A large number of individuals in India work on a freelance basis in the field of technology or art. There are also a significant number of self-employed small business owners.
The needs of freelancers might be the same as a salaried individual, however, they do not have a definite amount of fund inflows coming every month or pension fund provisions to plan their future definitely. That's why, with an irregular flow of income, you will have to strategically place your investments in different saving baskets.
Make a checklist
You can start by evaluating the current savings that you may have already, like fixed deposits, bank balance, property, etc to get an understanding of how much of it can you set aside as emergency fund for your 'rainy days.'
This activity will give you a better sense of where you stand and also a confidence that you are able to handle your own finances. If you are self-employed, you should also follow the rule of treating the business as a separate entity from yourself. You can assign a fix salary for yourself, irrespective of the rate of sales.
Another important reason to make a checklist is to understand your monthly or 6-monthly income on an average, which will help you opt for the right EMI option for any loans.
Unlike employed individuals, you will need to keep away at least 6 to 12 months worth to survive without a job in a fixed deposit or liquid fund.
It is also required for a self-employed individual whose business outflow will more or less be the same, regardless of profit made.
If you do not manage to create a decent emergency fund, you will have to sell off your assets, which could easily hamper your future monetary goals.
Goal based asset allocation
Apart from an emergency fund, you should consider the following buckets to make your savings:
- Child education
- Home loan
- Health Insurance
Insurance and child education
Health insurance and accident insurance are important because unlike a salaried employee, you do not have a medical cover or paid leaves as your health equates to your ability to work.
Even after you are no longer hospitalized, you will need a few days off to recover completely. It would be advisable to opt for an insurance that gives you over Rs 5 lakh coverage.
If you have dependents, you can go for a life insurance cover that is 10 times your annual expenses plus debt obligations. If you do not have anyone financially dependent on you, you can postpone this expense.
If you have children, you are responsible to make long term and short term arrangements of funds for their education. In which case, you can opt for a long-term SIP or STP for college education and maintain a liquid fund for school fees.
EMI on home loans is entirely dependant on the calculation you make on your average monthly income. Since your income is not regular, you will have to choose an EMI accordingly.
Suppose your monthly income crosses Rs 1 lakh, you can opt for Rs 50,000 or so EMI on your first home or a second home that you can let out for an additional source of income.
As a freelancer, you will not have the benefit of EPF, and that can leave your old age exposed to vulnerability.
You can start with an NPS (National Pension Scheme) account and a PPF (Public Provident Fund), both of which allow you a flexibility in amount towards deposits made. They also give you tax benefits. You can make deposits as and when you can, making sure you are maintaining the minimum deposit requirements.
Additionally, you can make long-term equity investments for a comfortable retirement. This savings can be made in terms of equity mutual funds too.