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What if you have irregular income

What if you have irregular income

Insulate your investment plan from income fluctuations.

If you have a 9-to-5 job, you might be deeply envious of those who have less structured work lives. But remember that they also have less structured finances. How do they deal with this?

If you are such a person, Swapnil Pawar, co-director, PARK Financial Advisors, has some advice for you. First, list your annual income for the past three years. The lowest figure should be taken as a benchmark, he says. Your annual expenses should not exceed 80% of this amount. The remaining amount should be invested (see “Budget for Irregular Income”).

To ensure that you have enough money to meet the recurring monthly expenses, Pawar suggests that you keep aside enough money to meet at least six months’ expenses. This is not an emergency fund, so it should be replenished every time you bring home some money.

What about monthly investment targets? Do you need to keep aside money for that too? Not necessarily. Pawar suggests that you invest a lump sum in a debt instrument and then systematically transfer money to equity mutual funds in the proportion you desire. The advantage of this method is that you are not under pressure to maintain a higher bank balance (where your money depreciates in value) on account of the money that is to be invested in SIPs.

Irregular income should not deter you from taking loans either. The banks will offer you credit on the basis of your past years’ income. But don’t opt for loans with long tenures.

Instead, Pawar suggests that you maximise the down payment and pay off the loan with higher EMIs. After all, it is easier to predict your career movement in the next three to four years than in the long term, he says.

The insurance calculation for people with irregular income remains the same as for those who get a regular salary. But professionals like doctors and lawyers should also buy a professional indemnity cover.

Akhilesh Gundecha, 40, Bhopal
(with wife and child)

Special situation: Irregular income

Profession: Pakhawaj player

Personal annual income: Rs 4-6 lakh

Strategy: Income from joint family pooled together (three brothers are musicians). Expenses of family easily met by the joint income

Budget for irregular income

Annual income for past three years:

2005: Rs 4 lakh
2006: Rs 3.5 lakh
2007: Rs 6 lakh

Lowest annual income: Rs 3.5 lakh

Average annual income: Rs 4.5 lakh

Monthly income for budgeting purposes: Rs 3.5 lakh/12 = Rs 29,000(Approximately)

Annual expenses limit: 80% of lowest annual income=Rs 2.8 lakh
Monthly expenses limit: Rs 23,300 (approximately)
Limit of discretionary expenses: 20% of total annual expenses
Minimum investments: 20% of lowest annual income
(If you earn more, try to channelise extra income in investments)
Emergency fund: 6 months’ expenses