Money Basics · Lesson 1 of 14
Give Each Dollar a Job
Write down what comes in, what goes out and what you owe, so every dollar has a job before any of it goes near a trade.
In this lesson
- Define income, expenses and cash flow
- Calculate net worth from assets and liabilities
- Separate money for near-term needs from money you can afford to invest
You don’t need to understand every chart to start managing your money. Start by writing down four things: what comes in, what goes out, what you owe, and what you want your money to accomplish.
Track the flow
- Income — money you receive, such as your pay after taxes.
- Expenses — money you spend, from rent and groceries to subscriptions.
- Cash flow — the difference between income and expenses over a period of time, such as a month.
Example Consider this example
If your take-home income is $3,000 and your monthly expenses are $2,700, you have $300 left before any irregular expenses. That $300 needs a plan. It might go toward a cash reserve, expensive debt or a longer-term goal rather than a trade.
Know where you stand
An asset is something you own that has financial value, such as cash or a car. A liability is an amount you owe, such as a credit card balance or a student loan. Your net worth is your assets minus your liabilities.
Note
A negative net worth is information you can use to make a plan. It isn’t a judgment about your worth as a person.
Keep near-term money separate
Keep money for rent, food, required debt payments and other near-term needs separate from money you can afford to invest. A market account isn’t a reliable place to keep next month’s rent, because prices can be down right when the bill is due.
List your take-home income
Use the amount that actually lands in your account each month.
List your expenses, essentials first
Start with rent, food, transport, insurance and minimum debt payments, then add everything else you spend, such as subscriptions and eating out.
Find the gap
Income minus expenses is your monthly cash flow.
Give the gap a job
Decide how much goes to a cash reserve, to expensive debt and to longer-term goals before anything goes toward trading.
Check your understanding
3 questions. Answer each one, then open “Show answer” to compare.
Question 1 of 3 Your take-home pay is $3,200 a month and your expenses are $2,850. What is your monthly cash flow?
dollarsShow answer
Answer: 350 dollars.
Cash flow is income minus expenses: $3,200 − $2,850 = $350. That $350 is the money you can give a job, such as building a cash reserve or paying down expensive debt.
Show answer
Answer: C. −$3,000
Net worth is assets minus liabilities: ($9,000 + $6,000) − $18,000 = −$3,000. A negative number is a starting point for a plan, not a verdict on you.
Show answer
Answer: B. In an accessible account kept apart from your investments
Money you need soon should stay accessible and separate. A market account can be down exactly when the bill is due, which could force you to sell at a loss.
Key takeaways
- Cash flow is income minus expenses, and the leftover needs a deliberate job.
- Net worth is assets minus liabilities; a negative number is a starting point, not a verdict.
- Keep money for near-term needs out of the market.
Key terms
Sources and further reading
Progress is saved in this browser only.
Educational content, not investment advice. Lessons describe how markets and models tend to behave. They don’t tell anyone what to buy, sell or hold. Interactive examples use illustrative sample data, and simulator results are simulated — not actual trading. Options involve risk and are not suitable for all investors.
Risk disclosureCharacteristics and Risks of Standardized Options (OCC) (opens in a new tab)