How freelancers can manage their finances
For starters, a freelancer should replicate the situation when he was earning regular income. This involves estimating an annual income and earmarking a monthly salary.
As and when he gets a payment, he tends to blow up the money. He knows he needs to start saving in earnest. But he has saved very little since he started out on his own. He wants to know how to get his finances back on track.
For starters, Sumit needs to replicate the situation when he received a regular income. The first step would involve estimating his annual income. As his income is irregular, he can smoothen things by earmarking a monthly salary for himself based on the revenue he expects to generate. He should pay the salary by crediting a fixed amount to a separate bank account. It is best to make a conservative estimate of the possible revenue as otherwise he may find himself with less than enough money to pay himself.
Once he has an income as a base, the next step would be to estimate the expenses that he can meet out of this self-paid salary. For this, he must prioritise his expenses in order of importance. All mandatory and essential living expenses will have to be met first. Lifestyle expenses may need to be curtailed until the business stabilitses. Along with this, he must provide for health and life insurance and his tax liabilities, as these are big ticket expenses that can derail his financial situation.
Sumit must focus on creating an emergency fund, as this will be useful in bridging any unforeseen gaps between income and expenses. In case he draws from his emergency fund, he must replenish it as soon as he has excess income.
Sumit should try to factor savings from his income since he is no longer covered under any mandatory employee savings plan. He should also be disciplined and move any excess revenue earned above his salary into investments rather than increased spending.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)