Sometimes, we focus too much on small savings and forget the bigger picture. We pinch pennies but end up spending pounds without even realizing it. In this article, let’s break down how we often misunderstand finance and make decisions that seem smart at first, but might hurt us in the long run.
Understanding Finance Basics
First off, many people don’t fully grasp the basics of finance. Terms like cash flow, assets, liabilities, expenses, and income sound fancy, but they’re pretty simple. Cash flow is the money coming in and going out. Income is what we earn. Expenses are what we spend. Assets are things that bring us money, while liabilities take money from us. Simple, right? Yet, many people treat their liabilities, like cars or expensive gadgets, as assets. This is where the pennywise but pound foolish mindset starts.
An apartment may seem like an asset, but if its value doesn’t appreciate more than inflation% or the rent that it brings in is lower than the interest that you could get from the bank’s principal amount, or it requires considerable money to maintain, etc. then you got to think, whether it’s a wise investment or not. Finance is simple and doesn’t take into account feelings.
Why People In Jobs Don’t Get Finance Like Business Owners
People who run businesses tend to understand money better. Why? They’re used to dealing with cash flow, expenses, and assets every day. But when you’re working a job, even though you may be a business professional, but it’s not your money on the line, you’re just waiting for that monthly paycheck. There’s little thought about where money is coming from or where it’s going. People in jobs often don’t think about building wealth. They live paycheck to paycheck, focusing on how to stretch their income. Business owners, though, are always thinking ahead. They understand that money makes money.
Why People in Jobs Take Loans Easily
Have you noticed how easily people take loans these days? Need a car? Take a loan. Want a holiday? Swipe that credit card! People working jobs tend to take loans without really understanding the consequences. Why? Because they feel secure with a steady paycheck. But here’s the catch: loans come with interest. That means you’re paying more than what you borrowed. Many job folks don’t realize how this adds up over time. They think, “Oh, I’ll pay it off next month,” but that interest keeps growing. Before you know it, you’re drowning in debt.
Understanding Interest Rate, Inflation, and Compounding Effect
Speaking of interest, let’s talk about it. Interest rates can either make or break you. When you take a loan, the interest works against you. But when you invest, it works in your favor. That’s called the compounding effect. It’s when your money earns interest on itself over time. Inflation, on the other hand, is when the cost of living goes up. If you don’t understand these things, you’ll lose out. You might save a lot of cash, but if inflation is higher than your interest, you’re actually losing money.
Taxation: Job vs. Business
There’s also a big difference in how taxes work for someone in a job versus someone in business. When you work a job, taxes are cut straight from your paycheck. You don’t have a say. But if you own a business, you can claim deductions on business expenses. It’s like paying fewer taxes legally. Example when you buy a car all that heavy tax of 40% to 50% that you pay to the Indian government, can be recovered substantially.
People in jobs usually don’t know this. That’s why business owners often save more on taxes, even if they earn the same amount as someone working a regular job.
Why It’s Important to Save and Invest Wisely
Finally, let’s talk about saving and investing. We all know saving is important, but saving alone isn’t enough. You need to invest your money. Whether it’s stocks, bonds, or real estate, investing helps your money grow over time. The best way to build wealth is by creating a stock portfolio. It might feel risky, but if you learn the basics, you’ll realize it’s one of the smartest moves you can make. Without investing, inflation will eat up your savings, and you’ll be left wondering where all your hard-earned money went.
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But I'm also %%personality%%
Abhishek is a computer science graduate. He was too scared of programming so he pursued MBA. He then joined a management consulting firm but soon realised that without any real world and technical experience, consulting wasn’t real.
So he joined a bicycle manufacturing company as a marketing manager. There he got into the nitty-gritties of cycling and learned all about manufacturing, sales & distribution. But soon, things got too easy, so he quit and joined a media conglomerate, which would later give him and his wife the idea for SAM, their digital media business. His heart was still in cycling, so he rejoined the cycling company as product manager, which he truly aspired for. He got selected for a company sponsored executive MBA program at IIM-A, only to realise that it would make everybody around him jealous.
That sent him working in other business areas like corporate strategy, precision steel tube, exports, etc. After COVID-19 and becoming a father of twin children, he was made to quit. So he finally got the guts to leave the job-life once and for all, and run the media business he helped start.
Today he’s the co-founder of a media business along with his pretty wife and also runs his investment fund. He is interested in writing about topics that no one wants to touch or discuss. Over the years Abhishek has come to realise how lucky and immature he has been and wants to repay the world with good karma.
He’s used to be passionate cyclist and participated in several competitive events, as of now he’s procrastinating to get back on to his bike’s saddle again. He also has interests are in behavioral psychology, economics, stock valuations and chess.