Expenses = Income – Investment ?

When I was starting out in my career and had some money to save, the financial equation prevalent at that time was ” Savings = Income – Expenses”. This made sense in those times 25 plus years back, when most savings went to fixed deposits and LIC with only a handful of intrepid people investing in the stock markets. Over a period of time, with more options available to put your money in and a distinction being made between investment versus savings the equation changed to “Investment= Income – Expenses”.

This was intuitively simple to understand. You earn money through income and then spend money for expenses. The surplus amount you have is channelized into investments for meeting your future financial goals. Over a period of time as financial products industry grew stronger, a new profession of financial planners got established, new modes of investing like SIP in Mutual Funds came into being, there was a concerted attempt to turn the equation on it’s head. The logic primarily went like this – you need to plan for your goals first and need to ensure that your future life is good, even if it means you have to cut corners for now. Complex calculators, built in with mostly wrong assumptions, try to convince you that unless you invest heavily right now and keep doing it, there is no way you will be able to manage anything in future. The outcome of all these efforts is to twist the above equation as follows : ” Expenses = Income – Investment”.

What does this really mean? You are being told that your first priority is investment, so much so, that you need to get it done every month as soon as you get your salary or other income. You will then have to manage your expenses out of whatever is left. Now, this will not be an issue for people who have an income high enough to invest the required amount, as they would still have a lot left for expenses. For these people, it does not really matter how the equation is written, it will work any way. Unfortunately, for a vast majority of people this is really not the situation. For them needing to invest a certain fixed amount mandated by their financial planner or calculators mean that they are not able to have much leeway for any discretionary expenditure at all.

Let me explain through a real life example. One of my readers wanted me to advise him on his current plan. The basic information gathered from him, made very interesting reading:-

  • His post tax income was 1.5 lacs, not low by any standards.
  • 50000 of this was going to the home loan EMI which has 5 years still to run.
  • 10000 was going to PF and another 40000 to SIP through MF.
  • He therefore had only 50,000 available. Out of this about 25000 went to the schooling and other expenses of his 2 children.
  • This left only 25000 for other expenses and he therefore had little or no room for any discretionary expenses. The family had not been for a good vacation in years and has to depend on any bonus etc for making any purchases of Durable goods.

Much of this was because he had boxed himself into thinking that the recommendations from his financial planner were mandatory. I was able to show him rather easily that there were much better ways of making an investment plan which will allow him enough surplus cash to spend on activities he and his family really wanted to do. With the kind of income he was having, it is absurd that they could not go for vacations etc.

While I can explain my recommendations in another post, the key thing to understand is this. You first need to lead the life that you and your family want to. There is nothing like “paying yourself first” through investment. You are paying yourself first when you are spending on activities or items which are important for you and your family. Yes, you should not be reckless in spending but then, most of us are not like that.

So the equation is very much “Investment = Income – Expenses” and not the other one which has been cleverly concocted by people having serious vested interest. If this results in your not being able to invest enough, there are other solutions to it.

Will take up that issue in another post at a later date.

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3 thoughts on “Expenses = Income – Investment ?

  1. The reason we need a lot more emphasis on “Expenses = Income – Investment” is because for every “Expenses = Income – Investment” kind of person, there are 100 “Investment – Income – Expenses” kind of people!

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  2. Please can you post what your recommendations were ? I understand you mentioned that you will do that in another post so just wanted to remind : ) Also i think it would be easy to correlate and understand if you had posted the details in this post itself. Thanks again for sharing your thoughts and looking forward to see the additional details requested.

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  3. I am very happy that someone has finally wrote down this piece and I am not surprised it is you sir. More often than not, we try to be conformists and try to stick to the cliched plan, while impacting our personal lives. What is the point for tomorrow if you are making your today wretched by tightening the belt too much. Yes, we need to save and should be careful about our expenditure, but we also need to have some leeway for hobbies, vacations, movies etc. If one starts to get paranoid about saving everything, I presume the situation would come to pass as my late mother used to say: “If you start worrying about everything, you will have to live by inhaling only air. Rest all would be expenditure”.

    One point I am looking forward to in your recommendations is the amount of housing loan one should take up. With such wonderful inflows, people can easily get carried away and take up a huge mortgage with outflows of 70K or more per month for long period of time. Though all of this is hunky dory when job situation is good, with the recent reality of job cuts, I presume one should be a little prudent of how much of housing loan EMI goes out. After all this too is an expenditure 🙂

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