Self-employed? Income planning is key for your financial freedom
9 October 2019
More and more millennials are choosing their own passions over cushy corporate jobs with fixed pays and benefits. Start-ups, contract employment, and the gig-economy have made their way to our neighborhoods and drawing rooms. These changes are positive for a young and vibrant Indian economy. The self-employed are in the profession for their passion for the job, independence, and the exposure it provides to them. However, freedom comes with its own challenges.
Cash flow management remains particularly uneven for self-employed and freelance professionals. The Covid-19 pandemic, especially, has brought upon us various disruptions in the work environment.
According to recent data by the Centre for Monitoring Indian Economy, about 5 million people lost their jobs in the month of July owing to a lack of economic activity at every level. A direct brunt of this situation has been felt by the freelancers. With retrenchment in multiple sectors, unavailability of regular jobs, and the work-from-home situation, there is likely to be a surge in self-employed and freelance professionals going forward. So, the discussion on uncertainty-proof financial planning for wealth creation and preservation is more important than ever.
Financial Freedom for Self-employed
Self-employed professionals take pride in their jobs and don’t want to compromise on their work-life balance. However, uneven income tends to come in chunks and can have a dent in the quality of life as fixed expenses like home rent, EMIs, school fees, and utility bills come with a monthly due date. There is a need for a disciplined approach to ensure that balance is created between monthly expenses and savings with the intention to meet long-term financial goals as well as creating emergency funds.
Any additional or sudden expense can make a dent in long-term family goals and years of disciplined savings. The financial habits and decisions have a direct and long-term impact on the quality of life one leads. So, it is a good idea to create a structure in place to support long-term wealth creation. The important step is to create an uncertainty-proof financial plan for self-employed and freelance professionals.
Creating an Emergency Fund
This is the first step for a safety net to protect your long-term goals. You should keep your money in liquid saving options like bank deposits or liquid debt mutual funds. You should accumulate at least six months of expenses in this fund. Should any emergency arise, these savings can absorb the financial shock and give enough space and cushion to ride through the rough patch.
Planning a Regular Income Source
Although additional income is useful for everyone, for freelancers and self-employed, it can give much-needed support to take care of the regular monthly expenses which are unavoidable regardless of your income frequency. So, creating a wealth pool that can double up as an income source at regular intervals can come in handy. There are many options to achieve this goal including income solutions.
Income plans among these options are most tax-efficient, as they are tax-free under section 10(10D). The most important aspect of insurance income plans is that they are based on pre-decided investments and time intervals. There is little need for customer intervention and these run on an automatic mode, so the wealth accumulation happens in a systematic manner. These solutions provide a stable passive income, creating additional cash flow. The extra income can also be useful for planning the finer aspects of life including vacations, up-skilling, and celebrations.
Buying Life Insurance and critical illness plans
Uncertainty often comes uninvited. So, no financial portfolio can be complete without adequate protection. Life insurance and critical illness cover help one sail through difficult times and deal with unpredictable disruptions to our long-term goals. Though many corporations cover their employees through group insurance and various other benefits, self-employed and freelance professionals must plan insurance for themselves. Hence, this is a priority.
Life is not about living in fear, life is to ‘live’. But if you want to go scuba diving, better practice first with the best gear. Similarly, while planning for long term wealth creation, a cushion is required to eliminate the possibilities of premature withdrawals or continuing investments. And hence, an alternate plan to generate income in regular intervals is a wise move to improve your cash-flows.
by, Anup Seth, Chief Retail Officer, Edelweiss Tokio Life Insurance