Cash Flow : income and Expenses
In your journey to Financial Freedom, it is important to understand your current and future cash flows, incomes and expenses.
Let us understand these terms in simple English, leaving aside all the mumbo jumbo of economics.
In the context of personal finances, Cash flow is how much money you have coming into your pocket and how much money is going out of your pocket in a certain time period.
Net cash flow is what's left after you add up all the money coming in and subtract all the money going out.
If you have more money coming in than going out, it's good (positive net cash flow).
But if you're spending more than you have coming in, it's not so good (negative net cash flow).
So what is income?
If you are in a job, then the salary you get is an income.
If you are self employed, like a doctor, painter, musician, electrician, plumber, etc.., then income is what you receive in exchange for the services you render.
If you own a house and you rent it out then the rent you receive is an income.
If you own stocks then, the dividend you receive is an income.
If you have deposits in the bank, then the interest you receive is an income.
If you purchased bonds, then the interest you receive on maturity is an income and so on.
In summary, money coming into your pocket is your income.
What about expenses?
Expenses are things you spend money on.
If you buy toys or games paying money, that's an expense.
If you pay for food at a restaurant, that's an expense.
If you pay money and get clothes or shoes, that's an expense.
If you pay for electricity or water at home, that's an expense.
If you have a loan with a bank and you pay an amount regularly back to the bank, that is an expense too.
So, whenever money leaves your pocket, that's an expense!
What is mortgage?
So, if you borrow money from a bank to buy a house, and you promise to give the bank the house if you can't pay back the loan, that's a mortgage.
When you have a mortgage, the monthly payment you make to the bank is classified as an expense because you're spending money to pay off the loan for your house.
So, just like any other bill you pay, your mortgage payment is an expense.
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