Personal financial levers

What I love about personal finance is that I believe it’s something I have good level control over even though there are many forces and unexpected events that are completely outside of my control that influence the final outcome. I don’t influence the stock market or world’s major geopolitical events. I can’t predict if I get into a car accident and am unable to work. Nevertheless, there are many things that I can have agency over by planning, acting, and reflecting. There are a few levers that enable me to control and steer my financial outcome. 

“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” Archimedes (credit: Doug Ravenel here)

I believe there are 5 foundational levers that I can pull

1. Income : all the different ways that I receive money. I further separate two types of incomes: active and passive. Active income involves constant exchange of my time and attention such as salary, consulting, or gigs. The income stops then the exchange stops. Passive income involves upfront exchange then only a tiny amount afterwards to maintain that income. I have control over how I invest my time productively to increase my income. I can increase one source. I can expand my sources of income. I can improve the mix of active and passive income sources. 
2. Expense : all the different ways that I spend money. I further separate three types of expenses: mandatory, discretionary, and contingent. Mandatory is a necessity for survival and minimal quality of life such as food, shelter, cloth, taxes, and internet. Discretionary spending improves my quality of life and extends my life. Celebrations, dining out, vacations, nicer cloth, charity, preventative care, etc. Contingent is one time or unexpected spending to manage risks. I can be more intentional about my expenses. I can find lower cost substitutes. I can vary frequency and quality of expenses. 
3. Assets : all the items or rights that can be sold (regardless of what “value” that I might place on it). I further separate two types of assets: financial and real. Financial traditionally means stocks, bonds, cash, etc. Real traditionally means gold, property, art, collectables, etc. The boundary continues to blur between financial and real. I have a tiny bit of bitcoin, I don’t think it belongs to either category. Maybe a better way to think about it is liquidity vs illiquid assets. I generally classify financial assets as a high liquidity asset and bitcoin would fall in this category. I can start small. I can diversify my assets. I can be intentional about my risk vs reward. 
4. Debts : all the money that I need to pay back and the associated fees. Might be useful to separate types of debt by fixed rate vs adjustable rate debt. I might also separate debt by collateralized vs uncollateralized debt. Either way, these are just different ways to think about the cost of debt or risk of defaulting on debt. I can pay off debt. I can refinance my debt. I can, as a last resort, declare bankruptcy to charge off my debt. 
5. Protections : all the event based rights that I acquired for future contingency on things above (income, expense, asset, and debt). When I buy insurance, I’m joining a pool along with other people to get protection on some future event. I believe this is an important aspect of risk mitigation due to all the things that are outside of our influence. There are many types of protections: life, health, house, flood, earthquake, auto, mortgage, long term care, accident, theft, etc. There are endless favors of insurance. I can buy more insurance. I can cancel my insurance. I only need to be thoughtful and intentional about risks that I want to mitigate. 

These are the foundational concepts that all personal finance planning is built upon. Cash flow is income minus expense. Net worth is asset minus debt. Financial independence is expense vs passive income. I call them levers because I have intentional control. Personal finance starts from understanding these 5 foundational concepts, then taking responsibility and ownership to understand our financial health and steer our financial direction. I can take responsibility by tracking and monitoring. I can take ownership by defining the successful outcomes and proactive working towards those goals. I can learn from others or from myself through reflection of my success and failure. 

What are your financial levers? 

Ricky