If you're anything like me, you hear advertisements about financial products frequently (as I am writing this, a commercial for a bank just came on). I hear ads for everything from banks, to investment products, to retirement accounts, and on and on. Every ad is for something different and it's hard to keep track of it all.
I've found that putting subjects into financial categories helps me to understand personal finance more fully, and it also helps me decide which area to focus on and how to set better finance goals.
To help you see the bigger picture, consider these eight categories of personal finance.
1. Money Management
The money management category of personal finance is where you plan what to do with your money. Money management includes budgeting, estate planning, and insurance. It's where you think about your money and make choices according to your values, vision, and goals for your financial life. Money management includes frugal living and all things on a budget - it's about managing the money you have.
If you don't do any planning, then your money management may be in need of a revamp. Your money isn't going to work itself - you have to tell it how to work. How you manage your money is often more important than how much money you make.
2. Income Streams
An income stream is money that you receive from any source. It could be from work or a side hustle, it could be from an investment, or it could be from your ex-husband who pays you alimony every month. Any income that you receive is considered an income stream. The more income streams you have, the better. This is because you rely less on each stream for every additional stream. If you only have one income stream and something happens to it (like if you're laid off without another source of income), you're in a worse situation than if you have multiple income streams.
There are three types of income: active income (earned from work; think trading time for money), portfolio income (from investments); and passive income (money generated from assets you own, like a rental property).
Any income that you receive is your "monthly cash flow". It's what you use to accomplish everything you want to do in the month (including saving, spending, and paying off debt). "Side hustling", as it's known in the blogosphere, is a way to increase your income by adding additional income streams in order to diversify your income and enable you to do more with your money (get out of debt, for example).
It's hard to forget about this category! What you do for your "day job" is your work category. This is your career, where most people spend their time in exchange for money. While this category is the most obvious, I want to point out that if you go to work for X amount of hours and are paid X amount of dollars in return for your time, then you are trading your time for money. This isn't bad but it is worth pointing out because you may not have thought about your work this way before. Your work is where you get your "active income", and it is the type of income that is taxed the highest. It's hard to become wealthy solely from active income for two reasons: 1) it's taxed at the highest rate, and 2) there are only so many hours in the day for you to work (you can work and work and work, but if you have to be there to make the money, there's a cap on your income because time is limited). This is why the wealthiest people usually are not wealthy from active income.
Thinking about your career as separate from your income streams is helpful because it allows you to see how you can create income in other ways and is a fresh reminder that more than one income stream is good.
Debt is its own category of personal finance (and most people won't argue with that). You will have a hard time building wealth if you stay in debt - especially consumer debt, in my opinion. Debt can be a tool to propel opportunities (who could really buy a home outright besides Dave Ramsey? Honestly.) But buying a home with debt (your mortgage) will actually not make you wealthy at all initially - it just will give you the opportunity to be a homeowner. Remember this distinction. Don't get caught up in "good debt" and "bad debt". Regardless of the type of debt you have, you have to repay it. That's what you need to remember. If you can focus on eliminating debt, you will set yourself up for financial success.
Most people don't save money. They just don't. Instead, they live paycheck to paycheck and have nothing to show for it. You can live that way, or you can be better than that - and I think you're worth it!
I'm talking about cash money. Money in the bank. Not investments. Not money to build wealth (number 6 below). I'm talking about saving money for a particular goal. One such goal should be an emergency fund. This rainy day fund will be your safe harbor when something goes wrong and you need it (not if - when). After that, you can save for anything your little heart desires. Getting in the habit of actually saving money ahead of time instead of charging it to your credit card is a fantastic habit for you to consider. It will enable you to stay out of trouble.
6. Wealth Building
Wealth building is different than saving money. The purpose of wealth building is to increase your net worth.
Building wealth isn't actually that hard in terms of technicalities - you don't need to be a pro to build wealth (and you should read Ramit Sethi's "I Will Teach You To Be Rich" because he explains it perfectly by discussing asset classes in his book). The hard part about building wealth isn't the technical side (you don't need to know about the market, stocks, bonds, and everything in between). The hard part about building wealth is that you need to get your shit together first. You need to have your money under control. If you can get out of debt, save an emergency fund and save for other things you want, then you can get to wealth building. The problem is that people tend to stay stuck in the land of debt and savings where wealth building isn't even on their radar.
7. People (Relationships and Money)
You probably wouldn't think of people as a subcategory of personal finance per se. But you would certainly agree that you have opinions about money, and your relationships have a money component. So the "people" category is twofold: 1) it's your money blueprint (how you learned about money growing up) and 2) it's how you relate to others when it comes to money.
Money is a reflection of you. If your money is a mess then you are a mess, too. I've yet to meet someone who had money problems without underlying personal issues. If you have internal issues that are unresolved, they may be affecting your money and without resolving them, you won't have a chance at fixing the money problem.
Second to your personal money blueprint is how you relate to others when it comes to money. If money is a cause of stress with your partner, then that is a problem. If you rely on your parents for money as an adult, then that is a problem - you're acting like a child. Your relationships that have money in them are part of this category and should always be considered when you're looking at the bigger picture.
8. Material Things
A Final Note!
Looking at these eight personal finance categories are meant to help you understand personal finance more broadly. After you compartmentalize the different areas of personal finance, you can learn to focus on the separate areas, set financial goals, and move forward with financial success.
This post originally appeared here.