Understand the difference between income and expenditure.
Income: Money received, usually for work or through investments. It's the money coming IN.
Examples: Salary, wages, rent received, interest from savings.
Expenditure: Money spent on goods or services. It's the money going OUT.
Examples: Rent paid, groceries, transportation costs, entertainment.
Relationship: Financial planning starts with understanding your income and tracking your expenditure.
Example 2: Savings and Investment
Understand the importance of saving and investing.
Savings: The portion of income that is not spent on current consumption. It's setting aside money for future needs or goals.
Example: Putting money in a savings account.
Investment: Using savings to buy assets (like stocks, bonds, property, or putting money in schemes like Fixed Deposits, Recurring Deposits, Mutual Funds) with the expectation of earning a return or profit over time. Investments help your money grow.
Example: Buying shares in a company, investing in a Fixed Deposit.
Why Save and Invest? To meet future financial goals (like education, buying a house, retirement), handle emergencies, and increase wealth.
Example 3: Simple Interest Calculation
Calculate the simple interest earned on a principal amount.
Step 1: Understand the terms in the Simple Interest formula.
Principal (P): The initial amount of money invested or borrowed.
Rate (R): The annual rate of interest (as a percentage).
Time (T): The duration for which the money is invested or borrowed (in years).
Step 2: Use the formula for Simple Interest (SI):
SI = (P * R * T) / 100
Example Problem: Calculate the simple interest on Rs. 5000 at 10% per annum for 3 years.
P = 5000, R = 10, T = 3.
Step 3: Substitute the values into the formula.
SI = (5000 * 10 * 3) / 100
Step 4: Perform the calculation.
SI = (50000 * 3) / 100
SI = 150000 / 100
SI = 1500
Result: The simple interest earned is Rs. 1500.
Example 4: Basic Budgeting
Understand the concept of creating a simple budget.
Definition: A budget is a plan for how to spend your income over a specific period (e.g., a month). It helps you manage your money effectively.
Steps to Create a Budget:
1. Calculate your total income for the period.
2. List all your expenses (fixed like rent, variable like groceries).
3. Categorize your expenses.
4. Subtract total expenses from total income.
Outcome:
If Income > Expenses, you have a **surplus** (money left for savings/investment).
If Income < Expenses, you have a **deficit** (spending more than you earn).
If Income = Expenses, you are breaking even.
Importance: Budgeting helps you control spending, identify areas to save, and work towards financial goals.
Practice Mode - Simple Interest Calculator
Calculate the Simple Interest and Total Amount for an investment.
Note: This calculator uses the Simple Interest formula SI = (P * R * T) / 100.
Related Concepts
Explore these related financial concepts.
Principal
The initial amount invested or borrowed.
Interest Rate
The percentage charged for borrowing or earned for investing.
Time Period
The duration of the investment or loan.
Simple Interest
Interest calculated only on the principal.
Compound Interest
Interest calculated on the principal and accumulated interest.
Amount
Principal + Interest.
Savings Account
A bank account for keeping money safe and earning small interest.
Fixed Deposit (FD)
Investing a lump sum for a fixed period at a fixed rate.
Recurring Deposit (RD)
Investing a fixed amount regularly for a fixed period.
Mutual Funds
Investing in a pool of money managed by professionals.