We need income because it's the money we earn from our work or investments that allows us to pay for things we need and want in life. Income helps us buy food, pay for a place to live, cover our bills, and enjoy activities like going out with friends or taking vacations. It's like the fuel that keeps our lives running smoothly, helping us meet our daily needs and achieve our goals.
An individual may have several sources of income:
Wages/Salary earned from a job
Self-employment income earned from one's own business
Interest earned from savings a/c in bank
Rent earned from a property
Earnings from any investments made in stocks and bonds
For example, if you work a regular 9-to-5 job, the salary or wages you earn from that job is considered active income. Essentially, active income requires ongoing effort and time investment to generate. Imagine you have a job at a local bakery. Every day, you go to work and spend your time baking delicious cakes, pastries, and bread. In return for your time and effort, your boss pays you a salary or wages. This money you receive from working at the bakery is an example of active income. To continue earning income, you need to keep working at the bakery. As long as you're actively working and contributing your time and skills, you'll receive your paycheck.
Imagine you have a job at a local bakery. Every day, you go to work and spend your time baking delicious cakes, pastries, and bread. In return for your time and effort, your boss pays you a salary or wages. This money you receive from working at the bakery is an example of active income. To continue earning income, you need to keep working at the bakery. As long as you're actively working and contributing your time and skills, you'll receive your paycheck.
Imagine you own a rental property, like an apartment or a house. You've rented out the property to a tenant, who pays you rent every month. The money you receive from the rent is an example of passive income. Each month, your tenant pays you rent for living in the property. While you may need to handle occasional maintenance issues or communicate with your tenant, the day-to-day management of the property doesn't require constant active involvement from you. This money flows to you regularly, providing a steady stream of income without requiring you to actively work for it.
Neha, a middle-class professional in her early 30s, works as a marketing executive in a corporate firm. She lives in a rented apartment in a metropolitan city with her husband and young daughter.
Take her family on a dream vacation to Kerala, in six months' time. She envisions spending quality time with her family amidst the serene backwaters of Kerala. To fulfil this ambition, Neha aims to save 5,000 inr per month for the next six months, totaling 30,000 inr, specifically earmarked for the Kerala vacation.
In addition to her short-term goal of the Kerala vacation, Neha also prioritises long-term financial security for her family. She aims to allocate 5,000 inr per month towards retirement savings to secure her future.
Income: Salary from Full-Time Job: 40,000 inr per month
Rent: 10,000 inr per month
Utilities (electricity, water, gas): 3,000 inr per month
Internet and Phone Bill: 1,500 inr per month
Transportation (commute to work): 2,000 inr per month
Insurance Premiums (health insurance, vehicle insurance): 2,500 inrper month
Dining Out and Entertainment: 3,000 inr per month
Personal Care Products and Toiletries: 1,500 inr per month
Household decor and groceries: 7,000 inr per month
After covering her expenses from her income:
Total Monthly Income: 40,000 inr
Total Needs-based Expenses: 19,000 inr
Total Wants-based Expenses: 13,500 inr
However, according to her goals, Neha should save ₹5000 for her Kerala trip every month and ₹5000 more for her retirement which amounts to 10,000 inr.