An Essential Guide to Financial Planning for Non-Salaried
If you are a non-salaried person, you may understand the phenomenon of uncertain earnings. Unlike ‘salaried’ people who earn a regular income from their jobs, ‘non-salaried’ people are those whose expected annual earning is a little difficult to guess.
In general, the non-salaried people are those who earn their living by doing some business, engaging in a part-time profession or carrying out freelancing. They do not receive a monthly paycheck from their company or bosses. Moreover, this irregularity in the income of the non-salaried people is dependent on several factors like demand, workflow, competition, technical innovation, regulations, and technical know-how.
Anyways, when we talk about financial planning, for most salaried people, the health insurances and retirement funds are somewhat taken care of by their employers. However, for the non-salaried people, they need to plan all these by themselves. And that’s why financial planning for the non-salaried person is a must.
In this post, we are going to discuss how non-salaried people can plan their personal finance effectively. Let’s get started.
Financial Planning For Non-Salaried People
Last Sunday, I met my friend Aditi for a coffee. We met after a long gap of three years. She told me that she has been working on a food blog for the last two years and making decent money from it.
After talking on a few causal stuff for some time, we started discussing her finances. She told me that although she was making good money as a freelancer, however, she is struggling a little as her income as they are very irregular in nature.
If we look into her finances, in general, whatever she saves, she deposits the same in her Savings Bank Account. She has also bought a Life Insurance policy and pays her premiums quarterly. Nonetheless, she was feeling a little clueless regarding how to come up with effective financial planning that can help her meet her future financial aspirations.
As a personal finance enthusiast, I tried to help her in my own way. So, we discussed in details regarding the four pillars of the financial Planning- Emergency Fund, Insurance, Retirement Fund, and Passive Income.
Firstly, I advised Aditi to build an adequate Emergency Fund. This fund should be big enough to protect her for at least six months in case her income declines or comes to a halt in the nearer term. By Emergency Fund, what I actually meant to say was that Aditi should have sufficient money in her Bank Savings account to run her expenses for a minimum of half a year.
Therefore, Emergency Fund = 6 times Aditi’s expected monthly expenses.
Anyways, these days Bank Savings Accounts do not offer a high interest on the deposits. In fact, the saving interests are not even good enough to beat the current consumer inflation rate in our nation. Therefore, I suggested Aditi to park her savings in a liquid Mutual Fund, which will not only help her in forming a good Emergency Fund but also boost her savings appreciate at around 7 to 8 % per annum.
Next, we discussed Insurances. Aditi already mentioned earlier that she has a life insurance policy. However, when we started discussing it in detail, I came to know that her insurance was in the nature of “Term Plan”.
According to me, although Aditi does not have an extremely high standard of living, still her Life Insurance plan should cover a minimum of 15 months’ expected annual income. So, I told her to review her policy once and in case she feels she is under-covered, she should give a thought to take another Life plan.
Another important point that I came to know was that Aditi didn’t have any Medical Insurance coverage at all. For a self-employed person, Mediclaim is an essence. I told her that it should cover a minimum of 5 months’ expected monthly income. Here, please note that many people prefer to go with Life Insurance policies in the nature of the endowment plan. For the risk-averse investors, as endowment plans provide decent insurance plus investment option.
After discussing insurances, I asked Aditi how long she is willing to work as a freelancer. In other words, when does she plan to retire? To this question, Aditi answered that she would like to work at least 25 to 30 more years from now.
When talking about the retirement savings, I must tell you that it does take an immeasurable amount of time to build an adequate fund. By the immeasurable amount of time, what I mean to say is that you might need to wait for around two to three decades to build a substantial Retirement Fund which could help you maintain a similar (or even better) standard of living after you finally stop earning from an active source.
If you ask me what should be the desired retirement corpus, my answer would be that you need to build a corpus which should be at least twenty-five times the expected annual expenses. Nonetheless, the big question here is how can you build such a huge corpus from around 25-30 years from now.
Don’t worry, the answer is not very complicated. Here, I will suggest you to consider investing in Equities or Equity Mutual Funds. Yes, of course, Equity investing is a little risky in the short term. However, if you opt for value investing, it can aid you in creating a huge corpus in the long run.
As a non-salaried person, Passive Income can help you to support your basics expenses as your earnings may be filled with ups and downs.
In meaning, passive Income is that income which does not require your active time. Once your passive income mechanism is set up, you don’t need to do anything to earn that income. Moreover, Passive Income can be stable and act as your secondary source of income. A few examples of Passive Income can be your rental income, dividends, and Interests from Equities and Bonds etc.
Apart from your emergency and retirement fund, you need to build a few consistent passive income sources and to add them as other income in your financial planning.
There is no doubt in highlighting the fact that non-salaried people are subjected to more financial risks compared to the salaried people. For all the self-employed people out there, like Aditi, effective financial planning can help you manage and mitigate the financial risk of your irregular income.
And therefore, as a non-salaried person, you should take your financial planning seriously and start working on your Emergency Fund, Passive Income, Insurance, and Retirement Fund.
That’s all for this post. Today, we tried to cover how a freelancer, business owner or an independent professional, can manage their personal finance effectively. We wish you all the best for your financial investment journey ahead. And Happy Investing!