Thursday, October 21, 2010

Basics of Financial Planning - Part 1

Basic Rule #1
                          ….is always to know what kind of income you are working for.

There are 3 kinds of income.

1.Earned Income
2.Portfolio Income
3.Passive Income

  Earned income is income generally derived from a job or some kind of labor. It is the income from the paycheck. You get your earned income from your job or business, or both. You need to have specific skills to generate the earned income. Most of the times, it is regular income and predictable. Most of people start creating their portfolio with the help of earned income. When you subtract your expanses from earned income, whatever surplus you get, can be used to generate Portfolio Income as well as Passive income.(discussed later in this blog)

  Portfolio income is generally derived from paper assets such as stocks, bonds, mutual fund. Mostly, people make this part of portfolio from earned income except some lucky one get it as inheritance. Interest generated from bond is predictable and regular. Dividend/bonus generated from shares/ mutual funds are not so regular and predictable. Portfolio Income should  not be used to supplement your earned income for day-to-day use. Rather, it should be used to build your wealth.

  Passive income generally derived from real estate. Same as Portfolio Income, people make this part of portfolio from earned income except some get it as inheritance. It is a great source of stable regular income along with regular appreciation. The house/ shop you are letting on rent will not only put regular money in your pocket , but as the time passed, the value of the house/shop will keep increasing. The only problem with this part of portfolio is, it needs constant care  and maintenance. It is also prone to depreciation. So, you can supplement your earned income as well as build wealth with this part of your portfolio.

Basic Rule # 1 is over. We will see Rule # 2 in next blog. Keep reading...

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  1. Good one.I wish I had income from all of the above sources :-).I will wait for the rule2.Write soon.

  2. hmmmmmmmm Hetal i dont have thoughs for # 2 & 3