How does Karma work exactly?

The great law of Karma—or cause and effect places every personality in just the place and condition in life, which will naturally bring it into touch with the lesson that is needed. 

However, every little thing that comes to you is not karmic, but is a part of the kind of conditions you must learn to overcome. For instance, if in your life you have to mingle with people who irritate you and tend to awaken in you unkind thoughts, it simply means that your Karma is to overcome such thoughts and actions and to demonstrate over those conditions. If you are placed in poverty, it means perhaps that you are there to learn how to recognise the fact that you do not have to be poor—that if you love your Father-in-Heaven and obey Him, He will take care of you and bring to you all that you need if you do your part.

So we might go on describing special conditions, but remember that Karma is not the Karma of every little event, but that Karma simply guides you into conditions where you will meet with the lessons you need and where you may learn the higher lessons you must learn.

Karma is an urge to awaken you to your higher Divine possibilities, very much as a father might put a wayward, thoughtless son into some position where the hard work and difficulties he would meet would make a man of him.

Letters from the Teacher, Teachings of the Order of the 15