A regular income makes planning and managing finances easier. It adds an element of certainty to the process of planning and managing your finances. But it may not always be a given. You may be someone who has chosen to take the self-employed route either by preference or because you had no other option. 

The initial years of establishing the business comes with uncertainty of income that throws up challenges for personal financial management. While the essentials remain the same, the unpredictable income imposes certain additional responsibilities on you. 

Go for a lean budget

Budgeting takes a new urgency when you don’t have the luxury of a definite periodic income. Have a bare-bones budget that covers the minimum essential expenses for each month. This will also include mandatory obligations such as taxation, repayment of loans and insurance costs; and essential investments. This is the minimum income that you need each month. 

Cut out the flab in expenses as much as possible. Avoid discretionary expenses and savings for goals that are not essential to your financial security till your income stabilizes. Once you have had time to establish your business and stabilize revenues, consider expanding your personal income.

Consider a separate budget for the business. Listing all the essential business expenses, including the income you have set for yourself, will give you the target revenue you have to work towards. Maintain separate accounts for business and personal income and expenses. Build the discipline to not mix the two for better control on both.

Protect yourself

Striking off on your own means the onus of protecting your finances falls on you. You have to replicate the compulsory savings that come with employment in the form of provident fund, gratuity and other retiral benefits, including the contributions from the employer. 

Determine the savings that you need for the retirement goal and make it part of the budget. Delaying it will put a greater financial burden in later years. Use Public Provident Fund to accumulate funds on a tax-free basis. The National Pension Scheme is a product to consider for your retirement savings since it gives flexibility to take exposure to different asset classes.  

Life and health insurance covers are the other employer-provided protections that you have to now take responsibility for. Look at term insurance as a low-cost, efficient option to take adequate cover. Consider keyman insurance to protect business revenue. Expenses related to health can derail finances if you don’t have protection. Take health insurance when you are healthy so that the premiums are low and you establish a history of continuous health cover with timely premium payments. This ensures that you are not denied health insurance in later years. 

The emergency moat

An emergency fund provides the protection that you need from a situation when your income may fluctuate and not be adequate to meet your expenses. 

This can be a very real situation when you are establishing your business. There may be periods when you may have to draw less than what you have earmarked as your income if the business revenues are low. The emergency fund will provide the cushion in such situations. Go beyond the 3-6 months that is typically prescribed and aim for a larger fund. Greater the uncertainty in income, the larger should be the emergency corpus. 

Draw on this only when the income available falls short to meet essential needs or in times of emergency. Be disciplined about the use and refill as soon as possible. Any improvement in income should first go towards stocking up the emergency fund. Consider building an emergency fund for your business revenues too.

Risks to navigate

Be aware of your risks. Primary among them is to take the convenient option of ignoring the need for an emergency fund and insurance and believing that the funds are better utilised in the business. During an emergency, this error is compounded as people typically resort to the credit card. The ballooning debt and interest costs put a strain on the already fragile finances. 

Another risk is overestimating income and underestimating expenses. Not clearly demarcating business and personal income and expenses is another risk. There is a tendency to focus on business needs and to reinvest all surpluses into the business without considering personal goals. Your goals will be at risk if the business does not do as expected. 

It is important to recognise the impact of irregular income and strategise accordingly. A systematic investment plan may not be the best way to invest when income is fluctuating. It is better to have an annual target rather than a monthly one so that you can make up for lean saving months in months where the income is robust. Another strategy is to fix a percentage of income as savings rather than an absolute amount. This will keep the discipline of saving going. 

If you have had the time to plan and execute the shift away from regular income then prepare well for it. Take utmost care in meeting your regulatory responsibilities, including paying your taxes and building and maintaining your credit score. Review and monitor the financial situation periodically so that you can make suitable updates to your expectations and actions.

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