If you’re anything like me, you hear advertisements about financial products all the time (as I am writing this, a commercial for a bank just came on Pandora).
Every ad is for something different and it’s hard to keep track of it all (not just for ads, but for your life, too).
For me, putting things into categories and compartmentalizing areas within finance helps me understand which area I should focus on and enables me to set better financial goals.
This post is about the 8 categories of money that encompass all of personal finance in an effort to make personal finance clearer for you.
1. Money Management
Money management is how you manage the money you have. It’s the saving, investing, spending, and financial goal-setting that you do all year round.
Here are a few of my best money management tools you can get started with:
2. Income Streams
An income stream is money that you make during the month. It’s money coming in. Any income that you receive is considered an income stream. The more income streams you have, the better!
- Related: How to increase your income
3. Work / Career
What you do for your “day job” is your work category. This is your career, where most people spend their time for money. Most people I know will never forget about this category.
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.
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.
If you’re like me and have debt, you probably know this category all too well. Debt is its own category of personal finance.
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?) But buying a home with debt (your mortgage) will actually not make you wealthy at all – 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.
- Related: How to get out of debt
Saving money is its own category (distinct from overall money management and investing).
Saving money means the money that you keep in the bank that is liquid (meaning cash or money that you can get to very easily — not stocks!).
An emergency fund is the most obvious and important type of savings that you should be aware of. An emergency fund is your safety net when something goes wrong and you need cash.
After that, you can save for anything else you want – a down payment, vacation, etc.
6. Wealth building / Investing
Wealth building is different than saving money. The purpose of wealth building is to increase your net worth and increase your income.
Building wealth isn’t actually that hard in terms of technicalities – you don’t need to be a pro (and you should read Ramit Sethi’s I Will Teach You To Be Rich because he explains it perfectly in his book).
The hard part about building wealth isn’t the technical side. 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 first and save an emergency fund second, then you are ready for wealth building. The problem is that we tend to stay stuck in the land of debt and savings where wealth building isn’t even on our radar.
The most common strategy for wealth building is saving for retirement.
- Related: How to save for retirement
You probably wouldn’t think of people as a category of personal finance. 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 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 (more on that here). If you rely on your parents for money as an adult, then that is a problem — you’re being a child (generally). 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
Suze Orman always says “people first, then money, then things.” This category is the “things” in her quote. Things meaning standard of living. It’s your standard of living that will greatly affect your ability to build wealth. Even if you are wildly successful, with multiple income streams, you still need to successfully manage the money you have, which means that you cannot blow it completely. Think of the celebrities who blow their money and have to claim bankruptcy after being super rich. If your standard of living is very high, keep in mind how hard it is going to be for you to be wealthy. Instead of going for everything, make thoughtful choices, where you intentionally choose what is important for you and leave the rest behind. This is everything from your house, apartment, vehicle, vacations, clothes, electronics – any and everything that you spend on your standard of living falls into this financial category. Keep in mind that if you have a really hard time keeping your standard of living in check, you may have deeper issues going on that you should consider sorting out instead of focusing solely on the money.
A Final Note!
There are 8 personal finance categories to keep you focused on the bigger picture:
- Money Management
- Income Streams
- Material Things
It’s good to know what these categories mean and how they relate to you before diving into the weeds of personal finance.
Remember, no one will care more about your finances than you will, so take the time to learn about basic money management, even if you don’t like it. You won’t regret it!