Concept of Finance - Introduction to Indian financial system, Interdisciplinary

this presentation is merely a brief
overview of the topics covered in the
chapter and should not be considered a
substitute for reading the chapter this
chapter covers income and expenses
assets debt and equity and income and
risk income is a cash inflow in other
words it is money that comes to you
there are three ways to earn income
selling labor which means working
selling capital which is investing and
renting capital which is lending to gain
interest income expenses are cash
outflows for items that are consumed you
like all people continually consumed so
you have recurring expenses most of us
have expenses for housing transportation
food and entertainment just to name a
few if your income is greater than your
expenses you have a budget surplus in
other words you have money left over
after you've paid your expenses you can
do with this money as you wish
getting ahead in a personal financial
sense almost always requires creating a
budget surplus and then investing that
surplus if your income is less than your
expenses you have a budget deficit this
means that you run out of money and
probably have to borrow to pay your
bills
this is extremely undesirable possible
solutions to turning a budget deficit
into a surplus are to increase your
income maybe by getting a second job
and/or cut your expenses an asset is any
item with economic value that can be
converted to cash assets are resources
that can be used to create income or
reduce expenses and to store value here
we see three assets gold stock and a
house let's look at what these assets do
for us
while there are some generalizations
here and it is possible to find
exceptions it is most likely that one
invests in gold to store wealth and
potentially increase income by buying
low and selling high stock is usually
held for the same reasons a home may
reduce our expenses over the long term
when compared to renting and it
typically stores wealth fairly well most
of us are probably all too familiar with
debt technically debt means renting
someone else's money for a period of
time we usually call this renting
borrowing while debt such as credit card
debt that carries high interest rates
and is used for unnecessary items is bad
some debt like student loans which allow
us to get an education we might
otherwise not have been able to obtain
is good equity represents ownership
let's pretend that you want to buy a
vacation cottage and you have saved one
hundred thousand dollars for such a
purpose you find the perfect cottage but
it costs one hundred fifty thousand
dollars instead of saving up the extra
fifty thousand dollars or borrowing it
you decide to approach a friend who will
put up $50,000 to buy part of the
cottage you spend one hundred thousand
dollars and your friend spends fifty
thousand dollars so you have two thirds
ownership and your friend has one-third
ownership these ownership stakes
represent equity now let's look at
another way you could have bought the
cottage you could have borrowed fifty
thousand dollars from the bank of course
you would have to pay the money back
plus interest so it would cost you more
than fifty thousand dollars over time
but you would own 100 percent of the
cottage and not have to share it with
your friend finally let's turn our
attention to risk we must not put all of
our focus on getting more of what we
want we must also focus on protecting
what we have most of us have two sources
of income labor and investment those
sources of income are
risk laborers can lose their jobs due to
economic downturns or poor performance
they can also have accidents or illness
that causes them to be unable to work so
selling their labor is no longer an
option
with investments we know that not all of
them pan out sometimes we pick winners
and sometimes we pick losers how can we
minimize the risk to our income sources
diversifying or spreading our risk is
probably the best way by not putting all
of our eggs in any one basket we
minimize the risk to significant sources
of our income we diversify our labour by
learning as many skills as possible
instead of just being really good at one
thing we can also sell our labor to more
than one employer or perhaps start our
own small business on the side and
investing we can spread our risk by
diversifying our portfolio so that it
includes stocks bonds mutual funds real
estate and other investments taking
these steps can help minimize our risk
and make us sleep better at night that
concludes this presentation I hope you
enjoy reading the chapter