How to manage finances with irregular income?

As a freelancer and an entrepreneur, my income stream doesn’t follow any pattern. However, I earn around Rs 20-25 lakh annually, with monthly expenses of about Rs 50,000. I have already saved about Rs 20 lakh. What is the best possible strategy to achieve stable monthly cash flow and my long-term financial goals through mutual funds?

What you are experiencing is similar to what millions of entrepreneurs face on an ongoing basis. We understand that you receive a decent cash flow annually, but this is not certain on a month-to-month basis, and you need a strategy for monthly cash flows and long-term financial goals. 

One of the most important aspects of managing irregular income is to avoid mixing personal and business finances. It’s common to feel the urge to dip into other accounts when there’s a pressing need on the business or personal front. However, try to resist this as much as possible because forming this habit can be detrimental in the long run. It’s always better to have separate accounts for both, ensuring that your finances remain organized and your financial goals stay on track.

Now, let me answer the question step-by-step:

Managing monthly income: 

It’s good that you have budgeted your monthly expenses to be about Rs 50K.  You can design a financial plan to get Rs 50K as regular income every month. Treat it as a “salary” so you can create a predictable and manageable flow of funds for your personal expenses. 

You mentioned that you already have saved around Rs 20 lakh, so you can consider this corpus to help you generate a steady periodic income to meet Rs 50,000 required for monthly expenses. Over a year, you would require around Rs 6 lakh. 

Park around Rs 6 lakh in a liquid mutual fund. You can set up a Systematic Withdrawal Plan (SWP) from this corpus to withdraw around Rs 50,000 monthly for the next year. 

There are investment avenues like high dividend-yielding stocks and REITs, which may offer periodic income, but there could be some uncertainty about the amount of income you receive from such investments. So, in our view, it is better to stick to less risky liquid funds. 

Your expenses may vary every year. Based on future needs and expense budgeting, make sure you transfer money equivalent to the next year’s expenses to liquid funds every year when your cash flow permits. 

Have separate accounts

Let the Rs 50,000 you withdraw every month from your liquid funds be deposited into your savings account. This account serves as your primary source for daily expenses, ensuring that your basic financial needs are consistently met without touching your investment funds.

Whenever you receive a lump sum amount, direct it to your investment bank account. This account is solely for growing your wealth—be it through mutual funds, stocks, or other investment avenues. By channeling all investments through this dedicated account, you maintain a clear distinction between your savings and your growth-oriented funds.

Investing in future goals

After allocating money for next year’s expenses, consider the balance amount for investments. For example, after transferring Rs 6 lakh each year to liquid funds to meet next year’s expenses, use the balance amount for investments. 

As the income is irregular, you can choose lump-sum investments instead of a monthly SIP (systematic investment plan). 

For short—to medium-term goals, we suggest investing the surplus in short-term debt instruments. For medium—to long-term goals, you can choose high-risk products such as equity. Remember the old adage, “Don’t keep all your eggs in one basket?” try to diversify across different asset classes and invest in a mix of debt, equity, and gold instruments based on your risk appetite. 

When investing in equity funds for long-term goals, you can also stagger your investments instead of making a lump sum investment. For example, if you think valuations in the market are too high, then consider investing the lumpsum amount in a debt fund and setting up a systematic transfer plan (STP) from a debt fund to an equity fund, where money is transferred in installments.  But remember, as per the current tax rules, STPs and SWPs are considered as withdrawals, and you will be required to pay capital gains on the same. 

Make sure you have proper retirement planning in place. Salaried employees are forced to save every month towards the employee provident fund (EPF), which is not available for the self-employed. Consider investing in long-term retirement options like the National Pension System (NPS) or the Public Provident Fund (PPF). These options also offer some tax benefits. 

Emergency fund

Having an emergency fund becomes doubly important when you have an irregular income.

This fund should cover at least 12 to 24 months of living expenses, which in your case amounts to Rs 6 to 12 lakh. As you are working as a freelancer, we advise around 24 months of living expenses as an emergency fund. This fund should be kept in a liquid, low-risk investment like a savings account or a liquid mutual fund. This ensures that you have immediate access to cash in case of any unforeseen circumstances. This should be on top of what you would require for your regular withdrawal to manage your expenses during the year. This way, if you are not able to generate income for a while, you can use this fund to tide over such a situation.

Try to diversify your income sources as well. When you have multiple income streams, you reduce your dependence on any one source. This helps in maintaining financial security and stability. 

Health Insurance

Buy a base health insurance policy with a minimum cover of Rs 5 lakh, along with a super top-up policy of around Rs 50 lakh with the base policy cover amount as the deductible. Buying health insurance this way would mean filing claims through multiple policies, but it would increase your health cover considerably for a very low premium.

This column is just to give a financial planner’s perspective, which is subjective. The views and opinions expressed in this blog are those of the author. All content provided is for informational purposes only and should not be taken as professional advice.