Irregular Income: Managing the Smart Way

Arnab Samanta 31, a Kolkata-based freelance PR and brand consultant makes it a point to keep a check on his basic daily necessities and plan his finances accordingly. He maintains a budget and tries to limit his expenses and keeps a cash buffer of six months to take care  of any temporary shortfall or a delay in income.

He regularly consults his financial planner who helps him keep a track of his quarterly expenses and pushes him to save more for a secured future. She also keeps him up to date with industry developments while he keeps a  note of his expenses and bills through various apps.

Samanta belongs to a breed of freelance professionals who work at their own pace. This means more freedom as compared to a regular job, (though not less work as Samanta  will tell you), but it also comes with  the reality of an irregular or fluctuating income.

Needless to say, there are millions like Samanta who, while enjoying the freedom of work, often choose to sustain on oscillating income. However, how do they continue with it and what about rainy days?

On certain months, when clients have made payments on time, income might be higher, while there are invariably some lean months. However, regular expenses and insurance premium remain constant and are a monthly affair, so planning ahead is important.

“It is important to have a bigger buffer for liquidity which should range between six months and one year of expenses, since income is irregular. Budgeting is very important for professionals with erratic income. It becomes even more necessary to understand what they should spend on a regular basis. They should also have a substantial contingency fund  to tide over emergencies,” said Suresh Sadagopan, Founder, Ladder7 Financial Advisories.

For Ankur Sinha, 39, a Delhi-based financial planner and Founder, Investogrow.com, managing a fluctuating income comes more easily as that is his area of expertise. So he plans ahead to keep his finances under control. “The biggest challenge for an individual entrepreneur is the consistency in inflow of money. I strictly follow the rule save first, spend later,” said Sinha.

On certain months, when his income shoots up, Sinha ensures that he saves lump sum keeping in mind the future.

“I always plan my expenses for the next three months and review it on a monthly basis” he said.

On the other hand, Mumbai-based freelance artist, Ranjit Dahiya, makes it a point to transfer a certain percentage of his income to another account every month and ensures that it is not spent. “This way, I know, I have a buffer” said Dahiya.

While creating a buffer is very crucial, those with a fluctuating income also need to be extra careful to ensure that they can meet their regular expenses. “Usually it is observed that for people with fluctuating incomes, their loans and EMIs eat up a big chunk of their earning. We need to make a ground rule that our EMIs do not cross 30 per cent of our total average monthly earning and our expenses be capped at 40 per cent of our total average monthly earning,” said Anant Ladha, Founder, InvestAajForKal. Sadagopan suggests that one should keep recurring costs low. He also says that professionals with erratic income must save first for what they want to spend on without resorting to a loan. “Forward planning and making provisions for various goals is important for them,” he adds.

Sinha is meticulous as far as planning his expenses are concerned. “At any point in time I keep my expenses for the next three months ready. I also keep track of the same on a monthly basis. Neither do I have a credit card, nor do I purchase goods on EMI. My only liability is my home loan, which I will pay off as soon as possible. Alternately, I have also sorted my monthly investments including household expenses, yearly expenses, annual premium and SIPs.”

Dahiya, however also works as a part-time lecturer in a college in order to manage his finances better. The compensation that he receives from it, helps meet his basic expenses such as rent. Having a regular income in place, however small, can come in handy for professionals like him.

Delhi-based Nikhil Chainani, 23, Founder, Perspectico, game-based career training platform, worked as an investment banker before starting  on his own. He had saved up enough to sustain for six months before his company received funding. “Initially I did not draw a salary but reimbursed my expenses such as food and travel. We have recently raised a substantial amount in funding and I am paying myself a salary.” Though Chainani has not planned specifically for any long-term goals, he keeps a contingency reserve and invests regularly in mutual fund and systematic investment plans (SIP).

Saving for future goals needs a lot of discipline, more so for those with a fluctuating income. “Goals would be there in one’s life irrespective of whether the income is regular or variable. Hence, for professionals with an erratic income it is even more important to be disciplined enough to invest every time they get a good payout. Since regular investments  are not possible—discipline has to make up for it,” said Sadagopan.

As mentioned, the first step is to create a contingency fund.“Post that make a sheet, which has a list of all the goals both short term and long term, then slowly start saving in a systematic manner. SIPs in equity mutual funds need to be used to achieve long-term goals. And for short-term goals, accrual based  debt funds or some portion of  fixed deposits should be used,” suggested Ladha.

Those who are on their own, need to focus more on retirement planning as they will not be eligible to receive any employee benefits like provident fund or pension.

For the next 12-15 years’, Sinha’s major long-term goal is to plan for his retirement. “I firmly believe that this should be the most important goal for any individual, because here the government cannot take care of senior citizens. Also, as we approach our retirement, our children will also be trying to earn and save for their future goals. If we, as parents become dependent on our children it will be difficult for them to create wealth for themselves,” he said. His other goal is planning for the higher education of his  five-year-old son Gaurik, which is another 11-12 years from now. While he started investing for his son as soon as he was born, Sinha has also started planning for his retirement. “The earlier you start, the better it is” he confirmed. He has invested in various asset classes within a defined time-frame and goals, which includes SIPs, fixed deposits and PPF.

Being a financial planner, managing investments is an easy task for him. He keeps track of his investments and makes changes as and when required based on the market scenario. Sinha also makes it a point to invest his surplus money in liquid funds to meet any contingency and switch funds depending upon time and situation.

On the other hand, Samanta has also started saving up for his retirement and he diligently invests in common instruments such as PPF, SIPs and fixed deposits.

Dahiya has not started saving for retirement yet, but it is never too late to start. “Starting step will always be difficult. We must gain control over our money or the lack of it will always control us. So control your expenses from the beginning and start saving. Your first investment will be the most difficult one. So if required start with investing  just Rs 500 a month and then slowly  increasing it keeping your goals in mind,” said Ladha.

While planning for expenses and goals is important, it is also crucial to take adequate health and life cover. Opting for a life insurance cover through a term plan is a good idea. An ebb and flow like income comes with its own set of challenges, having a proper plan in place is important.

anaghpal@outlookindia.com