Glossary

5% rule

A risk management rule of having no more than 5% in any position within a portfolio (part of ND3)

Accounting

Tracking numbers using methods that are consistent and accurate

Asset Allocation (aka Capital Allocation)

Separating capital into 3 tiers based on its liquidity, volatility and cash flow (part of ND2)

Asset

In a balance sheet, it’s everything I own. In TWF context, it’s things that produce a cash flow

Balance Sheet

Everything I own (assets) and everything I owe (liabilities)

Capital Allocation

See asset allocation

Capital Ratios

A formula to allocate capital into Tier 1, Tier 2 or Tier 3 (part of ND2)

Cash Flow

Money that comes in, could be earned or unearned

Consumer (as it relates to the Money Quadrant)

Things that are consumed like food, clothing, shelter

Consumer

Someone who increases their earned income to fund expenses and debts. If they have assets, the assets are usually speculative assets.

Context

The big picture

Depreciating Assets (dumb ass assets)

Assets that decrease in value and usually have negative cash flow.

Drawdown

Decrease (loss) in value of an asset

Earned Income

Money we work for

FOS Rule

An acknowledgment that all of us have some percentage that doesn't see, hear and understand clearly, and we don't know what that ratio is. Everything we see, hear and read are opinions, beliefs and perceptions - it's not 100% accurate or are they facts.

Freedom Number

Amount of passive income you need for your core needs (housing, food, utilities and transportation)

GRM (Gross Rent Multiplier)

A real estate market indicator to identify values and trends of properties

GRM = sale price / annual gross rents

Investments

Assets that pay cash flow

Liability

Everything I owe

Lifestyle Number

The amount of passive income you need for your core needs plus what we want (freedom number + travel, shopping, entertainment)

True Wealth Formula

A master wealth building system and strategy to manage finances. It’s a money, wealth and investing system, a philosophy, and a way of thinking, learning and living.

Money Quadrant

Separating debts and assets into 4 categories based on its characteristics: consumer, depreciating assets, appreciating assets and cash flow assets

ND1

Non discretionary rules based system to manage earned income

ND2

Non discretionary rules based system to manage capital by allocating it into 3 tiers based on its liquidity, volatility and cash flow.

ND3

Non discretionary rules based system to manage risk by allocating capital into multiple positions

Non-Discretionary (Rules Based) Systems.

Systems based on rules to manage risk and remove emotion from the decision process and protects us from our 180+ biases

Position Sizing

Dividing the total portfolio into multiple positions to minimize risk and avoid catastrophic lost

Producer

Someone who turns earned income into assets that kick out unearned income, the unearned income is reinvested back into the asset base

Recovery

The gain required to recover from a loss in value of an asset

Relevancy

How something applies to me today

Risk Management

Minimize and reduce potential losses from investment decisions

Self Directed Investor

Someone who takes responsibility to learn and manage their own money without relying on experts

Speculations

Assets that have the potential to go up in value. You buy it hoping it'll go up in value and they are usually cash flow negative.

Stop Loss

A risk management rule that tells you when to exit a position when the asset decreases in value

Tier 1 Assets

Assets that are liquid and have no volatility. The primary reason for holding the asset is liquidity, emergency and dry powder. Examples are cash, physical precious metals (for chaos hedge purposes) and short term bonds

Tier 2 Assets

Assets that pay cash flow and have low volatility. The primary reason for holding the asset is it generates positive cash flow. Examples are real estate rentals, dividend paying stocks and private lending notes.

Tier 3 Assets

Assets that are speculative and have high volatility. The primary reason for holding the asset is it might go up in value. Examples are stocks, land, and real estate flips.

Unearned Income

Money that works for us

Volatility Based Stop Loss

A risk management rule that tells you when to exit a position based on how volatile the asset is

Volatility

The up and down fluctuation of the price of an asset