How to Invest When You Have Unsteady Income Friday, Jul 12, 2019
“Investing is about predicting the future, and the future is inherently unpredictable. Therefore, the only way you can do better is to assess all the facts and truly know what you know and know what you don't know. That's your probability edge.” – Li Lu
Today, more and more people are taking up freelancing, starting off as budding entrepreneurs, becoming business owners to run their own ventures and employed professionals are quitting their corporate jobs. But such U-turns in life are usually accompanied by irregular income which can be quite strenuous compared to salaried people having their regular paychecks in hand every month end. Even worse, it can get very difficult to manage daily finances given the irregularity of income. One may not know how much one will earn in the next month or the months to come and such uncertainty becomes a hurdle in achieving long term financial goals and dreams. There may be some months when you will do extremely well resulting in lavish spends, some months may be a dampener and your emotions will get the better of you. What do you do when things get quite stressful? If your income follows an unsteady path of good inflows and bad inflows, how do you plan and manage your personal finances and ensure that your dreams are compromised? How do you invest during testing times to save up in case of an emergency?
Let’s have a look at how you can go about it despite having an unstable source of income:
Create a robust emergency fund
Having a contingency fund is of utmost importance when income is irregular especially if you have your own business or are a budding freelancer. There can be those unexpected expenses, large or small, which can take on us unawares. Often these emerge from normal wear and tear that requires fixing or perhaps more serious, like an accident. At times it could be the health issue of a family member. It might be a case of job loss or some situation that keeps one out of employment temporarily. However, for the days when you do well, ensure that 6 – 12 months of your monthly expenses are parked in an emergency fund like a liquid fund or a savings bank account and don’t touch it till the time you need it in case of any emergency. As the name suggests, you might need to make instant withdrawals from the fund. A liquid funds’ investment objective is to keep your investment safe and liquid and try and achieve slightly higher returns than bank savings deposits.
Don’t forget to keep SIP’ing through good days and bad days
When businesses are run by individuals, the revenues are not steady from time to time. There will be times when the business would have done well and then there would be not so great times where the inflows are relatively less. Even though the income may not be steady, you can benefit from Systematic Investment Plans (SIPs) through the power of compounding. When there is excess inflow during good times, the key is to invest the surplus amount in a liquid fund which will then transfer the money as and when opportunities arise into an equity fund. Likewise, when the going gets tough, continue to invest in SIPs to maintain discipline in the long run. This will ensure that your future goals and dreams are right on track and are not hampered by the volatility in your income.
Align your goals according to your prioritiesJust like your expenses, your approach towards your financial goals will also depend on the different priorities that you have to achieve in life. For instance, current day goals – These kinds of goals help ensure that you always have sufficient money for your daily expenses. Once you have calculated how much money you will need each month, you will be able to effectively build a plan that keeps you from falling into any debt. Emergency goals - Those living on an irregular income will know how it’s like to deal with emergencies. Even issues like regularly falling sick can sometimes take a toll on your finances if you are unprepared to deal with them. Hence, investing in the right insurance or medical cover are great ways to start preparing for unforeseen circumstances. Personal goals like planning for your child’s education, saving up for that dream car, retirement planning (as one is not eligible to receive any employee benefits like provident fund or pension) etc.; all these goals have a cost attached to them. With your goals aligned according to your priorities, you’ll never be worried about funds when your goals become a reality.
Contemplate on an asset allocation strategy
While an emergency kitty may just about help you create backup when income is irregular, it may not be enough to hold your finances in place. That’s where asset allocation is equally important. Asset allocation is the process of diversifying your money across various asset classes such as equity, debt, gold, cash equivalents, fixed income securities etc. As a person running a small business or a freelancer working from home, you need to make sure that you properly allocate your hard earned money (the times when your income inflow is relatively well) into different asset classes in order to fulfill your long term financial goals.
Freelancing or having your own business can bring rewards such as freedom and a higher quality of life and by paying attention to your finances, it can be economically rewarding as well. With good financial planning, you can continue to save, invest and channelize your hard money for a better future even if you have irregular income. It is advisable that you seek help from a financial advisor who can help you stay in the know about the market and chart out these important personal milestones that you wish to achieve as you grow older and move forward in life.
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