1.6 Understanding Terms

Essential terms explained

Three terms need to be understood as sometimes some of them are used interchangeably.

These terms are:

Income: This refers to our earnings, whether through salary or through business.

Expenditure: What we spend to fulfill our regular needs or cost of providing the services or the products that we sell.

Savings: This is the difference between income and expenditure provided the prior is greater than the latter. Otherwise you will suffer from a shortfall or deficit.

To put it simply:

1. Income = Expenditure + Savings
2. Savings = Investment

What equation 2 above says is that we have the ability to invest only to the extent of the savings we have at hand. We may choose to invest your entire savings or a part of it and these investments can be one of the several options that are available to us. In certain cases when savings are either unavailable or inadequate to invest, people may borrow money to invest.

A common example of this is the investment made in the purchase of a housing property. Mr and Mrs Sayyad want to buy a house worth Rs 40 lakhs. At present they have savings of only Rs 10 lakhs. They will then approach Homewalla Bank and borrow Rs 30 lakhs to invest in the housing property. They will have to pay back the loan through monthly installments till the loan is paid up.

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