Financial planning for people with Irregular Income

Many people with irregular income think that they don't need to create a budget. They think since there is not a fixed income on a fixed date of the month, they don't require the planning for income and expenses. Most of such persons spend their money on need basis and are not able to collect money for hard times. In fact, planning is even more important for the people with irregular income than for the salaried persons. Without budgeting skills, such people are unable to survive properly and make their life difficult. When one is into an income stream that is irregular, the onus is really on him to follow a proper financial game plan. In this write up, we would discuss such issues for people with irregular income and try to suggest better ways as far as their financial life is concerned. Like others, financial matters for such people can be divided into three parts- budgeting, spending and saving & investment. 

Budgeting is the key

Financial planning for such people starts with budgeting itself. People with irregular income should divide their funds into three parts- fund for day to day expenses, savings and contingency fund. Contingency fund is made for expenses for sudden and unexpected situations. One should keep aside cash equivalent to at least six-nine months expenses. This serves as a cushion for an extended lean period. First and foremost thing is to make the proper budget and follow the routine plan.

Invariable fixed expenses: Whenever one starts making a budget, he should start with invariable fixed expenses. There are some very essential expenses every month like your home rent (if one lives on rent), EMIs and insurance premiums. These are fixed amounts due for every month and one should make his budget including these all. This is the amount one needs every month at any rate and one can't trim it, regardless he earns Rs.50000 or nothing.

Variable fixed expenses: Next category is variable fixed expenses, which includes expense heads needed every month, but vary in amount. These include various utility bills (like electricity bill, bill of phone, bill of internet usage etc) and grocery bill. These expenses can be trimmed down drastically if one sees things getting difficult. People with irregular income can prepare themselves to deal with variable fixed expenses. Ideally, they should anticipate the highest amount they have fixed for this head (to maintain the same standard of life), but be ready to cut back if required. The mantra is- hope for the best but prepare for the worst.

Needed income: By adding invariable fixed expenses and variable fixed expenses, one would come up with a number (an amount) which is required every month to run the life smoothly. But one shouldn't forget to add ten per cent of the sum as miscellaneous expenses. This would show that what one needs to make every month in order to meet his most basic expenses comfortably. On the other hand, one should know that how much he would be making that month (a rough idea). By mid-January, one should have a good idea how much he would be getting during February.

Life doesn't stop: We have discussed it earlier that people with irregular income should divide their funds into three parts- fund for day to day expenses, savings and contingency fund. One may open three accounts for these three parts. Fund to meet the expenses of January should be kept aside in first account well before January. Let us understand it in detail. Suppose one has to arrange Rs.30000 per month to meet the both ends. Hence, it is necessary to arrange Rs.30000 and put that in first account.

People with irregular income know that cheques may not come for weeks or even months. If the income comes up short, one should take a temporary loan from savings account to bridge the gap in income. It is important to note that this loan from savings account should be repaid as and when situation gets better.

Spend the money sensibly

Every person in the world earns and spends money, but people who spend money sensibly can do wonders. A little difference between these people and others is smartness of spending on right things on right time and skipping the non-required expenses smartly.

Plan spending in a better way: Sometimes it is really helpful for the people with irregular income to adopt an approach of not purchasing more than is absolutely needed. Such planning of spending ensures the focus on the fact that how big one can cut from the variable fixed expenses and how much one can save each month. It's a matter of how much extra savings can be built up, and this can be done by if one practices saying no on several occasions. 

Skip the non-required expenses: People spend a lot of money for buying new clothes or buying books or eating outside. These are the expenses that are completely within one's control. These are the things on which one can spend money if he can afford. The expense of this non-required category can be skipped and can be trimmed if one doesn't have money. It is better to postpone buying of books for times when he has extra money. One may choose not to spend money on clothes at all for several months. Then, he may plan to make clothing purchases on few occasions.

Pay the bills and debts on time: Money should be arranged for bills and EMIs in advance and these should be paid on time. One must understand the fact that paying these on time saves some extra bucks every time. It is better to pay the debt than parking that into a savings account. If one has Rs.50000 earning 4 percent in a savings account, whereas his credit cards are losing 40-42 per cent, then it's a better idea to pay the card dues. Once the debt is paid, one can transfer that same monthly payment into a savings account.

Better to go for foreclosures: It is not that all the twelve months are lean months for the people with irregular income. There are always few better months which fetch them good amount. Whenever one gets a handsome amount, it is better to settle the existing loans, even if they are expensive. Despite the prepayment fee, it is advisable to dispose of all the loans as soon as possible.

Save and invest smartly

One shouldn't keep all his funds in the first account. Instead, one should try to put the extra amount (after keeping the day to day expenses aside) in the savings account. Following the routine plan is the best way to save. If one continues this for few months, he would don't even notice that he is not spending as much as earlier. Some people don't save because they are left with a very little amount after expenses. They should not feel ashamed in starting with a very little amount, but the important point is to get started. Keeping a long term view helps one realize the value of a small start. It is really foolish to save money and keep idle into a savings account. The next step is investing the money so as which proves to be helpful for future.

Buy Life and medical insurance: Life insurance plan is thoughtful investment that can be helpful in financial security of the family. Every family has a lifestyle and a standard of living. This is mainly based on the earnings of the head of the family. It would be really difficult for his family and children to maintain the same lifestyle in case he meets with any unfortunate incident. Hence, it is prudent to buy a term insurance for himself and make the children his nominee. A single-premium policy is the perfect idea for people with irregular income as they are not paid regularly. Another thing, which is necessary, is to buy a family floater mediclaim policy. It would really relieve him from the pressure of paying hospital bills.

Opt for liquid plus schemes and short term FDs: Saved money can be invested into liquid or liquid plus schemes. One can invest lump sum in such schemes and move the money over time, say six or 12 months. Such investing will ensure that the money is in the hands and does not get spent. One can use short term FDs as well which can be accessed at a very short notice.

In addition, sweep-in option offered by banks for a savings bank account can earn interest for investors. This facility puts money from the investor's account into a short-term fixed deposit and puts the money back into that account if there is a deficit when one has issued a cheque.

Public Provident Fund and NPS: One must think about the necessities of the years to come well ahead. Public Provident Fund is a good investment option to build a corpus for the future. It gives eight and a half per cent after-tax returns. One can invest as low as Rs.500 to as much as Rs.1,00,000 per year in his PPF account. Insurance companies and mutual funds are offering several pension plans but New Pension System (NPS) can be preferred to collect a corpus for the years to come.
(Published in Money Mantra)