Most people I know spend less than what they earn! I wish I could say ALL people I know spend less than what they earn…well they do not.
Why do I keep harping on income and expenditure, because it is not easy for many people to comprehend. Let me see how simple I can make it:
Income < Expenditure – you will run into debt
Income = Expenditure – risk that you have no fall back in case of a temporary income stoppage
Income > Expenditure – you have money to save and perhaps invest
This is class 4 math is it not?
However too many people do not understand this because all income is not cash flow, and all cash flow is not evenly spread out! Oops jargon did you say? sorry.
Let us take the case of even a salaried person – who has a quarterly bonus. First of all from the so called ‘cost to company’ there are deductions like provident fund, profession tax, income tax, etc. Also some ‘reimbursements’ like medical, LTA etc are done once or two times a year – and is not regular. So your MONTHLY take home may be different from your CTC/12.
Similarly when you are spending you may be spending some lump sum – school fees paid in advance for 2 quarters, expenses at festivals, vacations, etc.
all this makes ‘matching cash flows’ a little complicated.
It is necessary to spend much less than what you earn – so that you save up and invest it. Remember no great wealth was created by penny pinching – you have to ensure that there is enough moolah coming home in the first place. Of the money that comes in, you need to spend LESS so that there is a surplus that can be saved (to get out of debt, fast) and then invest the money in ‘ownership assets’ like equities and equity mutual funds….
I hope I am clear…many people are accusing me of not being simple enough…is this fine?
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