INCOME , EXPENSE, BORROWING & INVESTMENTS CYCLE EXPLAINED

The following picture (Fig 1) illustrates these terms in a simple manner, though this is already known to you.

Situation 1 : Income = Expenditure

It is the question of making both ends meet and he somehow manages to restrict his expenses to his income. His savings were nil. Doesn’t matter.

If the monthly income of Mr. Mahesh is Rs 10,000, there are several possibilities of how this income is used.

Situation 1 (Income = Expenditure)

It is the question of making both ends meet and he somehow manages to restrict his expenses to his income. His savings were nil. It doesn’t matter.

Situation 2 (Borrowing)

Due to unavoidable circumstances (say, ill-health) Mr. Mahesh had to spend an additional Rs 5,000. Though his income was just Rs 10,000, to meet this additional need he had to borrow Rs 5,000. In that case his income from subsequent months would be Rs 9,500 (i.e. salary minus loan repayment amount Rs 500 (principal + interest). It is very bad.

Situation 3 (Investment)

If he is really smart at managing his funds he might be able to restrict his expenses to just Rs 7,000. In that case he will be saving Rs 3,000. He decides to invest this amount for further returns. In such a situation his income from the next month increases (salary + interest on investment).

Is it clear?

The following picture (Fig 2) clearly depicts the flow of income to investment through saving or borrowings or a mix of both.