It is always easier to develop a financial and investment strategy when you have a fixed income. The salaried people know how much they are getting, and thus, the process of allocating money to expenses, savings and investments becomes fluid.
However, when it comes to fluctuating income, which is the case with most commission-based jobs, freelancers and for self-employed people, it becomes an ongoing struggle to stick to and realize a long-term financial plan.
With the increasing number of people switching their career options to become a freelancer or a self-employed professional, the need for proper financial management is important. If you are one of these people, then here are the few tips on how to develop an investment strategy with fluctuating income.
Mapping Your Income in Advance
For people with an irregular income pattern, it is essential to map out their income well in advance to develop an investment strategy they do not have to bail out from later on. In simple terms, you need to decipher an average income that you make regardless of how well or bad your business is going.
Take out your bank statements and see how much you have made in the past six months and find an average. It is this average amount that you can consider your salary and be on a safer side; you can take the liberty to deduct ten to fifteen percent of it too to be more conservative. By doing this you would come with an amount that you need to use to manage your expenses and develop an investment strategy with.
Creating a Monthly Budget
When you develop a baseline budget, you need to classify it into two categories – essential and discretionary. The essential items would be rent, utility bills, and food and discretionary expenses would be entertaining, dining out, online shopping, and so on.
Cutting down on your discretionary expenses would help you save money to invest in various investment tools like reliance mutual fund, fixed deposits, and so on.
For self-employed people with no employee benefits, investments are all the more crucial for a worry-free financial future. Invest in products like mutual fund, and with time, you would see your money grow, and it would definitely help you lead a life free of financial worries.
Fix a Savings Target
If you plan to retire thirty years from now, calculate the amount you would need post-retirement and work backward. Working in reverse would help you decide how much you need to save today to secure your tomorrow.
Follow the principles of goal-based investing to ensure you prioritize your savings and investments above other expenses. You would have to cut down on your expenses and make a few compromises here and there, but it would be worth it.
Create an Emergency Fund
You need to have an emergency fund for the time that you do not have an income during a few months at a stretch.
You need to have at least three months of emergency funds for bad periods of income. You can create this over a period of time.
Decide Your Own Salary (And, stick to it)
You should create two separate bank accounts – one personal and the other one for business. Decide on a salary and transfer that amount every month from your business to personal account. Make sure that you decide on the amount based on your expenses along with how much you wish to save.
You should make investments before you even pay for your daily expenses. You should invest using your personal account, and if you do not find a buffer every month, you can do it quarterly or on a half-yearly basis.
Once you pay your salary and your business expenses, any excess amount in the business account should not be touched unless extremely necessary. You can use the money to pay for expenses such as taxes or for working capital such as buying new business equipment.
Working in an industry with fluctuating income as a freelancer or self-employed can make it hard to prepare long term goals. However, with a little plan, it can make your life much easier. You will not only be able to satisfy your regular expenses, but also make sure that you save money and invest in your future.