Income and Expenses

Understanding how money moves through your life is a foundation for financial health. Your money flow usually begins with income. Income is the money you receive, and it generally falls into two main categories: active income and passive income.

Common examples include a salary from a full-time job, hourly wages, or commissions from sales work. If you work as a teacher, nurse, or retail associate, the money you get from your employer is active income.

This could come from investments like dividends from stocks, interest from savings accounts, or rental income from property you own. Earnings from a side hustle, such as selling digital products online or running a blog that generates advertising revenue, can also be considered passive income if they require minimal ongoing effort.

Once you receive income, it is typically used to cover expenses. Expenses are the costs you incur as you live your life. These can be divided into needs and wants. Needs are essentials - things you must pay for to live and work. These include rent or mortgage payments, groceries, basic clothing, transportation, utilities, and health insurance. For instance, paying your electricity bill or buying medicine are examples of needs.

Wants are discretionary spending - things you enjoy but do not absolutely require. Dining out at restaurants, streaming subscriptions, designer clothing, new gadgets, or vacations are all examples of wants. Understanding the difference between needs and wants helps you make better decisions about where your money goes and where you might cut back if necessary.