

This article is an excerpt from the Shortform book guide to "Your Money or Your Life" by Vicki Robin and Joe Dominguez. Shortform has the world's best summaries and analyses of books you should be reading.
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Do you know what passive income and socially responsible investing are? What about dividends? Would you like to understand investing better?
If you want to make sure you have enough money for the rest of your life, you’ll benefit from understanding investing terminology and basic principles. Knowing the ins and outs of risk tolerance, investment fees, and the like will give you—and your money—an advantage.
Read on to understand investing better.
Understand Investing to Maximize Your Financial Security
Imagine having enough money coming into your life through passive income that paid employment is optional. It’s not about getting huge amounts of money but about knowing how to invest so that you have enough money for the remainder of your life.
The more you understand investing terminology and principles, the more you’ll have a handle on smart investing.
Investing Terminology
Passive Income
Passive income is another way of saying “investment income”—money you don’t work to earn.
You can earn passive income from investments in five different ways (and you can see that passive income has investing terminology of its own):
- Interest. If you invest capital in certificates of deposit, bonds, or savings accounts, the money accrues interest over time.
- Rent. This is any payment you receive from renting out estate property that you own. It is the money you received, minus any associated expenses, like taxes or repairs.
- Dividends. You’ll get paid dividends, or a slice of profits, if you’re the owner of a private company, or if you invest in ETFs, stocks, or mutual funds.
- Royalties. If you own a patent, natural resources, or a franchise, you’ll earn money through royalty payments when others use the property.
- Capital gains. If you sell stock or real estate, you’ll earn capital gains: earnings from the sale that exceed the money you invested when you purchased it.
Risk Tolerance
Risk tolerance is your willingness to make risky investments. It’s a spectrum from not wanting to risk any capital to wanting to risk all of your capital in return for large gains.
Your willingness to make risky investments depends on many factors, which include:
- How you were raised
- Beliefs about money
- Age
- Time horizon—how quickly you expect to need access to your investments.
- Crossover point—you may take more risks to build wealth quickly ahead of reaching your crossover point (though not in all cases). After your crossover point, you’ll want to invest in less risky instruments to preserve your wealth.

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