5 financial strategies for freelancers with irregular income flows

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Updated: Aug 14, 2019 2:41 PM

Freelancers should plan their finances carefully to be able to withstand the higher uncertainty they are subjected to face.

freelancers, freelancers finances, freelancers investment, short-term financial goals, bank FD, fixed deposits, debt funds, Company Fixed Deposit, RD, High Yield Savings Account, Stock Market Investment tips, stock market, equity investment, market volatility, financial planning, asset allocation, best investment options, best investment option in India,Freelancers need to create a budget and stick to it even more thoroughly than salaried employees since income tends to be erratic here.

Freelancing, be it in any profession, has extensively picked up in recent times. After around a decade or so of work experience, most now decide to strike out on their own and try out new things. Though you get the freedom of working in what you want or how you want, it also comes with a few challenges. For instance, workflow along with income inflow becomes erratic.

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According to a recent survey Global Millennial Survey 2019, by Deloitte, a large percentage (94 per cent in India) of millennials and Generation Z consider joining the gig economy, rather than hold a 9 to 5 job. Experts, however, suggest one should also be prepared for the financial challenges freelancing brings. Hence, freelancers should plan their finances carefully to be able to withstand the higher uncertainty they are subjected to face.

Here are some of the financial strategies freelancers should follow to deal with irregular income:

  1. Save diligently
    Freelancers need to create a budget and stick to it even more thoroughly than salaried employees since income tends to be erratic here. Experts say an individual who is freelancing should save and invest at least 25 per cent of their average monthly earnings. Also, if you enjoy an extra lumpsum monthly income at times, you should save more to compensate for the tough months. Distribute your money between a different savings account, labeled for different goals, such as personal investment account, capital investment account, etc. That way, your money will get allocated every month towards achieving your goals. However, keep in mind to differentiate segregate and personal and business expenses.
  2. Emergency corpus
    With freelancing, future earnings are always uncertain. Hence, freelancers need to create an emergency corpus for a rainy day. Generally, an emergency fund is kept equal to 6 months of one’s average monthly expense, which can be built gradually. This money can be parked in an account, wherein it can be liquidated easily, such as a liquid fund or a sweep in fixed deposit account.
  3. Adequate insurance
    Even though it is always not adequate but one benefit of a regular job is that employees get insurance covers (life or health), from their companies. But when you are freelancing must make sure you and your family have got adequately covered with personal policies. For instance, buying a term cover early in life can cost you less. People in the 20-30 age bracket should have around 20 times their annual income as an insurance cover; for people in the 30-40 age, the bracket should have around 15 times their annual income; and around 10 times for those in the 40-50 age bracket. Also, choose carefully the mode of payment, as the earnings of freelancers’ tend to change rapidly.
  4. Investment strategy
    Another benefit of a regular job is the matching employer contributions through products like Employee Provident Fund (EPF) and the National Pension System (NPS). As freelancers do not enjoy such benefits, one needs to begin saving for retirement from an early age. Long-term goals such as children’s education and marriage also need to be planned for, along with your own retirement.
  5. Taxes
    To meet their tax liabilities, freelancers need to budget and save adequately. If one gets a large project, which increases one’s income and tax liability, one should also build reserves to meet it. Experts suggest freelancers should use all means, all deductions, and exemptions provided by the government, to minimize their tax outgo.

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