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How to save and invest on a fluctuating income?

Being self-employed has the challenge of dealing with a fluctuating income - a fat cheque on some months and smaller amount on other occasions. Under such circumstances, how does one save and invest to achieve one’s long-term financial goals?

The process of budgeting and investing is simpler with a stable salary. However, increasingly we live in a world of freelancing and commission-based jobs.  Being self-employed has the challenge of dealing with a fluctuating income - a fat cheque on some months and smaller amount on other occasions. Under such circumstances, how does one save and invest to achieve one’s long-term financial goals?

1. Map out income for the next year

Try to decipher income patterns based on past income data. It will help you estimate income for the next year. If you got a cheque of Rs 80,000 one month, Rs 40,000 another month and Rs 50,000 in all other months, you could project a monthly income of Rs 52,500 – based on yearly average. A more conservative estimate will take the lowest monthly pay of Rs 40,000. It is essentially the money with which you need to manage your expenses and savings.

2. Create a baseline budget

The next step is to categorize all expenditure under two broad categories – needs (essentials) and wants (non-essentials). Monthly expenditure on rent, food, groceries, and utilities are the essentials. Under no circumstances, it could be done away with.

Then, there is expenditure on non-essentials that includes discretionary expenses like those on buying trendy clothes, exotic vacations and entertainment like movies or dine outs. Keep in mind your discretionary expenses to ensure you are not overspending as compared to your estimated income.

3. Saving targets

Subsequently, convert all your financial goals into saving targets. For instance, if you plan to build a retirement nest egg over the next 30 years, work backwards. Look at how much you need to save (quarterly, half-yearly or annually) by investing in equities and debt in the proportion of your preference.

Typically, aim to make investments early during the month before making any household expenditure. And use your personal bank account to do it. If you find monthly investment a stretch, look towards investing on a quarterly or half-yearly basis. Any resultant excesses in the personal bank account can go towards making further investments.

4. Give yourself a pay cheque

Also, create two separate bank accounts – one that is personal and another that is for your business. Give yourself a pay cheque by transferring money every month from your business account. The amount to be transferred will be equivalent to budgeted household expenditure along with that of savings target.

Typically, aim to make investments early during the month before making any household expenditure. And use your personal bank account to do it. If you find monthly investment a stretch, look towards investing on a quarterly or half-yearly basis. Any resultant excesses in the personal bank account can go towards making further investments.

Any excess amount that will remain in your business bank account - after paying your salary and business expenses - will remain untouched. It could be used to pay non-recurrent expenses like taxes, while the rest could be transferred to your personal account as quarterly or annual bonus. Use it to plough money into equity and debt funds. You can revisit your monthly cheques after a year based on new earning patterns.

5. Create a cash buffer

How can you give yourself a monthly pay cheque when income is irregular? That’s where a three-month cash buffer comes handy. It should be made over and above that of your emergency fund. It will ensure that your savings and budget plan are not upset because of a few bad paying months.

Some of these funds could be prudently parked in good-performing liquid funds.

Takeaway

As compared to a regular nine-to-five job, working on a fluctuating income calls for a lot of discipline in financial matters. By exercising restrain in expenses when income levels hit a high and by resisting the temptation to tap into cash buffers when it hits a low, you can not only get full control of your finances but also move closer towards your financial goals.

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