Income and Expenditure

Chapter 3Chapter 3

Income and Income and ExpenditureExpenditure

Sources of IncomeSources of IncomeTo meet all your financial goals whether it’s a short-term or a To meet all your financial goals whether it’s a short-term or a

long-termlong-term

Monetary SourcesMonetary Sources Income from work (employment income)Income from work (employment income)

Primary sourcePrimary source The excess of income from current use can be used to The excess of income from current use can be used to

fulfill future goalsfulfill future goals Dual earner or single earner: Is more income earner better? Dual earner or single earner: Is more income earner better?

Look at trade-offs of having the wife to workLook at trade-offs of having the wife to work Working longer hoursWorking longer hours

Sources of IncomeSources of Income

Income from childrenIncome from children Secondary sourceSecondary source Working children contribute to income of old parentsWorking children contribute to income of old parents May be regular or may not be reliableMay be regular or may not be reliable Depends on the children’s value towards their parentsDepends on the children’s value towards their parents

Sources of IncomeSources of Income

Savings/investmentsSavings/investments Can be a reliable or unreliable source of income for your Can be a reliable or unreliable source of income for your

future needs future needs Depending on the risk you take with your moneyDepending on the risk you take with your money Invest in low risk investment with a low returnInvest in low risk investment with a low return Or invest in high risk investment with a high returnOr invest in high risk investment with a high return Investment is not based on luck but need knowledge or Investment is not based on luck but need knowledge or

experienceexperience Preferably just choose to save in bank accounts with no Preferably just choose to save in bank accounts with no

risk risk

Sources of Income(cont.)Sources of Income(cont.)

EquitiesEquities Equities (share of ownership) in home exist as individual Equities (share of ownership) in home exist as individual

payoff their mortgage loan & as the home increases in payoff their mortgage loan & as the home increases in valuevalue

Equities in life insurance policies also increase with timeEquities in life insurance policies also increase with time Both are sources for future need with substantial amountBoth are sources for future need with substantial amount Home can be refinanced or cashing in the life insurance Home can be refinanced or cashing in the life insurance

policy but not too earlypolicy but not too early


BorrowingBorrowing Borrowing enables you to pay for housing, automobiles or Borrowing enables you to pay for housing, automobiles or

college tuition college tuition If not, it may take years of accumulation of fundIf not, it may take years of accumulation of fund However, it involve finance charges that would be using However, it involve finance charges that would be using

future income or money. This affect the future cash flowfuture income or money. This affect the future cash flow Prudent borrowing can enhance current lifestylePrudent borrowing can enhance current lifestyle Imprudent borrowing can jeopardise future lifestyleImprudent borrowing can jeopardise future lifestyle

Sources of Income(cont.)Sources of Income(cont.) Enforced or Automatic Savings: Pension, Social Security, Enforced or Automatic Savings: Pension, Social Security,

Profit-sharing PlansProfit-sharing Plans Represent most of their sources for meeting retirement Represent most of their sources for meeting retirement

goalsgoals Vital for an accurate accounting of what would be available Vital for an accurate accounting of what would be available

on continuing basison continuing basis

Inheritances, Gifts & other WindfallsInheritances, Gifts & other Windfalls Consider the after-tax amount as this can have considerable Consider the after-tax amount as this can have considerable

effect on financial planseffect on financial plans


Non-monetary IncomeNon-monetary Income Household productionHousehold production

The production of goods services by the members of the The production of goods services by the members of the household for their own consumption, using their own household for their own consumption, using their own capital & unpaid labourcapital & unpaid labour

Financial Management Through Financial Management Through the Life-Cyclethe Life-Cycle

Financial activities throughout the life-cyle differs depending Financial activities throughout the life-cyle differs depending on the status and age of the individual; from preteen to teen, on the status and age of the individual; from preteen to teen, from singles to young and married, from middle-aged married from singles to young and married, from middle-aged married to their retirementto their retirement

Different needs arise throughout the life-cycle, thus reviewing Different needs arise throughout the life-cycle, thus reviewing and changing the financial plan is vital for financial success and changing the financial plan is vital for financial success

Expected financial events can be predicted and one can plan Expected financial events can be predicted and one can plan for the future needsfor the future needs

Unexpected financial events may occur , however some events Unexpected financial events may occur , however some events can be detected to occur several years before it happened. can be detected to occur several years before it happened. Inflating the savings may help to reduce the burden of the Inflating the savings may help to reduce the burden of the negative consequences of financial events negative consequences of financial events

Financial Management Through Financial Management Through the Life-Cyclethe Life-Cycle(cont.)(cont.)

Life-cycle Activities

Preteens Children are highly dependent on parents for existence and most decision making.There is little need to develop personal financial objectivesInterest in savings developed during this period

Teens Teenagers attempt to establish their identityConfronted with additional financial objectivesDecision on life-style, protection & probably investment become important



Singles Years between secondary school and marriage.This period lays the foundation for future periods and objectives, thus extra care must be taken in decision making.No additional objectives are introduced

Young married

The newly-wed discover economics involved in trying to live more cheaply using two heads.Family planning and addition of new family members.Initial plans for retirement and estate planning should be developed



Middle-age married

At this stage, the family objectives of protection , savings and certain investment needs such as education have been fulfilled .Concern for retirement and estate planning becomes paramount

Retirement Many people looking forward to a different way of life centered around recreation and relaxation.The ease or difficulty of this transition is a function of the financial success of earlier retirement plans and the psychological preparation of the retiree

Financial Decision MakingFinancial Decision Making

Financial decision making is a decision Financial decision making is a decision making involving financial mattersmaking involving financial matters

Trade-offs are associated with each Trade-offs are associated with each choice madechoice made

By selecting one choice, you are giving By selecting one choice, you are giving up the other choice, hence giving-up up the other choice, hence giving-up the benefit of that unselected choice. the benefit of that unselected choice. Thus, incurring an opportunity costThus, incurring an opportunity cost

Financial Decision Making (cont.)Financial Decision Making (cont.)

For financial management decision, trade-off situation or For financial management decision, trade-off situation or opportunity costs include the following:opportunity costs include the following:

Choose to spend reduces amount to save or invest Choose to spend reduces amount to save or invest Using credit results in payment later and reduces amount of Using credit results in payment later and reduces amount of

future income for spendingfuture income for spending Use saving for purchases reduce interest earning and inability Use saving for purchases reduce interest earning and inability

to use savings for other purposesto use savings for other purposes Comparison shopping saves money and improve quality of Comparison shopping saves money and improve quality of

purchases but use up your time purchases but use up your time

Financial IssuesFinancial Issues

Financial issues arising from changes in government policies, Financial issues arising from changes in government policies, economic environment and political stability economic environment and political stability These affect sources of income and pattern of expenditure These affect sources of income and pattern of expenditure

of householdsof households Retrenchment or a pay cut may occurRetrenchment or a pay cut may occur Inflation indirectly will increase prices of goods and Inflation indirectly will increase prices of goods and

servicesservices Increase cost of production (eg labour, transportation, Increase cost of production (eg labour, transportation,

energy) will increase prices of all the products in the energy) will increase prices of all the products in the production chain, thus increasing cost of livingproduction chain, thus increasing cost of living

Financial Issues (cont.)Financial Issues (cont.)

Financial issues arising from mismanagement at the household Financial issues arising from mismanagement at the household levellevel

Unwise financial decisionUnwise financial decision OverspendingOverspending Misuse of creditMisuse of credit Investment mistakeInvestment mistake Not financially prepared for retirement or old ageNot financially prepared for retirement or old age Not enough risk protectionNot enough risk protection Do not financial plan for the need through their life-cycleDo not financial plan for the need through their life-cycle File for bankruptcy File for bankruptcy


Negative financial events related to financial issuesNegative financial events related to financial issues Moving to new houses – costs of moving, costs of education of Moving to new houses – costs of moving, costs of education of

children & other expenses increaseschildren & other expenses increases Divorce – your own divorce or relativesDivorce – your own divorce or relatives

Shift from dual earner to a single earnerShift from dual earner to a single earner Divorce of relatives – divorcee might be your new financial Divorce of relatives – divorcee might be your new financial

dependentdependent Accident happening to family members or relatives that affect the Accident happening to family members or relatives that affect the

family financesfamily finances Death of spouse, children or relativesDeath of spouse, children or relatives

Became single earner, grieveness led to loss of spirit to workBecame single earner, grieveness led to loss of spirit to work


Natural disasterNatural disaster FloodFlood MonsoonMonsoon FireFire Earth-quakeEarth-quake Volcano erruptionVolcano erruption

Financial ProblemFinancial Problem

In general, financial problems exist when expenses exceed total In general, financial problems exist when expenses exceed total incomeincome

Financial problem may arise from the following:Financial problem may arise from the following: Cannot control desire to spend and keep spending without Cannot control desire to spend and keep spending without

proper planning – esp. for compulsive buyersproper planning – esp. for compulsive buyers Having irregular savings habitHaving irregular savings habit Keep using savings for daily expensesKeep using savings for daily expenses

Financial Problem (cont.)Financial Problem (cont.)

Indicator of financial problemIndicator of financial problem Unable to pay for utilitiesUnable to pay for utilities Unable to pay monthly installmentUnable to pay monthly installment Received overdue notice from bankReceived overdue notice from bank Taking cash advances from credit cardTaking cash advances from credit card Make minimum payments for credit card billsMake minimum payments for credit card bills Commit more than 20% of income to pay for Commit more than 20% of income to pay for

installment creditinstallment credit Using credit to pay for other creditUsing credit to pay for other credit No savingsNo savings Not knowing their financial situation (how much owe Not knowing their financial situation (how much owe

and own) and own) Spend without planSpend without plan

Financial Problem (cont.)Financial Problem (cont.) One way to trace early sign financial problem is by using One way to trace early sign financial problem is by using

financial statement (Chapter 7) financial statement (Chapter 7) From excessive debt in the statementFrom excessive debt in the statement Savings growth not as expected over the years by comparing Savings growth not as expected over the years by comparing

a series of financial statementa series of financial statement Consider this to be financially stable:Consider this to be financially stable:

Emergency funds should be 3 times the monthly incomeEmergency funds should be 3 times the monthly income Save each month a portion of 10% from incomeSave each month a portion of 10% from income Monthly installment payment should be less than 20% from Monthly installment payment should be less than 20% from

incomeincome Monthly installment plus mortgage loan should be less 35% Monthly installment plus mortgage loan should be less 35%

from incomefrom income

Economy & Finance

Income and Expenditure