WHAT IS YOUR FINANCIAL CYCLE?

“Try to save something while your salary is small; it’s impossible to save after you begin to earn more.” – Jack Benny

Your financial cycle represents the flow of money through different phases of your personal economy—from earning to spending, saving, investing, and protecting. Understanding this cycle helps you see how money enters and exits your life and how the leftover can build long-term financial stability.


The financial cycle has five key components, each shaping your financial health. Managed well, they lead to sustainable savings and wealth creation.


  1. Income – The Starting Point

Income is all the money you earn through various sources. It fuels your financial cycle.

Sources of income include:

  • Salary or wages
  • Bonuses and commissions
  • Freelance or side hustles
  • Rental income
  • Dividends and interest
  • Pension or retirement benefits

Example:
Rahul earns Rs. 70,000/month from his job, Rs. 5,000 from rental income, and Rs. 1,500 as interest, totaling Rs. 76,500/month.

Income sets the foundation—it determines how much you can spend, save, and invest.


  1. Expenditure – Managing Outflows

Expenditure is all money spent on essentials and non-essentials.

Types include:

  • Fixed costs: Rent, EMIs, utilities
  • Variable costs: Food, transportation, clothing
  • Discretionary: Entertainment, vacations, gadgets
  • Obligations: Taxes, insurance

Important: Spending more than your income leads to deficits and debt, breaking the financial cycle.

Example:
If Rahul spends Rs. 60,000/month, he has Rs. 16,500 surplus. Spending Rs. 80,000 means overspending by Rs. 3,500, requiring credit or borrowing.

Goal: Keep expenses below income to create room for savings and investments.


  1. Savings – The Buffer

Savings is the portion of income left after expenses. It acts as a safety net.

Savings options:

  • Savings accounts
  • Recurring deposits
  • Cash reserves
  • Emergency funds

Tip: Saving without investing may cause lost opportunities due to inflation.

Example:
Rahul saves Rs. 10,000/month: Rs. 2,000 in cash, Rs. 5,000 in a savings account, Rs. 3,000 for an emergency fund.

Savings are your financial cushion—vital for short-term stability.


  1. Investment – Making Money Work

Investments are assets where you expect returns, with associated risks.

Types of investments:

  • Fixed-income: FDs, PPF, bonds
  • Market-based: Mutual funds, equities, ETFs
  • Physical assets: Real estate, gold
  • Others: REITs, commodities, SIPs

Example:
Rahul invests Rs. 5,000/month in mutual funds and Rs. 2,000 in stocks. Over time, these grow and compound, creating wealth.

Investments grow your money long-term and protect against inflation better than savings alone.


  1. Insurance – Protecting What You’ve Built

Insurance safeguards you against unexpected events. A small premium can prevent huge setbacks.

Types of insurance:

  • Life – Financial security for family
  • Health – Covers medical costs
  • General – Protects property, vehicles, and liability

Example:
Rahul pays Rs. 2,000/month for life and health insurance, ensuring emergencies don’t destabilize his finances.

Insurance is the shield of your financial cycle—it protects your progress.


Closing the Loop: The Financial Cycle

Flow of money:
Income → Expenditure → Savings → Investment → Insurance → Financial health

Everything that remains after flowing through expenses, savings, investments, and insurance becomes your net savings, fueling your wealth-building journey.