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The whole process of budgeting as well as investing is simpler when there is a stable salary. However, increasingly we continue to live in a world of commission-based jobs and freelancing. Being self-employed has a distinct challenge – dealing with a fluctuating income i.e a fat cheque on few months while a smaller amount on other times.
Under such circumstances, the question that arises is, how does one save as well as invest to achieve their long-term financial goals? This blog will answer this question below. How can investors save and invest for achieving their goals with a fluctuating income? Map out next year's income One should try and decipher income patterns based on past income data. It will help them estimate income for the forthcoming year too. So, if an investor has received fluctuating amounts of money in different months as salary, like for instance maybe Rs 40000 in one month, Rs 80000 in another and Rs 60000 in the other months, they can project a monthly income of Rs 53000. This will be based on a yearly average. A more traditional estimate will consider the lowest monthly payment of Rs 40000. This is essentially the money with which one needs to manage their expenses and savings. Investors can also visit financial planners like Wealthclock Advisors and acquire their expert guidance for the best results. Creation of a baseline budget The next step involves categorizing every expense under two distinct categories – needs and wants. Monthly expenditure on food, groceries, rent, and utilities fall into the first category. Discretionary expenses like purchasing trendy clothes, entertainment and exotic vacations all fall into the 2nd category. One should keep in mind their discretionary expenses and ensure they are not overspending. The money saved can be utilized in investments like mutual funds. Saving targets Subsequently, every financial goal should be converted into saving targets. Like for instance, if someone is planning on building a retirement nest egg over the next 3 decades, they need to work backward. They should look at how much they are required to save (quarterly, half-yearly or annually) by investing in equities as well as debt in the proportion to their preference. Proper saving can lead to better mutual fund investments that will propel the goals of the investors. Paycheque People should create two separate bank accounts – a personal one and another that is for business purposes. They need to give themselves a paycheque by transferring money on a monthly basis from their business account. The amount to be transferred will be equal to budgeted household expenditure as well as that of the savings target. Also, there should be another aim to make investments early during the month, before the household expenditures. And the personal bank account should be used for this purpose. Creation of a cash buffer How can people give themselves a monthly paycheque when they have an irregular income? This is where a three-month cash buffer comes useful. It should be made over and above that of their emergency fund. This will ensure that their savings, as well as budget plan, are not upset due to a few bad paying months.
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