Home > Topics > Personal Finance > Key Financial Concepts – Income, Expenses, Savings, Investment, Tax
← PreviousNext →

Key Financial Concepts – Income, Expenses, Savings, Investment, Tax

To master personal finance, you must master its five building blocks. These live in a continuous cycle: You Earn (Income), you Spend (Expenses), you Save (Savings), you Grow (Investment), and you Share (Tax).

1. Income (The Engine)

Income is the inflow of cash. It is the fuel for your financial life.

Types of Income

  1. Active Income: Money earned by trading time for money.
    • Examples: Salary, Wages, Professional Fees (Doctor/Lawyer).
    • Limitation: If you stop working, income stops.
  2. Passive Income: Money earned by your assets working for you.
    • Examples: Rental income, Dividend from stocks, Interest from FDs, Royalty.
    • Goal: Financial freedom is when Passive Income > Expenses.
Note

Exam Point: Distinguish between Active and Passive income. Active requires effort; Passive requires capital.

2. Expenses (The Leakage)

Expenses are the outflow of cash. They are inevitable but controllable.

Classification

Loading comparison…

3. Savings (The Dam)

Savings is the portion of income not spent.

Formula: Income - Expenses = Savings

  • Wrong Approach: Spend first, save what is left.
  • Right Approach (Pay Yourself First): Income - Savings = Expenses.

Purpose of Savings:

  1. Liquidity: Cash available for immediate use.
  2. Safety: To build an Emergency Fund (Rainy Day Fund).

4. Investment (The Tree)

Investment is using saved money to buy assets that generate returns over time.

  • Savings = Storing money (Safe, Low return).
  • Investment = Growing money (Risk involved, High return).

Why Invest?

To beat Inflation. If inflation is 6% and your savings account gives 3%, you are effectively losing purchasing power.

Loading diagram…

5. Tax (The Friction)

Tax is the mandatory fee paid to the government. It reduces your disposable income.

Types affecting Personal Finance:

  1. Direct Tax: Income Tax (Paid on what you earn).
  2. Indirect Tax: GST (Paid on what you consume).

Tax Planning: Legally organizing your finances (using Section 80C, 80D) to reduce tax liability. It is different from Tax Evasion (illegal).

The Inter-Relation Cycle

Loading case study…

Summary

  • Income: Focus on generating Passive Income.
  • Expenses: Keep Variable Expenses in check.
  • Savings: The foundation of security.
  • Investment: The engine of growth.
  • Tax: A cost that must be minimized legally.

Quiz Time! 🎯

Loading quiz…

← PreviousNext →