For many, personal finance advice is tailored to those with regular, salaried jobs. But what about those who are self-employed, freelance, or do gig work? Standard tips like saving a fixed percentage of your income each month or relying on employer-provided benefits simply don’t apply. If you have an irregular income, here’s how you can effectively manage your finances and secure your future.
Diversify Your Income Sources
While traditional investment advice focuses on diversifying savings and investments, freelancers must also diversify their income streams. Relying on a single source can be risky if that client or gig dries up. Aim to have at least two or three different sources of income. This could mean doing similar work for multiple clients or taking on various types of projects. Additionally, try negotiating a retainer with a regular client, offering them a slightly lower rate in exchange for consistent, predictable income. This balance between freelancing and a steady retainer can provide financial stability.
Emergency Fund and Health Insurance
An emergency fund and health insurance are non-negotiable for freelancers. Without the safety net of employer benefits, you need your own social security to cover unforeseen circumstances like job loss or medical emergencies. Start by securing a health insurance policy. For those in their twenties, a Rs 5 lakh cover should suffice, with the option to increase it as you age. Alongside, build an emergency fund by regularly saving in bank fixed deposits (FDs) until you accumulate at least nine months’ worth of essential living expenses. Ensure these funds are easily accessible in case of urgent need.
Sweep Out Excess Income
To manage irregular income effectively, open a separate investment account distinct from your main income account. Keep only the minimum necessary for monthly expenses in your income account and transfer any excess earnings to the investment account. This method helps smooth out your finances, making your spending more predictable. For instance, if you receive a large payment, immediately move the excess into your investment account, ensuring you do not dip into it for routine expenses. This disciplined approach can stabilize your finances even during windfall months.
Smart Investment Strategies
Investing can be tricky with an irregular income, but you can still grow your wealth without relying on systematic investment plans (SIPs). While SIPs are great for equity funds, lump sum investments work well for other asset classes like fixed deposits, government securities, and sovereign gold bonds. From your investment account, set up an affordable SIP in an equity fund if possible. For the rest, allocate excess funds into money market mutual funds, corporate bond funds, or small finance bank FDs. This strategy ensures your money is working for you, even if your income is not regular.
Create Your Own Retirement Fund
Creating your own retirement fund is crucial since you don’t have access to an employer-provided EPF. The National Pension System (NPS) is an excellent option, allowing you to allocate up to 75% of your funds to equities, offering potential for higher returns. Open an NPS account early and contribute variable amounts as your income fluctuates. The NPS also offers significant tax benefits, allowing deductions up to Rs 2 lakh annually under sections 80C and 80CCD.
Establish Passive Income Streams
Lastly, focus on establishing passive income streams as your investment portfolio grows. Passive income can come from dividends, interest, or distributions, supplementing your irregular earnings. Look into high dividend yield stocks, Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts listed on the stock exchange. Fixed deposits from non-banking financial companies (NBFCs) or small finance banks are also good options. Systematic withdrawal plans (SWPs) from debt mutual funds can provide a steady income stream. While rental income is an option, it often involves hassles with tenants and low yields in India, making other passive income sources more attractive and easier to manage.
By diversifying income, securing insurance and an emergency fund, managing irregular earnings smartly, investing wisely, and creating passive income streams, you can effectively navigate personal finance with an irregular income. These steps can help ensure financial stability and growth, even without the predictability of a regular paycheck.
