The Second Aspect of our Financial Health Card

We have seen how Incomes and Capacity to earn are influenced by a host of many factors, including our upbringing, attitudes and the like.

In this post I will discuss about the outflow of money on account of expenses.

Whilst Incomes are largely steady and fixed for those employed and lumpy and at uncertain intervals for the non-employed category, expenses without exception are regular month on month with spikes large or small.

It is an eternal truth that money has a velocity and flows in a cycle continuously changing hands. The flow is inevitable, only the velocity keeps changing.

This flow of money in the economic system broadly represents income for the recipient and expense for the spender.

Incurring an expense is the act of spending money to get goods, services or satisfaction in return. Let us delve a little deeper in this. Expenses (including expenditure for the technical minded) can be divided as follows

Normal living expenses

These are the day-to-day expenses that are necessary for living in the current day and age. These would cover expenses on food, clothes, rents and taxes, electricity, conveyance, education, health, communication, information.

Such expenses are relatively inflexible and we have to incur them in order to live (more dramatically – survive). Even here where we presume relative inflexibility, we find that depending on income levels and propensity to spend, expense levels will vary across different strata of society.

Asset acquisition

It is always a dream to have one’s own house and in India, this is a great life time project. I will classify house buying as key asset acquisition expenditure.

Discretionary

These are expenses on goods and services which are not in the “Must Have” category. They can be classified as “Nice to Have”.

Let me try and give an illustration…….A foreign vacation is a discretionary expense to one while a visit to a movie at a multiplex could be a painful (and therefore discretionary expense) decision for another.

Simply put, these are expenses which may be postponed if you choose not to incur them. One has to think before committing to these expenses.

Emergency

These are normally associated with health problems, accidents, sudden unexpected events (travel on account of death of a near and dear one) and therefore unplanned and unforeseen.

If you observe closely, three of the above are not water tight silos and expenses are not rigidly classified under each.

Depending on the level of income and other factors many expenses will move from being Normal Living expenses, Asset Acquisitions and Discretionary. I presume that food and other survival expenses will never be classified as a discretionary expense. However, to a family which has “Chapatis” for breakfast, the decision to have corn flakes will become discretionary.

Similarly, buying a car may be a normal living expense to a professional/businessman earning say Rs.50.00 lakhs per year, asset acquisition to an executive earning Rs. 15.00 lakhs and discretionary to one earning Rs. 5.00 lakh per year.

In this post, I have explored the basic nature of “Expense” and attempted a broad classification. My next post will take this further and examine “Expense” further from a different perspective.