Why a lot of income is IGNORED
What is Income? and what is Increase in Net worth?
Well when a company earns money it reduces depreciation from its Profit and Loss account, and pays taxes and the balance is used to increase its reserves. Assuming it pays no dividend, the NPAT (Net profit after taxes) is added to its reserve and its ‘net worth’ goes up by that much amount.
For an individual staying in a house costing Rs. 4 crores, having a portfolio of Rs. 5 crores. and a business income of Rs. 1 crore post taxes..WHAT IS HIS INCOME?
Well his income is Rs. 1 crore. Ask him for his income and he will tell you it is about Rs. 1 crore.
How much is the INCREASE IN HIS NET WORTH. Well, let us say his house has appreciated by Rs. 30 lakhs and his portfolio has gone up by Rs. 1 crore..then his increase in NW = 30+100+100 – household expenses (say 18Lakhs) = 2.12 crores.
So technically what is his income? well it is the amount by which your NET WORTH goes up. If people started thinking like this, they will realize that THEY SHOULD PAY ATTENTION to their total Income. Right now they slog like mad for their ‘earned’ Rs. 1 crores but the ASSETS are ignored. Most IFAs and ALL economists ignore this ‘increase in net worth’ – unless of course there is a capital gains transaction. If for this man earning ONLY Rs. 1 crore post taxes PAYING MORE ATTENTION to his portfolio and trying to increase the YIELD there makes far more sense..does it always happen? No.
As dividends are tax free, people may not make a list of the dividends received, if the unit in a mutual fund are in ”Growth” mode, then the appreciation in the portfolio is again ignored.
Actually this man’s income was more than 2.14 crores. I guess he should stop calling himself “middle class”
Economists too ignore this figure…
Jacksparrow
Savvvy!! Your blog is an immense source of gyan subra 🙂
Shiva S
if for 1C he considers himself a middle class am wondering how many levels of Below Poverty Levels I have to add to mine. 🙂
Anyways its a good attitude to behave a Middle class while spending and behave mildly rich when investing sensibly!
chandana
sir I am an IT employee who has an average salary of 45 K per month. I cannot adopt the strategies which are mentioned by you as it is in crores 🙂 please suggest me a saving strategies to better my savings .and moreover I am married too 🙁 🙂
MRHDK2012
Agreed Subra. After ccertain stage, the net worth becomes important. For some people, it becomes far more important than the income earned through salary, etc. That is the time to decide what to do in life- whether to pursue your passions or keep slogging.
Unfortunately this stage doesn’t come for all.
Felix
Subra, If the house is for self-occupation, then the increase in the value of the house is not an income. One does not sell a self-occupied house just because the rate has gone up. The increase/decrease in the value of the portfolio is income/negative income.
Savithri Venkataramani
Like Mr. Felix says, if the owned house is self-occupied, there is no income at all. Also, only if the house is sold the WORTH/SALE DEED is considered Asset!
Then, how one can be defined as Lakshadipathi/crorepathi ?
Dr.Hemkumar
Mr.Felix/Mrs.Savithri,Though we don’t sell the house we are living in, if we don’t appreciate that then we can’t do good financial planning. For instance in that example if the gentleman is planning to retire soon probably that house might be locked in capital. He can just sell it unlock the gains invest the money for the retirement, move to periphery of the city with just safety and health considerations. That is what retirement planning should do.
Ritesh
Property value may help you get a good deal in your retirement life.
http://profit.ndtv.com/news/your-money/article-how-senior-citizens-can-benefit-from-reverse-mortgage-373027
Rajkumar
Yes. Accepted that Networth is valid term to say the increase in Income from past level to current level.