Monsoon is loved by everybody. Well, almost everybody. The rain can surprise you on a very sunny day and is generally unpredictable. Although the rain can be a dampener on your weekend plans, there’s just something really magical about the weather. Unfortunately, there’s nothing beautiful about your income being just as unpredictable as the rains. Here’s how you can stop feeling blue about it and work your income to your benefit.
Let’s take the case of Sudeep, a 35 year old who runs a garment export business in Patiala.
His business is largely based on the demand of the season and the market is highly competitive. Most of his clients have a 60-90 day credit period and it extends sometimes. This often makes him depend on loans to purchase raw materials and other miscellaneous business requirements.
It is difficult for him to predict what his income will look like from one month to another. He has to manage his business expenses, home loan and car loan with his irregular income.
When he does make a surplus income, he either closes his short terms loans or invests in some onetime ULIPs or the stock market. He often picks investment plans suggested by his friends without doing much home work. He has also invested heavily in real estate.
Sudeep’s company has a decent turn over, but he often faces financially insecurity and a lack of liquid money.
How can Sudeep Channelize his Income?
Streamlining his income is the first step Sudeep should take. Good budgeting and planned business expenses would help him get his debts organized. Here are the steps he can take have a more streamlined income.
Know his Cash Flow – Sudeep should take out some time to map the cash flow of his business over the last year based on his minimum monthly income. It should include everything – investments made for business, personal expenses, profit made, cash in hand and outlying cash.He should also figure out his usual earning intervals to have a better idea about the payment patterns of his clients.
Categorize Expenses – Next, he should categorize his expenses,both personal and professional. If he has a clear idea about the average monthly expenses he incurs, he can draft a clear plan for putting aside a fixed amount every month in another account.
Be Disciplined – An irregular cash flow is very tempting. It can prompt him to splurge when he gets surplus income. A financial discipline is very important to prioritize his needs and ensure controlled spending. Making financial commitments like insurance or home loan can help stay disciplined.
Emergency Funds- A business could definitely benefit from having emergency funds, considering the volatility of the market. Things can be just as unpredictable when it comes to personal life. Ideally, an average expense of three to four months should be kept aside.
Effective Financial Products
Loans – Sudeep can make use of short term business loans with no pre-payment penalty or letters of credit. Making use of the over draft facility in his current account is also a good idea.
For a home loan, he can opt for a home loan over draft or flexi payment loans, where he can pay lump sum amount whenever he can. These type of loans also allow withdrawal whenever he needs money.
As a thumb rule, he should avoid taking personal loans or credit card loans.
Investments – Fixed investments with heavy monthly or yearly commitments should be avoided as he is unsure about his cash outflow. One time insurance products are recommended; but he needs to make a good market study before investing. One time mutual fund investments are ideal to get the best out of his irregular surplus income.
Investing in stocks is a good option as well, but they need to be studied well beforehand. Also, considering stock investments as liquid emergency funds are a bad idea as he will face losses if the markets are down.
Investing a part of his surplus money in liquid funds is ideal, as it can be accessed at any time. They can reap benefits better than a traditional FD.
Sudeep should avoid real estate investments as they lock huge amounts of money. He may not be able to liquidate quickly enough when in need of money.
Sudeep should ensure that his budget includes savings for his personal goals, considering his family, retirement and emergency cushion as well.
His family members should be covered with ample insurance. His business establishments and raw materials should also be adequately covered with general insurance covers like Standard Fire and Perils Insurance, or an Office Package Policy, to avoid any unforeseen expenses.
An efficient tax planning with the help of a CA should be part of his planning as well.
Controlling your irregular income is not as tough as predicting the weather. In either case, being well prepared and avoiding potholes always pays well.