Much of the personal finance content that you get to see or read online is targeted towards people who have a salaried job and a regular income. But what about folks who are self-employed, freelance or do gig work? Many of the personal finance tips like saving 15% of your income every month, doing a lot of SIPs or depending on their employer for their EPF or health insurance, won’t work for them. So how should people with irregular income plan their finances and invest?  In this Question of Money video, let me share some tips for people with irregular income.  

Diversify your income sources 

Usually, investment gurus ask investors to diversify their savings and investments. For freelancers, it is important to diversify your sources of income too. You don’t want to get into a situation where your income suddenly stops because the organisation or person who was employing you goes bust, or decides to switch to someone else. Therefore, do not be happy with one assured source of income even if it looks rock-solid. Try to cultivate other sources. Having a minimum of two-three sources of work and income is essential when you’re free-lancing. You could do the same job for different people or take on different types of jobs. After freelancing for a while, try and negotiate a retainer – a regular payment instead of piece-based payment - with one of your regular clients. Offer to work for a retainer that is a little lower than what you would earn freelancing, that’s the price you pay for certainty.   

Emergency fund and health insurance 

As a freelancer, it is very critical that you have your own social security net to take care of a temporary job loss, accident or emergency that interrupts your income. A health insurance cover is the cheapest way to get reimbursement for hospitalisation or surgeries. If you are in your twenties, a Rs 5 lakh health cover will do. You can top this up as you enter your 30s.  

For emergencies not covered by health insurance, you will need an emergency fund. In the first year or two of employment, regularly invest money into bank FDs to create an emergency fund. The emergency fund should be equal to 9 months’ worth of minimum living expenses. It should be withdrawable at any time.  

Sweep out excess income  

What if your clients don’t pay you regular income? You can still smoothen it out. As soon as you start earning, open a separate investment account which is different from your income account. Keep only the minimum sum required for your monthly expenses in the income account and sweep the rest into your investment account. If there’s any month in which you receive a lumpsum payment or a windfall, immediately park the excess in the investment account. This will ensure that your expenses remain predictable and manageable even in the months where you are rolling in money. Make a rule that you never withdraw from your investment account for routine expenses.  

Doing large SIPs may be difficult for people with irregular income. But the good news is that SIPs are not necessary for most kinds of assets. Lumpsum investments work well for all non-equity mutual funds, FDs, government securities and sovereign gold bonds. So from your investment account, first set up an affordable SIP in an equity fund. You can go with a Nifty100 fund and Nifty Midcap 150 fund if you aren’t sure of choosing the right funds. Ploughing the excess in your investment account after this SIP debit, into money market mutual funds, corporate bond funds and small finance bank or NBFC FDs.   

Create your own retirement fund 

If regular employees have EPF from their employer, you have an even better option in the form of the NPS. The NPS scores over EPF for your retirement vehicle because it allows you to allocate upto 75% of your money towards equities. Equities give you a much better shot at double digit returns that beat inflation than debt vehicles like EPF. Open an NPS account as soon you begin to earn and start contributing to it. The great thing about NPS is that it allows you to invest variable sums every month and every year. You can keep your NPS account alive by contributing just Rs 1000 a year and there is no maximum limit to how much you can contribute. The NPS also allows you to save upto Rs 2 lakh a year from income tax by exempting your contributions under section 80C and 80CCD.  

Set up passive income streams  

As your investment kitty grows over time, it can earn you a passive income in the form of interest, dividends or distributions that can supplement your earnings. Some of the good passive income sources are stocks with a high dividend yield (you can find them on online stock research platforms like Screener), REITs and Infrastructure Investment Trusts which are listed on the stock exchange and NBFC or small finance bank FDs. You can also use SWPs from debt mutual funds to supplement your passive income. What about a rental home? Well, as rental yields in India are just 2-3% and ma aging tenants can be a pain, there are far easier ways to earn passive income. 

(Host: Aarati Krishnan, Producer & Edits: Anjana PV, Camera: Siddharth Mathew Cherian, Bijoy Ghosh)