With the gig economy growing and influencing the way people work, there has been a paradigm shift in how people view their careers.
Professionals are increasingly seeking more flexible and exciting avenues and exploring unconventional career options, taking the freelance or self employment route.
However, this flexibility also translates to a lack of financial security ; the reason being irregular income. Having an irregular income at times can be very stressful since you no longer have the assurance of a paycheck at the end of the month.
You would make good money for a few months and there would be days when you may face a cash crunch.
So What do you do when you face a similar predicament? If your income follows an unsteady path of good inflows and bad inflows, how do you plan and manage your personal finances and ensure that your dreams are not compromised?
How do you invest during testing times to save up in case of an emergency?
Let’s have a look at how you can go about it despite having an irregular source of income:
Having an emergency fund is of the utmost importance when income is irregular especially if you have your own business or are a budding freelancer. There can be those unexpected expenses, large or small, which can take us by surprise
Often these emerge from normal wear and tear that requires fixing or perhaps more serious, like an accident. At times it could be the health issue of a family member. It might be a case of job loss or some situation that keeps one out of employment temporarily.
However, for the days when you do well, ensure that 6 – 12 months of your monthly expenses are parked in an emergency fund like a liquid fund or a savings bank account and don’t touch it till the time you need it in case of any emergency.
As the name suggests, you might need to make instant withdrawals from the fund. A liquid funds’ investment objective is to keep your investment safe and liquid and try and achieve slightly higher returns than bank savings deposits.
Even though the income may not be steady, you can benefit from Systematic Investment Plans (SIPs) through the power of compounding. Nowadays you can open a SIP for as low as Rs 100 a month. SIP brings discipline into your financial life as the money gets automatically deducted and diverted towards the mutual fund you invest in.
You can step up your SIPs when your income stabilizes a bit . Another good option is to do lump-sum investments when you have a surplus inflow.
You can pick up your financial goals according to priority and start a SIP of a small amount for each goal. The power of compounding will ensure your wealth grows steadily and you would soon have a comfortable corpus.
Methodical and diligent investing will definitely ensure that your future goals and dreams are right on track and are not hampered by the volatility in your income.
Just like your expenses, your approach toward your financial goals will also depend on the different priorities that you have to achieve in life. For instance, current day goals – These kinds of goals help ensure that you always have sufficient money for your daily expenses.
Once you have calculated how much money you will need each month, you will be able to effectively build a plan that keeps you from falling into any debt.
Emergency goals – Those living on an irregular income will know what it’s like to deal with emergencies. Even issues like regularly falling sick can sometimes take a toll on your finances if you are unprepared to deal with them.
Hence, opting for the right insurance or medical cover are great ways to start preparing for unforeseen circumstances.
Personal goals like planning for your child’s education, saving up for that dream car, retirement planning (as one is not eligible to receive any employee benefits like a provident fund or pension) etc.; all these goals have a cost attached to them.
Make a list of your goals properly and then plan your finances around them. Invest in the right avenues that make your money grow and start investing diligently to achieve these goals. Consult with a qualified financial planner in case you find yourself in difficulty.
While an emergency kitty may just about help you create a backup when income is irregular, it may not be enough to hold your finances in place. That’s where asset allocation is equally important.
Asset allocation is the process of diversifying your money across various asset classes such as equity, debt, gold, cash equivalents, fixed income securities etc.
As a person running a small business or a freelancer working from home, you need to make sure that you properly allocate your hard earned money (the times when your income inflow is relatively well) into different asset classes in order to fulfil your long term financial goals.
Freelancing or having your own business can bring rewards such as freedom and a higher quality of life and paying attention to your finances, it can be economically rewarding as well.
With good financial planning, you can continue to save, invest and channel your hard money for a better future even if you have irregular income.
It is advisable that you seek help from a financial advisor who can help you stay in the know about the market and chart out these important personal milestones that you wish to achieve as you grow older and move forward in life.
Also, Check out this video discussing how young professionals should go about with their investments.
Disclaimer: The views expressed in this post are that of the author and not those of Groww