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.
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.
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!