Financial Planning for a Business Person with Unpredictable Income

Financial planning for Unpredictable income

Financial Planning seems to be easy when you have a fixed income every month. But what about a business person or anyone else who has unpredictable income. They do not have the luxury of a fixed income every month.

I am outlining a few steps which can help such a person to plan their finances better. According to me, there are two approaches by which you can address this issue.

Average Income Approach

Consider your average income over the last one year. Then arrive at your monthly income by dividing that amount by 12. Make your budget and plans for investment accordingly.

Fixed Salary Approach

This approach considers your business as a separate entity and you are providing managerial services to the business for which you are being compensated.

I think this is the better way to plan. Fix your monthly salary which you will draw from your business account.

Whether you had a good month or a bad month for business, you will draw the same amount as your salary.

You need to keep your business and personal bank accounts separate, if not already done so. All your business expenses have to go from your business account only and all your personal expenses need to go from your personal account.

Once you have this system in place, it will be easier to do financial planning for yourself. Also, it will ensure that you have some money in place for doing business development, whenever you have a good month.

Steps of Financial Planning:

  • Adequate Risk Coverage

The very first step is to ensure that you have adequate risk coverage.
Purchase a term insurance plan with a sum assured of 100 times your monthly income. Your sum assured should cover all your liabilities and more if you want to ensure that your family is provided for financially, in case something tragic happens to you.

  • Emergency fund

You need to keep 12 months expenses as emergency fund. You may keep this in a bank deposit or a liquid fund. This will help in case of emergency and also it will not disturb the funds for long term goals

  • Short term and Long term goals

Enumerate your short term and long term goals in order of priority. You may invest in debt funds for short term goals and hybrid or equity funds for long term goals. This will also include your retirement goal.

  • Plan for financial freedom

This is something that very few people do.
Planning for financial freedom means that you invest in such a way, that, later on, your money starts to work for you. You can live off the income generated by your investments and achieve financial freedom.

Read more: How can you achieve financial freedom by investing in mutual funds?

Happy Investing.

Financial Planning for a Business Person with Unpredictable Income
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