How to plan your finances if you have an irregular income?

Listen up professionals and start-up owners!

Every individual has a passion and a dream. Many wish to break free from their mundane work life to pursue their passions. However, it can be difficult to break the shackles of comfort and security that a well paying job offers and venture into unchartered territory that your dream might lead you to. For those who manage to do so, we tip our hats to you and offer these words of advice.

 

Being a business ourselves, we understand the trials and tribulations that a professional or a start-up founder goes through. The fact is that it can take a while before you break even and start drawing an income. Even the revenues generated can be irregular so how do you manage your personal finances and ensure neither your nor your family’s dreams are compromised.

 

1. Know your expenses– With a job that gives you a fat paycheck your lifestyle expenses are bound to be high. Now with an irregular salary keeping up with the same expenses will get challenging. You and your family should be prepared to adapt to your new financial situation and trim down your expenses wherever possible. It might make sense to set up a SWP (Systematic Withdrawal Plan) that provides the necessary income and help you stick to a budget without going bust.
2. Keep those SIPS going through the good and the bad days-As the case is with most businesses, the revenues are not steady. There will be times when the business would have done well and the receivables have also come in and then there would be not such great times. With such irregular and unsteady income how do you manage to keep your family’s dreams alive. The Key is to invest the surplus in a liquid fund which will then systematically transfer the money on a regular basis in an equity fund. This will ensure that you keep saving and investing towards your future goals unhindered by the ups and downs of your business.
3. Insurance, your protection shield– The job of a life insurance policy is to not only provide for your family in case of an unforeseen event, it is supposed to also cover your outstanding loans and the financial goals such as kid’s higher education, comfortable life for your dependents etc. So ensure you have taken a cover large enough to meet your family’s needs. A simple term plan will do the needful.
4. Health is wealth– With the medical inflation rising at 10-15% annually, the importance of a medical insurance can not be stressed enough. Health is indeed wealth but you don’t want to lose your wealth due to any illness or accidents. You might also want to consider taking an accidental and critical illness policy as a safe guard measure along with a regular medical cover.
5. Contingency fund- This fund should be large enough to cover your 6-8 months expenses. Since you do not have a regular income, it is optimum to consider expenses over a longer period. You could even consider including your SIPs amounts for those many months, this will ensure your goals are right on track and are not hampered by the volatility in your income.
6. Keep personal and business expenses separate– This is the most important advice as it is very easy for the business expenses to spill over and be paid for from your family kitty. This is especially possible if you use the same credit card for both personal and business use. This can further stress your family budget over time.

With an irregular income it becomes essential to plan and channelize your money to ensure your family is well secured financially and their goals and dreams have wings. You might want to consult a financial planner to see how to fund your family goals if you choose to launch your start-up.

 

Read Full Post »

A Guide to Financial Planning for HR Consultancy Owners with Uncertain Cash Flows

I have uncertain inflows – how should I invest?

Money may not be the end in itself, but for most, it is a means to achieve many necessities as well as aspirations. Therefore it becomes important how an individual plans to use his/her hard earned money. More so when the inflows are not necessarily streamlined and consistent like that of an employee. When your personal income is linked to the performance of your firm, a well thought out plan could be all the difference between financial stability or having to make huge compromises.

Being a HR firm owner can have its ups and downs. By following certain simple financial planning steps, you can have some peace of mind with regards to your personal financial situation even though you may not have a steady income:

1. Contingency Fund: This is a basic yet most critical part of any financial planning for a self employed individual. You never know when your next pay check may come. So it pays to prepare for the worst. Thumb rule has always been 3-6 months worth of household expenses to be kept aside in highly liquid assets as an Emergency Fund. Yet we feel that when it comes to a owner/manager, it should be at least 6-9 months worth of basic expenses!  A handy tip, do not forget to count any committed payments such as EMIs and any insurance premiums when calculating the corpus. 

2. Risk Planning: or in lay man terms, Insurance Planning. This could be a considered an extension of contingency planning, but for very specific events. Following are the types of insurance policies one must always have at all times: 

• Term Life Insurance Plan: The plain vanilla term plan is exactly the only kind of life insurance anyone should purchase. Handy tip, to know the amount of cover you might need, start with at least 15 times your annual revenue/income. Don’t forget, insurance should never be mistaken for an investment!

• Individual Health Insurance: If nothing else, an individual health cover to at least cover your own standard hospitalization expenses is a must. Financial independence means you should be able to fend for yourself at the very least, even if it paying for your own recovery. 

• Critical Illness Policy: Contracting a serious illness or undergoing a major surgery would mean a drag on your finances as well as a dent on income. Such financial risks can be mitigated by procuring a critical illness policy. Such policies usually provide for a lump sum payment to tide over the finances needed, in case of being diagnosed with a critical illness.

• Personal Accident Policy: Another source of financial risk associated with most professionals is loss of income/job due to an accident. Similar to a Critical Illness Policy, this policy provides a supplement alternative income for certain weeks of disability depending on the terms of the policy. This can be used to either pay off medical expenses or help in taking care of household expenses during the recovery period.

While more types of insurances are available, it is essential that this set is acquired first. Having your Contingency funds and Risk Planning in place makes a strong base for you to venture into the world of investments.

3. Planning for Retirement: Retirement, or as financial advisors put it, Financial Freedom, is something we all aspire for. The dream of not working for the sake of survival is a goal we all work towards. Yet having an uncertain income can make such a dream feel a little distant more often than not. And while retirement always seem likes a far off goal in comparison to what seem like more pressing concerns, it should ALWAYS be top priority! Underestimating your retirement financial needs can be the one of the biggest mistakes you could make and more often than not, people realize it far too late to make any significant course corrections. Even if you have to start with small amounts, it is the consistency and discipline that will ultimately help you reach your goal.

4. Financial Goal Planning: Only after the first three steps are in place, is when you should really consider planning for the rest of the commitments/aspirations that you might have. As with any goal planning, the two critical aspects to consider are time horizon and future value of the goal, not current value. If you get these two right, the rest becomes clear.

For any individual with uncertain income flows, planning can become easier if you can channelize your savings, prioritizing in the above order! It is essentially in this area where the difference between financial planning for an owner of a firm/business versus that for an employed individual lies.

Read Full Post »

Why Risk Management is critical for HR Consultancy firms!!

Insurance is still a highly misunderstood concept in India. People often look at insurance plans as an investment option. Yet the golden rule of insurance is that it should always be separated from your investments. For a HR Consultancy Owner, a combination of various types of insurance policies can insulate the business as well as themselves and their family from potential risks. Insurance policies such as:

• Vanilla Term Life Insurance: This is a primary insurance that one should procure for pure life cover. The sole objective of such a policy is to ensure continued financial stability for your family in the eventuality of your sudden demise.
• An Individual/Family Health Insurance: This type of policy is meant to cover for standard hospitalization expenses in case of an illness. Depending on the requirements, such policies can cover just a single individual to a family of four and even more.

However, one must now look beyond these basic necessities. Someone who is constantly on the move and if he/she is the sole bread earner of the family needs to have other risks covered. Risks such as:

• Critical Illness Policy: Contracting a serious illness or undergoing a major surgery would mean a drag on your finances as well as a dent on income. This phase of “no cash inflow” could be extended if recovery periods take longer than expected due to a serious illness. As such a substitute income source has to be provided for such situations, either to pay, at least partially, for basic household expenses or fund the significant expenses that are part of any big medical procedure. Such financial risks can be mitigated by procuring a critical illness policy. Such policies usually provide for a lumpsum payment to tide over the finances needed in case of being diagnosed with a critical illness.
• Personal Accident Policy: Another source of risks associated with most professionals is loss of income/job due to an accident. In such cases, temporary or permanent disability caused due to any accident can force the individual to stop or totally cease his work. On top of that the costs related to recovery are usually on the higher side. Hence, similar to a Critical Illness Policy, this policy provides a supplement alternative income for certain weeks of disability depending on the terms of the policy which can be used to either pay off medical expenses or help in taking care of household expenses.

But insurance should not have to be curtailed to insure just the individual. Founders of HR consultancy firms are usually the most valued personnel in the organization. After all, they are ones that drive the image and the growth of the firm forward, eventually becoming indispensable to the firm. The firm therefore must look to protect itself from possible fall in revenue/image from unforeseen events related to such individuals. Policies such as:

• Keyman Insurance Policy: this is a policy that a firm takes for a key employee such as the CEO/Founder, through whom a lot of business is generated. Losing such a valuable individual due to his/her demise can lead to significant financial loss. Hence in addition to being tax efficient from the company standpoint, such a policy also helps the firm deal with such loss in case of an unfortunate event.
•  Directors and Officers Liability Policy: This is a little more unconventional type of a policy. It is specifically applicable only when to provide cover for the personal liability of Directors arising due to mistaken actions carried out by directors in pursuance of their managerial duties. Such policies covers paying for legal costs incurred while defending the individual director in a court of law. Such policies provide protection for claims brought against directors and officers for actual or alleged breach of duty.

A combination of such policies may be crucial for HR Consultancy Firm owners to cover risks. Uncertainties are the only certainty in life. And while you can never rule them out completely, you can soften the hardships that come with such hard times if you have the necessary insurances in place. In the end, that is the singular function of any Risk Management Plan.

 

 

Read Full Post »