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…
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