One of the most common issues that people with any kind of dependents face is, "How much life insurance do I need?"

This is a tough question to answer in a simple equation; there are quite a few variables which affect the amount of insurance needed. First off, I'm only going to discuss term insurance. For most people, that's the only type of insurance to consider.

J.D.'s note: I said this over the weekend, and I'll say it again: Permanent life insurance (such as whole or universal) is not a bad idea for everyone. For some folks, it absolutely makes sense. But for the average joe, term insurance is usually the best option.

In my last post at Get Rich Slowly, I explained the basics of passive investing and why it's a good strategy. I explored the differences between index funds and exchange-traded funds (ETFs), and showed how they're great tools for passive investors. My article ended with a breezy "just pick some basic index funds and away you go". But in reality there are a few more steps before you actually make any investments.

One of the keys to investing is deciding your asset allocation. "But what is asset allocation?" you ask. Asset allocation is the relative amount of each asset class in your portfolio, and it determines how much risk your portfolio has. Still confused? Let's take a closer look.

Asset Classes

An asset class is simply a group of similar investments whose prices tend to move together. In other words, their price movements are at least partially correlated.

Personal finance bloggers are vocal proponents of passive investing in index funds and exchange-traded funds. But not everyone knows much about these, and not a lot of bloggers do a good job of explaining the basics of passive investing. This post is intended to explain the basics — along with the basics of the basics!

I was inspired to write this article because of two separate but identical conversations I recently had with friends. They went something like this:

Friend: What do you invest in?
Me: I do passive investing. You know — investing in index funds and ETFs. ETFs are kind of like index funds.
Friend: I see... [Blank stare.]
Me: Do you know what an index fund is?
Friend: Nope.
Me: It's a fund that invests in all or most of the stocks of a stock market index and gets a return which is equal to the index return minus a small fee.
Friend: I see... [Blank stare.]
Me: Do you know what a stock market index is?
Friend: Nope.
Me: I see....