Basics of Personal Finance

 So let's get back to some basics of finance.

We all know that

Earnings=Savings +Expenses
Hence
Savings =Earnings - Expenses
How many of you agree with this ?
It is correct ? Yes it is correct but only mathematically.
In order to live a healthy financial life
Expenses =Earnings-Savings .
However most people including professors who teach finance forget this basic truth
So now let's move a little forward

Why do we need savings?
The answer is very simple. We humans can earn only up to a certain age,after which we are forced to retire.For example, if we retire at 50, earnings will last only till age 50. But our expenses will continue to be with us even after that .We cannot depend on any one for our expenses including our children. So for surviving post our retirement , we need our savings today to meet our expenditures later. This answers the question ,as to why we need savings.

Are just savings enough ?
Most people will doubt whether today's savings will be enough to meet our expenses many years later. That apprehension is correct as the inflation rate will just keep eating into our savings.
However by INVESTING our savings, we can definitely save enough money for our post retirement expenses. There are various ways by which investing can be done which includes Direct investing through Stock Markets,Mutual Funds,bonds and Gold.

Now that we have understood as to why  saving and investing is important, the next most crucial concept to be understood is Compounding. We have learnt in our school that the formula to calculate compound interest is 

Future Value=Present Value (1+r)^n. 

The important thing to understand is 'n' .

More the value of 'n' ,more will be the future Value. Discipline to be invested for a long amount of time , atleast a decade, is the key here. 

I will explain on the different methods available to invest in the next post