How To Stay Financially Secure With An Unpredictable Income? Find Out

With monthly expenses averaging Rs 50,000, it’s essential to create a reliable, predictable cash flow. Treat yourself as an employee of your business, paying yourself a set "salary" each month

While your primary focus might be on stabilising your cash flow, it’s important not to neglect your long-term financial goals.

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By Chakravarthy V

Managing finances with an irregular income is a challenge that many freelancers, entrepreneurs, and self-employed individuals face. The unpredictability of cash flow makes it difficult to meet regular monthly expenses and save for long-term financial goals. However, with a solid strategy in place, you can achieve both stability and growth, even if your income doesn’t follow a predictable pattern.

Let's break down how you can manage your finances effectively when you have an irregular income, using a step-by-step approach:

Keep Business and Personal Finances Separate

One of the most common mistakes entrepreneurs and freelancers make is mixing their personal and business finances. While it might seem convenient to dip into your business account for personal expenses, or vice versa, it's important to resist this urge. Keeping separate accounts for business and personal finances allows for better tracking, clearer financial goals, and improved decision-making.

Managing Monthly Cash Flow

With monthly expenses averaging Rs 50,000, it’s essential to create a reliable, predictable cash flow. Treat yourself as an employee of your business, paying yourself a set "salary" each month. This will allow you to handle personal expenses consistently, even if your income fluctuates.

Since you’ve already accumulated Rs 20 lakh in savings, you can set aside Rs 6 lakh annually to cover your living expenses for the year. The simplest and most effective way to do this is to park this amount in a liquid mutual fund and set up a Systematic Withdrawal Plan (SWP). This will allow you to withdraw Rs 50,000 every month to cover your personal expenses for the year.

Liquid mutual funds are a low-risk investment vehicle that offers better returns than a savings account and can be easily converted into cash when needed. By using this method, you can maintain a steady cash flow without touching your long-term savings or business income.

Build a Separate Savings Account for Expenses

Once you've set up your SWP, ensure that the Rs 50,000 withdrawn every month is deposited into a dedicated savings account. This will serve as your primary source of funds for daily expenses, keeping your financial life organised and ensuring that your basic needs are met consistently.

Whenever you receive a lump sum payment or an influx of income, transfer it to a separate investment account. This account should be used solely for wealth-building purposes — whether through mutual funds, stocks, or other investment opportunities. This clear segregation between everyday expenses and long-term investments will help you stay on track toward your financial goals.

Invest for Future Goals

While your primary focus might be on stabilising your cash flow, it’s important not to neglect your long-term financial goals. After setting aside the Rs 6 lakh for your annual expenses, you can invest any surplus income into suitable financial products based on your risk tolerance and goals.

Given the irregular nature of your income, lump-sum investments might be a better option for you compared to a regular Systematic Investment Plan (SIP). For short- to medium-term goals, consider investing in short-term debt instruments or fixed income products. For medium- to long-term goals, high-risk products like equity mutual funds or stocks can provide substantial growth over time.

Remember to diversify your investments across different asset classes such as debt, equity, and gold. This will help mitigate risk and improve the overall stability of your portfolio.

If you're unsure about market valuations, consider using a Systematic Transfer Plan (STP). This allows you to invest a lump sum in a debt fund and transfer it gradually into equity mutual funds, reducing the impact of market volatility.

Plan for Retirement

One of the challenges of being self-employed is the lack of a formal retirement plan, like an Employee Provident Fund (EPF), that salaried employees enjoy. It’s up to you to take charge of your retirement planning.

Consider investing in long-term retirement options such as the National Pension System (NPS) or the Public Provident Fund (PPF). Both these options offer tax benefits and are structured to help you save consistently for retirement.

Build an Emergency Fund

With an irregular income, having an emergency fund becomes even more critical. We recommend setting aside at least 12 to 24 months of living expenses in a liquid, low-risk investment like a savings account or a liquid mutual fund. This will ensure that you have immediate access to cash in case of unexpected events or periods without income.

Given your monthly expenses of Rs 50,000, this fund should cover at least Rs 6 to 12 lakh. We suggest leaning toward the higher end of this range, especially considering the uncertainties that come with freelancing and entrepreneurship.

Diversify Your Income Sources

While your core business might provide a decent income, it’s always a good idea to diversify your income streams. This can help reduce the pressure on any single source of revenue and provide greater financial stability. You could explore side gigs, passive income from investments, or even consider rental income if you have property.

Multiple income streams offer financial security and flexibility, which can be especially valuable in times when your main business experiences a slowdown.

Secure Adequate Health Insurance

Health insurance is a crucial part of your financial plan, particularly when you don’t have the safety net of a corporate health policy. Ensure that you have a base health insurance policy with a minimum cover of Rs 5 lakh. Additionally, consider purchasing a super top-up policy with a cover of Rs 50 lakh. The base cover will act as your deductible, keeping the premiums low while ensuring comprehensive coverage for major medical expenses.

Managing your finances with irregular income requires discipline, planning, and a clear strategy. By separating personal and business accounts, creating a steady cash flow through a systematic withdrawal plan, and investing in a diversified portfolio, you can achieve both short-term financial stability and long-term wealth accumulation.

The author is the cofounder and executive director at Prime Wealth Finserv Pvt Ltd.

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