This magic equation never fails. This is the ultimate truth of our financial well being
Incomes less Expenses = Resultant Surplus.
At the end any surplus money that we have in hand is always the result of our incomes exceeding our expenses. Some may say that they do have money in hand but that comes from borrowing. This series of posts have not taken “borrowings” as a means of cash inflow. I have stuck to “conventional wisdom” or a “conservative approach” if you will.
These resultant surpluses do not automatically become savings. These have to be managed for them to become savings. A person or family having a surplus could
- Save and invest, or
- Spend the surplus away on consumption, or
- Use this for asset acquisition, or
- Prepay debts taken earlier for any purpose.
Each person / family would, presumably, choose any of the above options in their best interest and depending on their financial position. I am referring to option -2 above. It is not necessarily irrational to choose spending especially if surpluses have been adequately put aside and built-up in the past.
We eventually need to build our understanding on how to manage our surpluses. This is in essence the core of “Financial Literacy”.
A note on borrowings:
Easy borrowings to facilitate spending, fortunately has not been a part of the larger Indian psyche. It did make its presence felt mainly in urban areas and amongst youth but thankfully has been a restricted phenomenon. The growth rates in “loan products” has seen a phenomenal rise in the past decade or so but the absolute figures still seem in control.
Borrowings, however, have been accepted as a norm to finance asset acquisitions like buying a house or car or some other assets. The best part is such borrowings never run their full course. People tend to pre-pay their loans and be debt-free. A normal fifteen year home loan has an average life of just seven – eight years.
This shows the general aversion of an average Indian to carry debt in his name and a sense of shame attached to inability to repay or repossession of the asset acquired out of that debt.
I also think, the spectre of slowdown, job losses and loss of confidence in sustainability of one’s income flow has in the recent past slammed the brakes hard on free spending. One can sense a general tightening of belts and postponing non-essential expenditure.
Some interesting links for those interested in further reading:
We shall examine the basic principles of money management and how our surplus money may be handled.