A financial planning guide for freelancers

You’ve read Dinks, Suddenly Single, Nuclear Family, and our other stories on financial planning for specific needs. This week, we bring you financial planning for freelancers, as a continuation of Firstpost’s series on financial planning. To know more, read on.

Your life: Most probably, you are a free-spirited animal. Getting stuck in a 9-to-9 job isn’t your idea of life. Hence, you chose freelancing. Freelancing means ‘freedom’. Freedom from reporting to a boss, freedom from fixed work hours, and most probably, freedom from work-to-home commute. Freedom from working according to someone else’s schedule, freedom from workplace politics, freedom from cubicle culture. The reasons as to why you are a freelancer could be many. But, along with this freedom there is also an unacknowledged concern; where the next pay cheque will come from. You could either be a freelancer who is struggling to make ends meet, or someone successful enough to get huge and handsome lumpsums for a few weeks a month followed by dry spells for a few months, before you get your next assignment and have the moolah flowing in. This story is for the latter and not the former.

Your Money

Higher Cash Reserves: The fact that your work, a.k.a money, goes through a cycle of famine and feast, makes you very different from those who get a regular steady income. Hence, it’s imperative that you have a good amount of cash reserve kept aside. Ranjit Dani, Nagpur-based Certified Financial Planner (CFP), says, “It’s important to have a minimum of six to twelve months of cash reserve kept side. Just three to four months’ money won’t do.”

Medical Insurance: “Even before buying a medical insurance, ensure you get yourself a personal accident cover,” says Kiran Telang, Mumbai-based CFP. Logic being, if there is a temporary disability, you will be able to get some funds rolling in from the insurer’s side. Telang adds, “But, keep in mind, since you don’t have a regular income, the amount that your get during the disability period from the insurer will always be a fight.” Next, is the medical insurance. Unlike for those with a steady income, who usually have an employers’ medical insurance cover of Rs 3 to 5 lakh (and that amount is enough), you should get yourself at least a Rs 10 lakh cover.

Life Insurance: Buy life insurance only if your have financial dependents. Ensure you buy a term plan which covers an amount equal to 12-15 times your annual expenses or 8-10 times your annual income plus debt obligations.

Investments

Liabilities: As a general rule for freelancers: Avoid taking fixed, long term, large liabilities. Of course, this would vary from case to case. If you earn Rs 8-10 lakh every six to eight months, you can afford a home loan with an EMI of Rs 50,000. But if you earn just a lakh every three- four months, a home loan with that EMI amount won’t make sense.

Strategy: Dani says, “A major reason why a freelancer’s financial planning need is different from a person with a steady salary is his erratic income pattern. If you take care of this issue, regular financial planning applies to him.” Dani suggests a strategy. He says you should open two separate savings accounts. One should be used as a professional savings account. The other should be used as a salary account.

The lumpsum amounts you earn from the freelancing assignments should be kept in the professional savings account. And every month a fixed amount should be transferred from here to the salary account - a salary you pay yourself. Dani says, “This takes care of erratic income, so for all practical purposes, this is the amount you should assume you receive as a salary.”

And, you have to do the best with this amount every month. This will nudge you to practice much-needed financial discipline and prevent impulse buys. The amount you pay yourself as a salary should cover your living expenses, your EMIs and investment (small amounts as SIP in a good mix of debt and equity oriented MFs) for various financial goals. Just a reminder: even as you use this two-account strategy for better money management, ensure you have your emergency funds parked in liquid, short or ultra short debt-oriented funds.

Retirement: Since you get the pleasure of a boss-free worklife, you don’t get the privilege of EPF. Period. Investing small amounts towards PPF and NPS isn’t a bad idea.

If your spouse has a regular income, things would be a bit easier. If your spouse is a homemaker, you will have to use these financial planning tools more wisely. We highly recommend you avoid the DIY approach to finances and instead approach a certified financial planner. So that even during a famine (no-work, no-earnings period) your barns are full, and even during the feast (working period) you aren’t worried about the next famine. Good Luck!