Basic Ideas of Finance

this presentation is really brief overview of the topics covered in the chapter and should not be considered a substitute for reading the chapter this chapter covers income and expenses assets debt and equity and income and risk income is a cash inflow in other words it is money that comes to you during free ways to earn income selling labor which means working selling capital which is investing and renting capital which is lending to gain interest income expenses are cash outflows for items that are consumed you like all people continually consumed but you have recurring expenses most of us have expenses for housing transportation food and entertainment just to name a few if your income is greater than your expenses you have a budget surplus in other words you have any left over after you've paid your expenses you can do with this money as you wish getting ahead in a personal financial sense almost always require creating a budget surplus and then investing that surplus if your income is less than
your expenses you have a budget deficit means that you run out of money and probably have to borrow to pay your bills this is extremely undesirable possible solutions to turning a budget deficit into a surplus or to increase your income maybe by getting a second job and/or cut your expenses and if there is any item with economic value that can be converted to cash assets are resources that can be used to create income or reduce expenses and to store value here we see three assets gold stock and a house let's look at what these assets do forth while there are some generalizations here and it is possible to find exceptions it is most likely that one invest in gold to store wealth and potentially increase income by buying low and selling high stock is usually held for the same reasons a home may reduce our expenses over the long-term when compared to renting and it typically stores wealth fairly well most of us are probably all too familiar with debt technically that means renting someone else's money for a period of time we usually called is renting borrowing while debt such as credit card debt that carry high interest rates and is used for unnecessary items is bad some debt like student loans which allow us to get an education we might as​  what it represents ownership let's pretend that you want to buy a vacation cottage and you have saved $100,000 for such a purpose you find the perfect cottage but it cost $150,000 instead of saving up the extra $50,000 or borrowing it you decide to approach a friend will put up $50,000 to buy part of the cottage you spend $100,000 on your friend spends $50,000 so you have two thirds ownership and your friend has one-third ownership these ownership stakes represent equity now let's look at another way you could have bought cottage you could have borrowed $50,000 from the bank of course you would have to pay the money back plus interest so it would cost you more than $50,000 over time but you would only 100% of the cottage and not have to share it with your friend finally risk we must not put all of our focus on getting more of what we want must also focused on protecting what we have most of us have two sources of income labor and investment those sources of income or at-risk laborers could lose their jobs due to economic downturns or poor performance they can also have accidents or illness that causes them to be unable to work so selling their labour is no longer an option with investments we know that not all of them pan out sometimes we pick winners and sometimes we pick losers how can we minimize the risk to our income sources diversifying or spreading our risk is probably the best way by not putting all of our eggs and anyone basket we minimize the risk to significant sources of our income we diversify our labor by learning as many skills as possible instead of just being really good at one thing we can also sell their labor to more than one employer or perhaps start your own small business on the side and investing we can spread or risk by diversifying our portfolio so that includes stocks bonds mutual funds real estate and other investments taking these steps can help minimize our risk make us sleep better at night that concludes this presentation I hope you enjoy reading the chapter ​