Financial planning for fluctuating income

Planning your finances with a steady pay cheque on a fixed date can be easy. However, if you are among those who have a fluctuating income each month, money planning can seem like a challenging task. An unpredictable income stream is a common challenge that self-employed professionals, musicians, consultants, actors, sports persons and commission agents face. Fluctuating income causes a certain vulnerability or to some extent even insecurity. Financial planning as a concept is an essential way to ease out the stress of an irregular income pattern and overcome the blues.

Here is a five-point strategy to create financial security and stability while having a fluctuating income:

1. Budget – Income and expense

Having an idea of your probable income and expenses is the first step to creating an order. Lack of a budget in most cases amplifies the impact of an irregular income. Create a list of your absolute essential expenses in order of importance. Once a comprehensive list of this is made, one can start prioritising payments and even have a mechanism for receivables. All excess monies after essential expenses must be saved while you start off this exercise.

2. Save wisely – Make money work for you

With a realistic budget in place, have a savings nest to take care of lean periods of income. Ensure the monies are smartly saved, rather invested appropriately as per liquidity and time available. Investments can earn you an additional income along with building assets (financial and physical) at this stage. For example, savings should be converted into an asset, that is, liquid or arbitrage fund, which can grow and provide quick liquidity. For medium to long term, you can opt for diversified equity, real estate or other assets. Assets are stores of value and income generators leading to wealth accumulation. Don't be too conservative and hoard excess cash.

3. Pay yourself – Stabilise your income

Paying yourself sets the right perspective and helps plan cash flows efficiently. Create a steady and sustainable minimum salary for yourself every month. Paying yourself a suitable salary gives you a perspective of the excess income. This excess income provides you comfort for future and the stability of fixed income. Keep a track of your month-on-month income and set a date for starting a regular salary on a prime earning month. During the month where you have extra earnings, set aside an exact realistic salary that you need. The surplus amount or the extra cash will accumulate over a period of time.

4. Use debt effectively – Liquidity management

In today's market place there are plenty of instruments or facilities that help manage the swings in income. Options like credit periods, credit cards, overdraft limits and short-term loans can be effective in managing uncertain incomes. Though all these facilities cost you, they can be useful strategies to create a harmonious cash flows. Make sure you don't over rely on debt and get into a debt cycle.

5. Create your own workable strategy – Customise

You have to be flexible and agile to the changing dynamics of income. For instance, you may get huge incomes in very short periods and then have a dry spell. There will be cyclical patterns of high and low or no income. Knowing the trends in your specific industry or demand cycles will help you create a relevant plan.

The writer is founder and managing partner at Germinate Wealth Solutions LLP