When income is uneven, go for a steady plan
Planning is crucial to sustain a certain lifestyle and for financial security
While the salaried can plan ahead with regular cash flow, businessmen and professionals typically find this exercise much more difficult due to their income flow. Without a proper strategy, the end-game can have undesirable outcomes. World heavyweight champion boxer Mike Tyson earned more than $400 million in his career, and yet was declared bankrupt when he retired in 2003. Similarly, celebrated footballer Diego Maradona had unpaid taxes of $50 million.
When your income arrives in lump sum, the tendency to spend is strong. Without a budget approach that is built upon your minimum income, nothing is saved for investments. Also, without a crisis staring at them, professionals and businessmen don’t look at money management. One of my acquaintances, an instrument player, realized this the hard way. As long as professional assignments flowed in regularly, she was happy. Yet, when she started suffering from shaky hands, it changed her world. In many cases, professionals are blind to the risks they may encounter professionally until it actually happens.
Let us see how different strategies would work for a few categories of entrepreneurs and professionals.
Strategy for businessmen
X runs a small eatery in Indore. She earns more during certain months of the year, or on particular days like the weekends. Here is what such investors can do.
1. Create a regular income stream through investments. Business owners often earn more, but the irregular nature of inflows can hide this fact. One must invest in products or avenues that give a recurring regular stream of income while also creating long-term wealth. If you earn Rs60,000 per month for 9 months and Rs3 lakh per month for 3 months, then you must direct whatever is left to savings, after deducting monthly expenses. If your cost is Rs40,000 per month, then you must save Rs20,000 per month for 9 months and Rs2,60,000 per month for 3 months. This will mean accumulating a total of Rs9,60,000. Remember to spend only after setting aside savings from your income.
2. Life goals need not be irregular even if income is. Financial goals should be a mix of professional (expansion of business) and personal (education, marriage, house and retirement). Arrive at the sum required for each goal. Next, allocate money. Once you know your goals, you have to start saving and investing for them. Mark your goals as long-term or short-term, and invest in equity-based instruments for long term because equity has historically given the best returns among all asset classes.
Strategy for professionals
B is a football player in Kerala. Barring a few, sportspersons and celebrities usually have a very short career. They earn more during peak periods, but the decline is extremely sharp. So, their financial planning has to be more elaborate. Here is what they can do.
1. A lifetime’s worth of corpus has to be built in half the time. So, target a corpus and then work towards it during the working years. For example, a sportsperson can assume that his career will last for 15-20 years. If a 22-year-old sports professional assumes that his career won’t last only till he is 37 years old, then he needs to build a corpus that will support him for the next, say, 40 years. In such a case, he must consider his current expenditure per annum, and future expenses when he will have a family and their future expenses (child’s education, marriage or others). Do this in consultation with an expert to capture aspects like risk profiling and the right asset allocation.
2. Use a systematic withdrawal plan (SWP) for regular income. This is beneficial for those who need a corpus for the latter half of their lives. The prime role of the SWP is to generate a tax-efficient additional cash flow without the need for liquidating the entire investment. Match fees, one-time bonanza and other such income can be invested in funds and withdrawn through SWP. In this way, you will get a fixed income at a predetermined time frequency.
3. Build an untouchable emergency fund. Once cash flows are taken care of, the next step should be to set up an emergency fund for rainy days. Injuries can set you back financially. So, aim to have 3-6 months’ worth of living expenses at all times. An emergency fund will relieve the stress in the face of unanticipated situations.
For those who have irregular income, financial planning is crucial if they want to balance sustaining a certain lifestyle and achieving financial security.
Arun Thukral is managing director and chief executive officer, Axis Securities