coming in’ – think inheritance. You earn $50,000 a year, save about $1,000 a month; but one fine day you inherit $60,000 – it is a large amount of money as compared to what you would normally have to invest every month.


Dollar Cost Averaging

Dollar Cost Averaging

You have 2 options: either invest $60,000 right away (Lump Sum Investing) OR invest a fixed amount of dollars periodically – for example, invest $10,000 every month over the next 6 months  (Dollar Cost Averaging).


It is called Dollar Cost Averaging because the price at which you buy the stock averages out (and you do not get hit by rapid increases or decreases in price). Let us take two examples:


Example-1: Rising stock prices: You started to buy on 3/1 at the stock price of $40 and the stock price increases every month for the next 6 months all the way up to $77. Your average cost of purchase is $54.56 (you would have been better off with lump sum investing on 3/1).

Example-2: Falling stock prices: You started to buy on 3/1 at the stock price of $40 and the stock price decreases every month for the next 6 months all the way up to $24. Your average cost of purchase is $31.66 (you would have been worse off with lump sum investing on 3/1).


As you can see, you benefit from DCA if the stock prices are falling (going to fall). You benefit from Lump Sum Investing if stock prices are going to increase.

I can logically/ mathematically prove that Lump Sum Investing is better than DCA but a lot of humans invest using emotions. The emotions are particularly strong in bigger decisions – in our example, the $60,000 windfall was much bigger than $1,000 usually available to invest.


Therefore, most people end up using DCA in windfall situations (another example would be annual bonus if that is significantly more than your monthly saving available to invest).

Estate: Estate is a concept – it is not an actual account. Estate is the sum total of all that the deceased owned and owed.

So estate is the ‘conceptual entity’ that owns his house, car, mortgage, credit card debt, and everything else that he owned or owed.
Think of it as – if the person was still there but wanted to ‘square out’ one day before ‘the’ day. He would sell everything he has, pay off everything he owes to others, and give the remaining to the heirs.

Form 4852You get a W-2 at year end if you were an employee at any time during the calendar year. You need the form W-2 to prepare your taxes at year end.

What happens if the employer does not issue you a Form W-2 or issues a W-2 with incorrect information?

Call the IRS (1-800-829-1040). You will need to provide your name, address, SSN, and phone number. You will also need the employer’s name, address, phone number, dates of employment, and your best estimate of your gross wages and the federal income tax withheld. You can base these details off your last pay stub.

IRS will send a letter to the employer requesting that they send you a corrected W-2 within 10 days. You meanwhile can file your taxes with a Substitute W-2 (IRS Form 4852), estimating the amounts as best you can (again you can use your last pay stub for that). If/ when you do get the actual (corrected) W-2 from your employer you can amend your return (if necessary).

(Exactly the same logic applies to 1099-R. You get a 1099-R if you took distributions from pension/ annuity/ retirement plans/ profit-sharing plans/ IRAs/ insurance etc. If you do not get a 1099-R at year end, Call the IRS (1-800-829-1040) yadda yadda yadda’.

HELOAN (Home Equity Loan):  Most common scenario with real estate loan is mortgage – when you borrow money from the bank to buy a house.

What can you do if you already own a home? You can still mortgage the house and take out what is called a HELOAN – Home Equity Loan.

What is your equity in the house? If you buy a house today for $500,000 – you put down $100,000 and you finance $400,000 through the bank. Your equity in the house is $100,000.

As time goes by, you make payments, and at some future point in time you owe $300,000 to the bank. Assuming value of the house to be still $500,000; your equity in the house is $200,000.

Slo, value of the house = your equity in the house + the money owed to the bank.

HELOC (Home Equity Line Of Credit): Home Equity LOC is a line of credit backed by the house. There are some initial charges to open a Home Equity LOC and then you are charged interest on the amount drawn on LOC.

Interest rate on HELOC is usually higher than HELOAN.

Large-cap: is an abbreviation of “Large market capitalization”. Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share.

Let us simplify what Market Capitalization means – it is the total value of the company. Who owns the company? The shareholders. If the company has 1,000 shares and each share is trading in the market at $100, what is the total value of the company? $100 * 1,000 = $100,000. So the Market Cap of the company is $100,000. Similarly, market cap of Apple is around $600 Billion.

Large caps like the name suggests are companies with large market capitalization. Various definitions are available in literature as to what constitutes ‘Large’ but a commonly used definition suggests any company with a market cap of over $10 Billion is Large Cap.

In contrast, anything between $2 Billion and $10 Billion is Mid cap, and anything less than $2 Billion is small Cap.

Keep in mind that Small cap does not necessarily mean Small by an average household standards, for example:

Vitamin Shoppe (a largest nutrition supplement retailer) has a Market Cap of $750 Million (about a third of what qualifies to be Mid Cap). It started in 1977, and today has about 500 locations and about 3,600 employees (2,200 full time and 1,400 part time). So it is not ‘small – small’.

Money Factor is a decimal number (analogous to the interest rate) that is used to calculate the lease payment. To convert the money factor to interest rate, multiply it by 24. This number may be converted to an approximate interest rate by multiplying by 2400. Example: A money factor of 0.00417 converts to an interest rate of about 10%.

Every salesman (well every smart salesman) will again and again try to make you focus on the monthly payment but remember monthly payments can be very misleading if looked at in isolation. You need to look at the cap cost, residual value, MSRP, upfront down payment, permissible mileage, excess mileage fee, money factor, acquisition fee, disposition fee, and an early termination fee.

MSRP is Manufacturer’s Suggested Retail Price (List/ Sticker Price).

Residual value is the estimated worth of the car at the end of your lease. This is the price at which the dealer is taking back the car from you at the end of your lease. When you got the car, it was worth the cap cost, when you returned it it was worth the residual value. So what did you pay for the car to use it for lease term? Cap cost MINUS residual value.

Higher the residual value, the better it is for you. Usually residual value is calculated as a percentage of the cap cost. I remember a friend of mine having 68% of the cap cost as residual value.

Since you are paying ‘cap cost minus residual value’, your monthly payments are determined by these two numbers, rather by the difference between these two numbers, plus an interest charge (money factor). Raising the residual value will benefit you; so will lowering the capitalized cost or the money factor.

SSA-521: Request for withdrawal of application (Social Security Benefits). After applying for social security benefits, you can change your mind within 12 months of first claiming your benefit. You will need to repay all of the money you received, including any spousal benefits. You can then restart benefits in later years (hopefully for a bigger amount).

Tax Gain Harvesting (TGH) – Opposite to Tax Loss Harvesting (explained below), TGH involves realizing your capital gains towards year end. This is commonly used by people whose annual income is likely to be in the 0% or 15% tax bracket. Capital gains tax rate for these income ranges is 0%. As of 2015, if your taxable income is less than $37,450 (including capital gains), then you do not pay taxes on the capital gains.

Tax Liability – In personal finance context, it refers to the tax you owe in total to the IRS for the year. An important distinction needs to be made between tax liability and tax due. Let us take an example:

Mary and Linda both earned $100,000 in 2015 – Mary and Linda both have identical situation (dependents, retirement contributions, deductions, filing status, and others).

But Mary and Linda filled w-4 differently: Mary was having $2,000 withheld from her pay check (twice a month) while Linda was having only $1,000 withheld.

(The employer withholds this money and gives it to the IRS as an ongoing payment of estimated taxes for the year).

At year end, their tax liability is identical. Let us say that is $18,000 – a very common scenario for someone earning $100,000 a year.

Mary and Linda both owe $18,000 to the IRS.

How much has Mary already paid? $2,000 *24 = $48,000

How much has Linda already paid? $1,000 *24 = $24,000

How much refund will Mary get? $48,000 – $18,000 = $30,000

How much refund will Linda get? $24,000 – $18,000 = $6,000

So Mary and Linda had the exact same tax liability for the year 2015 but the refund they will get in 2016 is vastly different.

I would encourage you to read my article What to know before filling Form W-4? – One More Dime

Tax Loss Harvesting (TLH) – IRS allows deduction of up to $3,000 capital losses from the other income. The practice of selling losing stock towards year end in order to realize capital losses is called TLH.

Tax Shield – Certain interest expenses are tax-deductible. What does this mean? This means that every dollar you spend on interest is deductible from your taxable income.

Assuming you have taxable income of $90,000 (tax bracket single, 25%) and you paid $10,000 as mortgage interest in 2016. This means that your taxable income reduces to $80,000 – so you saved 25% of $10,000 on income tax. This is called Tax Shield.

Total cost of ownership (TCO) is a measure of the total direct and indirect costs of a product. Let us take the example of a car- when you own a car for a five year period, the direct and indirect costs include depreciation (difference between what the car is worth at the beginning – what the car is worth at the end) + gas + insurance + financing + maintenance + repairs + annual state registration fee.

Time Value of Money – Textbooks define Time Value of Money as “The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.”

In simple words $100 received today is not worth the same as $100 received one year from now. Similarly, $100 spent today is not the same as $100 spent one year from now.

For simplicity, let us assume the rate of return (interest rate) is 10%. If you have $100 today, you make 10% over the next year, the same $100 today is worth $110 after one year. So, by not spending $100 today, you are able to spend $110 after one year.

Wash Sale – Do you know what is an eyewash? Eyewash is when someone does some jugglery / structuring/ tricks to make something look more ‘genuine’ than it really is.

For example: I knew of a chemical corporation that was dumping a lot of industrial waste in the local soils (of the plant). This dump was causing many problems (farming related and health related) in the neighborhood. To improve it’s relations with the farmers, the corporation started to give some money to the farms to buy fertilizers. Many viewed this fertilizer subsidy as an eyewash to hide their harmful actions.

In our financial world: Wash sale is a sale of stock that is an eye wash. It is not actually a sale because the investor wanted to dispose the position in stock, it was only an ‘eye wash’ to get tax deduction from the IRS.

Let us take an example: You buy SPY (S&P 500 ETF) on 1/1/2016 for $200. By 10/1/2016, SPY has fallen to $150. You have $50 unrealized loss – your investment is making a loss but you cannot write off the loss till you realize it (till you sell the investment at a loss).

You sell SPY at $150 in order to realize the loss. But at the same time you did not want to lose exposure to S&P 500, so you buy another S&P 500 ETF called VOO.

Under this scenario: IRS rules say that you cannot claim the $50 as a capital loss deduction, because you acquired a substantially similar security within 30 days of the sale (sale of SPY in this case).

There are 3 important things to note here:

  1. The security has to be substantially similar to the one that is sold
  2. Thirty days implies 30 days before or after the security sale – in our example, if you acquired VOO on 9/15 and then sold SPY on 10/1, wash sales rules still apply
  3. IRS rules say either acquiring the security OR gaining rights to acquire a security (so buying CALL options amounts to the same effect as far as Wash Sale is concerned).