Today, more and more people are following their aspirations and quitting their corporate jobs to run their own ventures. However, this is usually accompanied with irregularity in income, at least in the initial stages. In this scenario, financial planning becomes even more crucial. Here are some financial tips for those with irregular income:
Emergency fund in savings account
Self-employed people should build an emergency fund and park the funds in savings account. With interest rates up to 7% offered by savings accounts, emergency fund amounting to at least 4-6 times your monthly expenses should be created and used only in case of emergencies.
Since savings accounts provide the highest form of liquidity along with high yield, the self-employed may also park additional funds for their short-term goals like a family vacation or big-ticket purchases in savings account. Building an emergency fund would help self-employed in tackling financial exigencies such as low income, accident or severe illness, thereby preventing the need to borrow money or compromising on your investments.
Opt for STPs to invest in equity
Medium- to long-term goals such as buying a car, creating corpus for child’s higher education and marriage, retirement, etc., require disciplined investment for a significant period of time. For long-term goals, equity should be an appropriate choice, rather than FDs, NSCs or PPFs, since equities have consistently outperformed them for longer tenure investments and have beaten inflation rates comfortably as well.
But, investing in equities through regular Systematic Investment Plans (SIPs) is easier for salaried individuals as their monthly regular income takes care of the SIP outgo every month. However, due to irregular income inflow, self-employed can instead opt for Systematic Transfer Plans (STPs) route for investment. Whenever surplus income arrives, one can invest in liquid fund and then, through STPs, transfer a fixed amount to the chosen equity fund, whereas the remaining amount in liquid funds continues to earn extra returns for you. This way, through STPs, those with erratic income can gradually invest in equity to accumulate corpus for long term goals. STPs can be done over a time period of 3-6 months or even across several years, the decision being solely at the discretion of the investor.
Prioritise purchase of term, health insurance
Irrespective of whether you are a salaried professional or self-employed, insuring yourself should be your top priority. Buy a pure term insurance plan. It ensures that your family is financially covered when you aren’t around anymore. The term insurance amount should be at least 10-15 times your annual income.
The continuous rise in medical costs has created the necessity to purchase a health insurance to cover medical expenses of you and your family. In the absence of it, a single incident of hospitalisation can drain you financially. Moreover, an adequate health insurance is even more vital for the self-employed, since they aren’t covered by employer’s group health policy, as in the case of most salaried individuals. Self-employed individuals having a family should also buy family floater cover to get your children included in it. Additionally, a top up medical policy can be bought to cover medical costs for any form of disability or accidents, since these are cheaper than regular plans providing such benefits.
Use credit cards to build credit history
Credit history shows your past record of availing various credit forms such as loans or credit cards, and how you have been handling their repayments. Lenders check your credit history through your credit report. Therefore, in order to build a credit history, most appropriate tool is disciplined usage of credit cards. Timely payments of entire outstanding amount would assist you in gradually building a favorable credit history and not incurring any interest cost as well.
A strong credit score would help you get better deals on loans and strengthen your loan application, as banks usually prefer to lend to those with a steady income flow. In case you haven’t availed any form of credit in the past, you may be denied a regular credit card due to either lack of credit history or insufficient income. Such individuals may opt for secured credit cards, which are issued usually against fixed deposits, with up to 80% of the FD’s maturity value being available as credit limit for usage.
The writer is CEO & co-founder, Paisabazaar.com