Basics of Investment - Expenses

The first question we get while doing Investment is from where we will get the money for investing? The answer is Income. 

The next question comes to our mind is how much shall we invest? Shall we invest all of our income? To get this answer we need to understand the concept of Expense.

Expense is defined as an outflow of money or assets from one to another individual or company as payment for an item or service. Expense for one party will always be income for another party. In simple term - anything, which decreases your net worth, is your expense. 

There are three major types of expenses we all pay - Fixed, Periodic and Variable. Let us discuss these in detail. 

Fixed Expenses are the expenses which are predictable and usually paid in monthly interval. These are the easiest type of expense for which we can plan and manage accordingly. Example for this kind of expense is Monthly Rent, Monthly Fixed EMI, Monthly Insurance, Monthly Internet and Phone Bills, Any Monthly Subscriptions etc. Yes, they can vary by some amounts month to month, but most of these remain just like a copy of previous month. Also the changes for the next month is very predictable.

Periodic Expenses are also predictable amounts and occurs in intervals, but are much less frequent. They might be due annually or a few times a year. Or they might not even come at a regular interval at all. Due to less frequency, probability of changing the payable amount from it’s previous payment is high. Life Insurance Yearly Premiums, Car Registration, Annual Subscriptions, Car Insurance, Property Taxes, Domain Registration Renewals etc. can be the examples of Periodic expenses. Beside these, some expenses which do not occur in a fixed interval can be considered under this category. For example - Car Maintenance, Medical Expenses, Home Maintenance etc.

Variable Expenses are the daily spending decisions like eating at restaurants, buying clothes, automobile usage expenses - like fuel and maintenance, utilities payments, groceries, entertainment, tobacco / alcohol etc. They are costs that vary depending on the volume of activity. The costs increase as the volume of activities increases and decrease as the volume of activities decreases. We can further divide this variable expenses in Discretionary Expenses and Necessary Expenses. Discretionary Expenses are those that are desirable, but we have a choice whether to spend on them or not. In simple word, we need to understand whether it is a want or a need. We need food, but we don't need it to come from a restaurant. So, groceries are a Necessary Variable Expense, but dining out is a Discretionary Variable Expense.

In the process of Investment, it is very much important to track the expenses and try to minimize it. If we see our Active Income is less than our Total Expense for a particular period (Monthly / Quarterly / Yearly), that means our net worth is decreasing which is not a good sign. 

Hence it is recommended to track your Income and Expenses properly (mostly on Monthly basis) and try to maximize the Savings by decreasing the Expenses, so that you can get better opportunities for Investment.

Parent Topic: Basics of Investment

Related Topic: Income, Savings