Executive Summary: An irregular income is usually cited as a reason not to plan finances. But Financial Planning becomes all the more importance when your inflows are uncertain. Have adequate emergency corpus to meet unexpected expenses. Invest surplus in a liquid corpus. Baseline your SIPs for critical goals, including retirement. Buy sufficient health and life cover. Budget for expenses and be prudent while spending.
- Emergency corpus: When you don’t have regular income, you are at a higher risk of finding yourself without enough money to meet unexpected expenses. This is because an emergency can arise any time - even during the months you do not earn anything. Therefore it makes sense to have a sufficient emergency corpus to fall back upon. While an average of 6 months of expenses is recommended for salaried professionals, in the case of individuals with irregular income, it is suggested to maintain 12 months of expenses as an emergency corpus. This should ideally be the first step in planning your finances.
- Invest excess in a liquid corpus: A base minimum of 12 months expenses should ideally be in the form of an emergency corpus. Over and above this, you could continue investing in liquid instruments which can be withdrawn easily and at the same time yield you a return. For example, you can make use of instruments like debt mutual funds. You could also consider the option of an auto sweep savings account, wherein any amount above a specified threshold will automatically move to a fixed deposit.
- Budgeting for expenses: Next, keep a check on your expenses. When Raj, a freelance photographer realised that he couldn’t meet his expenses during the months he didn’t earn, he recognized that simple mathematics of income minus expense will not work. Preparing a budget for expenses and sticking to it is recommended for everyone. This is all the more critical when you have irregular income. Prepare a base budget for your monthly expenses so that you can plan for them in advance.
- Baseline your Systematic Investment Plans (SIPs): Goal planning becomes challenging when you have uncertain cash inflows. But it is not impossible. You should estimate your critical goals and plan to invest a base amount of SIPs every month towards this. During the months of surplus income, you cash inflows permit you to invest. However, the problem arises in the month when you don’t earn income. During such months, you could withdraw from your liquid corpus and invest for your goals. This ensures that goal planning is not interrupted.
- Insurance planning: When you are not in a regular job, you do not enjoy the benefits of a life and health insurance provided by most employers. Therefore, for self employed individuals, purchasing a health insurance and a term policy is of utmost importance. Estimate the needs of your family and purchase these two key insurance covers. Keep in mind to buy only a term policy and not life insurance policies which involve an investment component.
- Retirement planning: Retirement planning also becomes critical, as you do not have access to an Employers Provident Fund or a pension scheme provided for Government employees. Invest in the New Pension Scheme as this can help in retirement planning. A Public Provident Fund is also a good option. If you are young and are not risk averse, SIPs in equity mutual funds are the most recommended form of saving for retirement. Any surplus cash flows should be invested in the form of SIPs for retirement. Remember not to withdraw from this pool.
Having an irregular income is not necessarily a disadvantage. Remember that you chose this option because you wanted to do something you are passionate about or because you desire flexibility in your schedule. Becoming great in what you do can mean creating a better potential for you to earn a higher income in future. Therefore, having an irregular income is not a reason to avoid financial planning. Instead proactive, intelligent financial planning is a way of becoming money strong, while at the same time pursuing what you love.