All of us want to get richer. In this capitalistic world, where happiness is directly correlated with money, we all strive to make more. We read articles or listen to podcasts about how to get richer; everyone advises you on what is the right way- but no one actually clears your basics.
Money has two very broad, but significant components- Income and Wealth. While a layman might use them interchangeably, on the path to enhance your financial literacy and enriching your portfolio management- it is important for you to learn the difference.
In Economics, stock and flow are both methods of measurement. The quantity of a commodity, or the units of an object can be measured on both stock basis and flow basis.
Stock Concept refers to the quantity that is measured at a given point of time. Stock is a static concept and does not have a time dimension. A person’s net worth is an example of a stock variable. For example, Mr. Sinha’s net worth on 31st December, 2018 is Rs. 5 crores. Mr. Sinha’s net worth in this regard is a stock variable. It bears no time dimension. His net worth does not account for a what happened in the previous month, year or decade. It stands true only on 31st December, 2018.
Whereas, Flow Concept refers to the quantity that is measured over a period of time. Flow is a dynamic concept and has a time dimension. A country’s expenditure in a FY (Fiscal Year) is an example of a flow variable. For example, India’s Total Public Expenditure from 1st April 2018 to 31st March 2019 is ‘x’ crore. India’s total public expenditure in this regard is a flow variable. It bears a time dimension. The expenditure on all days in that fiscal year is counted.
In order to understand income and wealth more efficiently, an understanding of stock and flow concepts is a must.
Income refers to the money an individual receives in compensation for their labour, service, or investment. There can be multiple means and sources of income. Income is a flow concept.
One of the key points about income is that in most cases, it is recurring in nature. If you earn income from salary, you are due to get salary each month. If you run a business, you are due to earn periodic profits. If you let out a house property on rent, you willreceive rent each month.
For example, if the monthly salary of Rohit is Rs. 30,000, then his income is Rs. 30,000. This is income is recurring in nature, and hints at a source from which the income has arises.
The various heads of income are:
Hence, when we talk about maximizing income, we should focus on finding a better job, or finding a more lucrative business to start. Since income is recurring in nature, maximizing income will lead to greater gains in the long-term.
Wealth refers to a person’s tangible and intangible assets, minus their liabilities. Loosely, wealth refers to the net worth of an individual. It is a stock concept.
There are multiple sources to accumulate wealth. These include:
A person need not have a high income to be wealthy. There are people around the world, who have zero income (on paper at least), and are still very wealthy. This happens because they have already accumulated a sufficient amount of wealth. A healthy estimate of wealth management is crucial for this.
When we talk about wealth maximization, it might be through any of the sources mentioned above, as well as several others. Income maximization happens through revenue operations, whereas wealth maximization can happen through both capital operations as well as revenue operations.
In conclusion, we learn that income and wealth may not necessarily go hand in hand. You can have a high income, but because of certain loan repayments, have very little left with you thereby having a lower wealth amount. Similarly, you can be very wealthy but have little to no income. In the longer run though, we must aim at maximizing both.
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