Before you can manage your money, you need a clear picture of what's coming in. This is your income. For most people, income is just their paycheck from a job. But money can come from many places.

Common sources of income include:

• Salary or wages: Regular pay from a full-time or part-time job.
• Freelance work: Earnings from projects or services you provide on the side.
• Side hustles: Money from a small business, like selling crafts online or driving for a ride-sharing service.
• Investment returns: Profits from stocks, bonds, or other investments.
• Allowances or gifts: Regular money you might receive from family.

Once you know what's coming in, the next step is to track what's going out. These are your expenses. Understanding your expenses is about seeing where your money is actually spent each month.

Expenses fall into two main categories: fixed and variable.

Fixed expenses are the foundation of your financial obligations. They are the bills you know are coming, no matter what. Because they're consistent, they are the easiest to plan for.

Variable expenses are where your daily spending habits show up. How much you spend on groceries, gas for your car, or coffee can change a lot from one month to the next. Tracking these helps you see where you have more control over your spending.

Another way to look at your expenses is to separate them into needs and wants. This is about understanding the difference between what you must spend and what you choose to spend.

Non-discretionary spending covers your essential needs. These are the costs required for daily living, like housing, food, and transportation to work. Many of your fixed expenses, like rent, fall into this category. But some variable costs, like gasoline or basic groceries, are also non-discretionary.

Discretionary spending, on the other hand, is for your wants. This includes things like concert tickets, a new video game, or a fancy dinner out. These are the expenses you have the most control over and can adjust more easily.

Thinking about your expenses in this way helps clarify where you have flexibility. While you can't easily change your rent, you can decide how often you eat at a restaurant. Understanding this difference is the first step toward making intentional choices with your money.

Time to check your understanding.

By now, you should have a solid grasp of how to identify your income and categorize your expenses. This foundation is crucial for building any financial plan.