Financial Moves For Those With Irregular Income

While self-employment has the potential of generating richer benefits, irregular cash inflow can pose massive challenges in financial planning. Moreover, such individuals are also devoid of Employee Provident Fund (EPF) and employer-provided health benefits, which leaves them completely on their own for their health cover and post-retirement security.

Here are five smart financial moves to assist self-employed individuals in achieving financial fitness:

Focus on building sufficient emergency fund

For a salaried individual, an emergency fund equalling at least six times of his monthly mandatory expenses is advised. However, as self-employed have lower income certainty, their contingency fund should be on the higher end. An emergency fund should be at least 9-12 times of the mandatory monthly expenses, including existing EMIs, monthly SIP, insurance premiums etc. Without a sufficient contingency fund in place, one would be propelled to borrow at higher interest rates or redeem existing investments meant to achieve financial goals at a loss to mitigate unforeseen financial exigencies.

As you may have to make instant withdrawals from your emergency funds to meet financial shortfalls, park your emergency fund in high yield savings bank accounts to ensure instant liquidity. High yield fixed deposits offered by some scheduled banks can also be considered for parking emergency funds by those comfortable with mobile or internet banking.

Buy adequate term & health insurance policies

The primary objective of buying a life insurance policy is to provide adequate replacement income to dependents in case of your untimely demise. Ideally, the cumulative life cover of an earning individual should equal at least 15 times his average annual income. The best way to purchase such big life covers is to purchase term life policies, which offer large-sized covers for very low premiums.

The rising cost of private sector healthcare and lack of a quality public healthcare system increased the importance of buying a health insurance policy to cover the medical costs of you and your family. Without sufficient health cover in place, a single incident of hospitalization can wipe off your life long savings and investments. The importance of buying health insurance policies by self-employed individuals increases manifold as they are not covered under any employer-provided group health insurance.

Create a financial plan

A financial plan helps strategize money management activities to attain financial goals based on one’s investment horizon, risk appetite and cash flow. Begin the process of creating a financial plan by estimating the amount required to achieve each of your financial goals while assuming a rate of returns and investment horizon left to attain those financial goals. On having definite numbers for your financial goals, use online SIP calculators to know the monthly contributions required to attain each of those financial goals.

Besides showing a proper direction to your investments, financial planning also assists in creating an appropriate asset allocation strategy to attain those financial goals. With an appropriate asset allocation strategy, you can balance out your rewards and risks by diversifying your investments across different asset classes like fixed income instruments, equity, gold, debt, etc based on your financial goals, investment horizon and risk appetite.

Consider SIP mode of investments

Systematic Investment Plan (SIP) allows mutual fund investors to invest the pre-set amount in mutual funds at periodic intervals, which can be monthly, quarterly, etc. As the SIP amount is debited automatically from one’s savings account, it ensures regular investment and also instils financial discipline. Moreover, when routing your mutual fund investments through SIPs, the minimum investment size can be as low as Rs 500 for ELSS fund and Rs 1,000 for other equity funds. Thus, SIPs enable those with irregular income to begin investing in MF with small amounts without having to wait for accumulating bigger amounts for investment. Just by investing limited investible surplus, one cannot just avail diversification in their equity mutual fund investments but also simultaneously make most from the power of compounding.

Such regular and automated investments via SIPs enable retail investors to gain the benefit of rupee cost averaging during market corrections by buying a higher number of units at lower NAVs. This eliminates the needs to monitor the markets and time your investments.

Ensure to be credit healthy

Lenders fetch your credit score while evaluating your credit card and loan applications. Some lenders also factor in the credit score for charging preferential interest or processing charges to those with good scores. Usually, a credit score of 750 and above is considered to be good. The only way out to ensure a good credit score is by adopting healthy financial habits. Such financial habits include repaying credit card bills and loan EMIs on time, avoiding multiple direct enquiries for credit cards and loans within a short period, maintaining a CUR (Credit Utilization Ratio) of under 30 per cent, having a balanced credit mix.

Make sure to review the credit report at regular intervals. Doing so would enable you to figure out fraudulent transactions or clerical errors, if any, wrongly pulling down the credit score.    

 The author is CEO & Co-founder, Paisabazaar.com