What do artists, consultants, and freelancers all have in common?
An irregular income.
When you’re a self-employed professional, generating a steady income is considerably harder when compared to just waiting for your salary to hit the bank. Some months are good, some are bad, and some are just downright depressing. While the amount of satisfaction you get from your work may be much higher than someone employed at a company, dealing with the fluctuating nature of your finances can become a tedious task.
However, the last statement only holds true if you are unaware of your true financial condition and what you need to do to fix it. Here are a few tips that will help you start working towards a stable financial future despite having an unstable source of income.
- Understanding Your Expenses
The first and most important part of every financial planning exercise. In order to take control of your finances and reduce your dependency on an irregular income, you must first have a clear idea of how much money you actually need on a monthly basis. This is the capital that you require in order to maintain your lifestyle and not cause a strain on your savings.
Divide your expenditure into –
- Living Expenses – All the things you need on a regular basis in order to maintain a healthy and productive life. These include things that are a must-have for your survival every day.
- Lifestyle Expenses – All the things you need to keep yourself entertained, comfortable and stress-free. These include vacations, hobby expenses, and leisure activities.
- Know Your Income Pattern
As a freelancer or consultant, you’re well aware that there are as many good times as there are bad times. While you may have a great run for the first three months of the year, the next two could very well be ‘dry’ months where you don’t really make any money.
Look through all your past statements to see how your bank balance looked at the end of each month. You will most definitely be able to identify lean periods where business is not particularly booming. This is important for you to know as it helps you plan how you should allocate your savings in order to have enough capital even when you’re not making a lot of money.
- Categorize Your Financial Goals
Just like your expenses, your approach towards your financial goals will also depend on the different situations that you have to deal with in life.
- Living Goals – These goals help ensure that you always have enough money for your living expenses. Once you have calculated how much money you will need for your survival each month, you will be able to effectively build a plan that keeps from drowning at any cost, whether it is a lean period for business or not
- Emergency Goals – No one know better than a freelancer how it’s like to deal with emergencies with an irregular income. Even issues like the common cold can sometimes take a toll on your finances if you are unprepared to deal with them. Investing in the right insurance and setting up a savings fund are great ways to start. These will keep your mind clear of financial worries when something more important is on the line.
- Personal Goals – Sending your children to a good university, buying that car you’ve always had your eye on, learning photography; all these desires also have a cost attached to them. Sit with your financial advisor and map out these important personal milestones. With the right approach, you’ll never be worried about funds when the time comes to make your dreams a reality.
- Refrain From Amassing Credit
One of the biggest perils of having an irregular income is being reliant on your credit card. Many freelancers end up utilizing their credit cards when their bank accounts are low and dealing with the expense once the money comes in and you clear your credit card bill.
The problem with this is that you’ll always be in a state of constant debt. And if you don’t get paid on time, you might even default on your credit card bill, which will lead to a negative impact on your CIBIL score, and result in higher interest rates and expensive EMIs if you ever need to avail a loan later.
- Maintain Discipline
It’s great that you’ve charted out your expenses, listed down your financial goals, and taken the initial steps towards financial independence. But remember, you need to keep at it in order for your financial plan to actually work. Seek help from a certified financial planner who can help you stay in the know about the market and your financial goals and assist you with changes in your financial plan as you grow older and move forward in life.