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Earning a Variable Income? Plan Your Finances Now! - Outside View by PersonalFN

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Earning a Variable Income? Plan Your Finances Now!
Jun 10, 2015

Doctors, commission agents, private tutors, lawyers, free-lance writers etc. often earn a variable income. Meaning, unlike those who are employed and get a fixed pay every month, their income varies. If you are one of those who earn a variable income, it is vital that you plan your finances prudently in the interest of your financial wellbeing, whereby you can also meet your financial objectives. PersonalFN, through this article has listed down a few points which should be kept in mind by such individuals while planning for their finances.

  • Maintain a high level of contingency reserve: If you are a variable income earner, you must maintain a high level of contingency reserve / emergency funds. You may initially begin by keeping aside 6 months of your expenses (including household expenses, loan instalments, children's education expenses, etc.) in a savings bank account or a liquid fund, and then increase this to 12 months. This is extremely necessary as there might be months when you may not have sufficient inflows of money, making it difficult to even meet necessities.

  • Determine your financial goals: You must write down your financial goals (such as retirement, children's education and marriage and so on). Thereafter, determine the amount that will be required to fulfil these goals at the time of their realisation...and mind you when you do that, don't forget to account for inflation as it has an effect of eating into the purchasing power of your hard earned money. Also, calculate the amount that is required to be saved each month for fulfilling your goals (after considering the rate of return earned on investments and your existing investments). It is prudent to include your family during this process, as they will be able to give you valuable inputs and also make it a co-ordinated effort.

  • Save and invest: Once you know the amount that needs to be kept aside every month for achieving your goals, you must start saving. But depositing money in a savings bank account alone will not help you. You ought to beat the inflation bug and hence you need to invest your money wisely in various investment avenues (such as equities, debt and gold) on the basis of the asset allocation that's appropriate for you. While, there may be months where you would earn a higher income and would be  tempted to splurge a little, it is imperative that you be disciplined at most times. You must use this opportunity to invest a lump sum amount for saving towards your goals, as this would compensate for those times when you might not be able to make the necessary monthly contributions. 

  • Have an adequate insurance cover: If you have any family members dependent on you (parents, spouse and children), it is extremely important to have an adequate life insurance cover. And while you intend to cover yourself, it is vital that you keep your insurance and investment needs separate, so as to be optimally covered against the insurance premium you pay. At PersonalFN, we believe that term insurance is the best when it comes to indemnifying the risk to life the optimal way. Also, health insurance is a must for all, especially if you have a variable income pattern. Healthcare expenses can burn a hole into your pocket with the rising cost of medical expenses. And in months when inflows are low, it can have an extremely damaging impact on your finances. Therefore, make sure that you have an adequate health insurance cover.

  • Keep expenses in check: As a variable income earner, it is important for you to be conservative while spending money. A budget for all expenses - be it personal (clothes, mobile bills, etc.) or family (food, electricity bills, transportation costs, etc.) - should be made in advance, and all family members must stick to it. High income in some months should not result in over spending during those times. This is imperative if you wish to keep your finances in pink.
PersonalFN believes that financial planning is a must for everyone. But, people with variable income must take special care and should not delay charting a financial plan. Remember that planning in advance will not only help you to take care of expenses in the months of low income, but also help you to meet the financial goals of your family. If you do not have the time and / or expertise to make financial plans, do not hesitate to take the help of an experienced financial planner.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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