Are you one of those individuals who has chosen freelancing over a full-time job? Did you know that India contributes 50% of the global freelancers in the software domain? India is the second largest country with freelancers after the US with approximately 15 million people freelancing in various sectors like finance, IT, animation, design, content writing, etc.
A survey done by PayPal reported that a majority of freelancers were under 40 with an average annual income of ₹19,02,785/- (sample size: 500 respondents). This figure surely seems high and is more applicable for those in a very niche space with technical expertise. And if we talk about startups, the Indian startup ecosystem ranks third largest in the world as per Nasscom Startup Report 2017. Working on your own has its own advantages and disadvantages. There is freedom to be one’s own boss but there is also a major drawback of irregular income. From a financial planning perspective, it is very important to have a disciplined and regular approach towards one’s investments when it comes to goal planning. If investment discipline is missed, there are higher chances that goal might not get fulfilled. To achieve financial discipline where the income flow is not regular, you ought to have a well-thought financial plan.
When the flow of money is not regular, we fail to plan it properly. For proper planning, you need to know your inflows and outflows first. Understand the pattern of your inflows and outflows from the previous years. You can easily get to know your average monthly income and expenses by calculating them for a year and then dividing them by 12. You can track both your income and expenses from your bank account transactions if you are dealing with online transactions only. In case, of cash expenses, you need to check your average monthly expenditure over a period of 2-3 months and calculate monthly average.
Worst part of having an irregular income is that we might not have enough money in times of dire needs. Hence, it is recommended to have an emergency fund for times like these. For a salaried person, the rule of thumb is to have minimum 6 months’ salary as emergency corpus. But in case of freelancers since the frequency of money inflow is not time-lined, they should have at least 12 months income as emergency fund. To know one’s monthly income, one should calculate the average annual payment he/she receives and divide it by 12. It is not necessary to keep money in savings bank account, one can earn better returns from liquid mutual funds, or FDs.
Having an emergency corpus is not enough. Since self-employed individuals are not covered under any group insurance schemes (both life and health), it is important to cover this risk. Life might not go as per plan. You can get in touch with a financial planner to calculate your exact insurance requirement and buy a life and health cover to cover yourself and your family for any contingency. Both your life and health covers should be reviewed on regular basis as the requirement changes depending on life circumstances.
Since you are on your own, goals like retirement need to be taken care of by you. There would be no Employee Provident Fund to provide the buffer for your retirement savings. Then, there might be important milestones like child’s education or buying a house. You should look at options like PPF, NPS or SIPs (Systematic Investment Plan) in equity mutual funds. SIPs in equity mutual funds debit a pre-set amount from your bank account every month which gets invested in equities. You might want to keep a separate bank account for your investment needs which should always have money for the automatic debits as per your investment plan. Or you can also follow a staggered investment approach through STP route (Systematic Transfer Plan) in case you wish to invest lump sum. You must ensure regular monitoring and review in order to ensure fulfillment of your goals.
Remember “If you fail to plan, you plan to fail.”
Planning is one thing, but not executing that plan also means it is deemed to fail. Sometimes we tend to splurge when we see enough money lying in our bank accounts. While retail therapy is good for our minds, if done on regular basis, it might not be that good for the financial plan. Your investments should continue in a disciplined and regular manner in order to achieve your life goals and help you in emergency situations as well.