Nihar Bhonsale is very busy these days, but that may not be the case at the end of the year. A voice artist by profession, July-August is when he gets maximum work. A mechanical engineer by qualification, Bhonsale turned down a fat pay cheque from TVS Motor Co. Ltd as soon as he got the first opportunity to follow his passion. But with that came a precarious cash flow—while this time of the year is ripe with opportunities, December to February is lean for him.
“Sometimes I wondered if I had done the right thing. In fact even during the months when I was really on my toes and getting good money, the fact that the coming months would be bleak depressed me,” says Bhonsale.
For Bhonsale and several others, who have irregular income, managing daily finances in itself is a challenge. Thinking big picture, naturally, becomes even more challenging.
Till the time you have been able to put aside a kitty to tide over the uncertainties of life, it is critical for you to sort out the basic issue of managing daily expenses. Says Ranjit Dani, principal planner, Think Consultants, a financial planning and advisory firm: “In the initial days, when the income is erratic and you still haven’t regularized your finances, planning is crucial.”
Budget well: Having a budget and living within it is the key. “It’s best to prioritize and budget your expenses so as to live within your means,” says Dani.
Avoid impulsive shopping: There would be times when your income is fatter than other times in the year, but that doesn’t mean you go ahead and splurge. Of course, if you are into a profession, where you can’t do without some basics, it’s a different matter.
Says Bhonsale, “I always have a long list of ‘to buy’, but I invest all the excess money before it gets over.” Bhonsale entrusts his money with Archana Bringarde, principal planner, Hi Q Financial Planners.
Postpone big-ticket spending: When you have just started out, planners suggest it’s best to postpone anything that is not urgent to a time when your finances are more stable and you have buffer funds. “Postpone whatever you can and cut out the leaks,” adds Dani. The initial savings would go a long way in building a fund you can bank upon.
Segregate personal and business expenses: “One should separate the personal and business balance sheets and bifurcate the income as well,” says Vivek Shah, chief financial planner, Ffreedon Financial Planners.
Shailendra Thatte, 34, a lawyer with his own practice has learnt the art of keeping his personal and business lives separate. Thatte is a client of Ffreedom Financial. While his business goals include expansion and starting his own legal processing outsourcing unit, travelling regularly appears high on his personal life agenda, apart from buying a house.
This is an absolute must, if you have to ensure that any time of the year is a good time for you in terms of income and expenses. Not only would a contingency fund help you sail through lean periods, it will also take care of any emergency—medical, business-related or otherwise.
Building a contingency fund takes time but that would depend on your income, expenses and lifestyle. The size of the corpus will depend on how much your individual income fluctuates and your family income. Says Shah, “For instance, if your spouse has a regular income, then a fund of about three to six months should be sufficient. Otherwise, you should be stocked for at least a year.”
“There should be no element of equity. It should be liquid as you will have to access it in case of an emergency but it should not be too easily available because then you are likely to confuse liquidity with availability and just spend it,” says Dani.
But it will also depend on the individual’s case. Thatte’s business is still at a nascent stage and his cash requirements are usually immediate; so he keeps his funds in his savings bank account.
Switching to regular gear
To continue living on the brink is not a good idea. The first step to moving over to a regular life is ensuring regular cash flow. Extensive saving over a period of time and treating all your savings as capital, which can give you regular income, may work.
“If you invest your money in a POMIS (Post Office Monthly Income Scheme), or a monthly income plan of a mutual fund or in a bank fixed deposit or other debt instruments that make periodic payments can help you regularize your income. But in this case since your investments are in debt, you are compromising on growth,” says Gaurav Mashruwala, a Mumbai based financial planner.
Another avenue is real estate. Rental income from the property you acquire will add to your regular income. “However, buy a property only if you can pay for it upfront,” adds Bringarde.
Securing your future
Like those with a regular income, individuals with irregular income, too, need to cater to goals, such as retirement and children’s marriage or education.
Depending on the time frame of your goals, invest any windfall gains in a combination of debt and equity mutual funds. If you want to secure the future of your children, gold should be an important component of your portfolio.
Lump sum investments make more sense; you may not be able to service instalments. “Avoid enrolling for an SIP (systematic investment plan), or buying regular premium insurance plans,” says Bringarde.
For long-term goals, such as retirement, funds should be stashed away in equities. “Although the stock markets are volatile in the short term, this volatility gets balanced out in the long term and you get inflation-proof returns,” says Bringarde. However, readjust your portfolio and make it debt-heavy as you approach retirement.
A life insurance is must for everyone, who has a dependant. But for those who have sporadic income, a health insurance and critical care insurance assume a lot more importance.
Moreover, ensure you opt for a cashless facility. “A person with irregular income has no idea when his next paycheck will come in, so best use the cashless facility and save the emergency fund for a rainy day,” says Dani.
Entrepreneurs should insure their business, too.
Avoid taking loans because you don’t know when repayment could become a problem. If you must take a loan, look for the bank overdraft (OD) facility. This loan charges an interest only for the amount and duration you use the funds. Such products are available even for a home loan. “If you need a home loan, then opt for a product that offers a combination of OD facilities and equated monthly instalments (EMIs) and keep the EMI component minimum,” says Mashruwala.
Since you will not be able to produce a regular income slip, it’s good a practice to maintain your business accounts well as your firm’s revenue documents will help facilitate your loans.
Last, but not the least, taking help of a financial planner may help you put your financial life on track.
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