Please wait...

Head Start

‘Hi, I came across this interesting article on the Franklin Templeton website. Check it out!’
Budget for a Bumpy Ride

If you are in a profession where the income flow is rather irregular, plan your expenses right. Irrespective of the profession and the income stream, typically, the outflows are largely similar to an individual with a steady income comprising household expenses, loan repayments, children’s expenses and insurance payments, among others. Paying regular expenses with fluctuating income can be problematic, making you reach for debt. But lenders too may shun you away because of unsteady income flow. So, to manage your expenses and pay your equated monthly instalments (EMIs) on time, plan ahead.

ESTIMATE INCOME

Its best to be conservative in estimating your monthly income. Consider only the minimum monthly amount that you can count rather than the average. Anything extra can work as buffer to meet distant expenses. It’s safe to underestimate as finding ways to use extra cash is easier than cutting imminent expenses .

SEPARATE ACCOUNT

No matter what your profession is, if your income is irregular, maintaining separate accounts for income and expenses helps. The segregation provides a clear picture of your commitments towards household.

DETAILED PLAN

Involve all family members in carving out a spending plan, goals and the approach for meeting those goals. The plan should touch upon savings and expenses on both monthly and periodic basis. Yearly budgets can go a long way in identifying big-ticket and recurring expenses.

BUCKET YOUR EXPENSES

There are certain expenses that require utmost priority such as household, utilities and transportation among others. In addition to household expenses, there could be certain contractual obligations such as home loan or car loan that are equally important. Ensure you have made provisions for them. Certain expenses that occur less frequently such as insurance premium and quarterly children school fees, can go into the bucket of periodic expenses.

EMERGENCY FUNDING

For those with irregular income flows, creating an emergency fund is very important. The emergency fund should be large enough to meet all fixed and variable expenses as and when they occur, in case your income flow stops for a certain period of time. Ideally, 9-12 months of emergency funding should be the target. It is advisable to maintain at least 3 month’s expenses in savings account and the balance in liquid or short-term funds. Liquid funds are almost as safe and liquid as bank fixed deposits and are more tax efficient. If you stay invested for more than a year, the returns will be taxed as longterm capital gains at 10 per cent. This compares favourably with the 30 per cent paid for FDs by those in the highest tax bracket. Alternatively, you can also keep liquid cash in short-term funds.

LIFE COVER

It is likely that people with irregular income stream do not have a cover to take care of medical needs through employer provided group cover. Hence, it’s essential that health insurance is addressed even before you plan your investments. Younger families can start with a family floater health plan and gradually move on to individual health plans. For life coverage, avoid plans with larger and regular commitments, especially traditional and market-linked insurance plans, instead, buy a pure term insurance cover. Such plans come with lower premiums and hence, lower commitments.

INVESTMENTS

When it comes to investments, avoid long-term SIP’s in mutual funds unless commitments are within manageable limits. It is better to stick to short-term SIPs of 6-12 months. Based on your goals and savings schedule, invest your lump sum in an existing folio to better manage the portfolio. You can keep accumulating in recurring deposits and liquid funds and then put the lump sum in an MF.

CONCLUSION

Pay your bills on time and avoid rolling over of expenses, especially debt. Living on infrequent income can be similar to tight rope walk unless you plan well, have self-discipline and the ability to anticipate expenses in the changing scenarios ahead of time.

Next To Come: Save before you Splurge