How to manage your finance



Our finance is like a pitcher with a tap for outflow at the bottom of it. The water flowing into the pitcher is our income and the water flowing out of the pitcher are our expenses

What is income?

Money earned from various sources like salary, wages, earnings from farming or business etc. is our income.

Income (Source of money)

Amount (Rs.)

Salary / wages

2,000

Earnings from farming / business

3,000

Total

5,000

 

What is expenditure?

Money spent by us on various items is our expenditure. It includes spending money on essential as well as non essential items.

Expenses (Uses of money)

Amount

Food, clothing & shelter

2,000

Education

1,000

Repayment loan

700

Sickness

300

Expenses on marriage, festivals, pilgrimage, etc

1,100

Total

5,100

What is investment?

Deployment of money, say out of savings, with the expectation of earning higher returns overtime is investment. e.g. purchase of land, fixed deposit in banks, etc.

What is saving?

When income is more than expenses, then we have surplus money known as savings.

What is debt?

When expenses are more than the income and we have no savings with us, then there is shortage of money which is covered through borrowing, creating debt.

Income

Expenses

Result

Action

Rs. 5,000

Rs. 4,000

Surplus of Rs. 1,000

SAVE

Rs. 5,000

Rs. 5,000

No surplus

THINK

Rs. 5,000

Rs. 6,000

Shortage of Rs. 1,000

STOP

 

How to manage the debt?

If we have expenses more than income in a particular month, the savings of previous months can be used for meeting this shortfall. If we do not have savings, we have to borrow and incur a debt at high cost.

This is similar to how we manage the use of water in our daily life. Sometime the municipal water may come for the whole day and sometime it may not come at all. Do we stop using water? No! We do not stop using water, we store water when it is in plenty and use when it is scarce. This act is called saving. Our finance is like a pitcher with a tap for outflow at the bottom of it. The water flowing into the pitcher is our income and the water flowing out of the pitcher are our expenses.

Source: Financial Literacy Guide, Reserve Bank of India 



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