How to manage finances with irregular income?
Published by Z-Connect by Zerodha
Abhishek Kumar's role: Wrote this article
Abhishek Kumar, SEBI RIA and founder of SahajMoney, wrote this reader Q&A for a freelancer, suggesting separate personal and business accounts, a year's expenses in liquid funds drawn as a monthly 'salary', a larger emergency fund and diversified long-term investing.
What Abhishek Kumar said
How can a freelancer with irregular income create a steady monthly cash flow?
I suggest paying yourself a salary. Work out your monthly spending, set aside roughly a year of it in a liquid mutual fund, and run a systematic withdrawal plan that moves that fixed amount into a savings account each month, which then handles day-to-day expenses. When cash flow allows, refill the liquid fund to cover the next twelve months. Keeping personal and business money in separate accounts is the other discipline I would insist on, so a shortfall on one side does not quietly drain the other.
How big should an emergency fund be when income is irregular?
Larger than for a salaried person. I usually suggest twelve to twenty-four months of living expenses, and for a freelancer I lean towards the twenty-four-month end, kept in something liquid and low-risk such as a savings account or liquid fund. Importantly, this is in addition to the year of expenses already parked for monthly withdrawals; the two serve different purposes. If work dries up for a stretch, the emergency fund carries you without forcing you to sell long-term investments at a bad time.
How should I invest the surplus once a year of expenses is set aside?
Because the income arrives unevenly, lump-sum investing from a dedicated investment account can be more practical than a monthly SIP. For goals a few years away I would favour short-term debt instruments; for longer goals equity can play a bigger role, spread across debt, equity and gold in line with your risk appetite. If valuations look stretched, parking the lump sum in a debt fund and transferring it to equity in instalments is one way to stagger entry, bearing in mind that under current tax rules such transfers count as withdrawals and attract capital gains tax.
What do the self-employed miss out on compared with salaried employees?
Mainly the forced saving of EPF, which salaried people get automatically. I suggest the self-employed build that habit deliberately through long-term options such as NPS or PPF, both of which also offer some tax benefits. The other gap is employer health cover. I would buy a base health policy and add a super top-up with the base sum insured as its deductible; claims then run through two policies, but the overall cover rises a great deal for a modest additional premium. Diversifying income sources helps too.
In our words, from what he said in the piece. General information, not personal advice.
More of Abhishek's views on money management
An August 2024 Zerodha Varsity reader Q&A for a freelancer earning ₹20–25 lakh a year with irregular income and monthly expenses of about ₹50,000. The column covers keeping personal and business accounts apart, paying a monthly 'salary' from a liquid fund, investing surpluses in lump sums across asset classes, NPS or PPF for retirement, an emergency fund of 12–24 months and health cover.
Publisher source
How to manage finances with irregular income?
