- Date : 04/07/2022
- Read: 4 mins
Self employed can cushion their financial instability and erratic incomes by creating a larger emergency fund. Know more.
Emergency Funds Help Self-Employed Avoid Financial Risk: How?
Self-employment gives you independence. However, you cannot overlook the degree of financial instability it brings with it. Self-employment cannot give you the mental peace that a fixed monthly salary or insurance coverage gives.
Self-employed persons should always be prepared for financial contingencies appearing out of thin air. This is mainly because they don’t have a fixed salary. It makes their financial condition unstable. To deal with any contingency, you should be fully prepared to deal with the finances. That’s the reason why you should create a larger emergency fund.
Create a Larger Emergency Fund to Handle Irregular Cash Flows
Everyone should have a fund for contingencies. However, those (primarily self-employed professionals) with unstable incomes should maintain a larger emergency fund.
The retainment of six months’ expenses as an emergency fund is the general thumb rule. However, it might be better for the self-employed to have a larger fund. Its size will depend on the following factors:
- The volatility of your income
- The possibility of no or low income
- Whether you have an earning spouse or you are the sole earing member of the family.
Considering you are the sole earning member of the family, a self-employed person should save adequate funds that can cover his expenses for 12 months.
What expenses should you include while Calculating 12 Months of Emergency Funds?
You should include rent, education, medical, transportation, communication, EMIs, and other regular costs while calculating your monthly or 12-months of expenses. In addition, you should also include expenditures on car servicing, repair maintenance, insurance premiums, regular savings, and other miscellaneous costs.
The main objective behind maintaining a larger emergency fund is to financially prepare you for all adverse financial situations that lay ahead. It cushions you from all contingencies.
What Financial Instruments Should you Invest in to Create Large Emergency Funds?
To create a large emergency fund, you may use simple investment options. One such instrument is fixed deposits (FDs). You can also put the fund partially in the savings account and employ a flexi-sweep-in deposit. A mixture of FDs, liquid funds, and some debt funds will facilitate optimization for better post-tax returns.
Invest in These Financial Instruments for a Large Emergency Fund and Better Quality of Life
Provide for your own Health Insurance
Self-employed persons are not covered under any scheme of group health insurance. However, they should have a 15-20 lakh policy covering them and their dependents. As a self-employed person, you should not be negligent towards health insurance because uninsured hospitalization can take up a large part of your savings and be your worst nightmare. Top-up coverage over any already existing health plan can also be considered one of your best options.
Opting for a Term Insurance
The main logic of getting term insurance is to provide a level of income replacement in case the sole earner is no more. The amount of life insurance you require has to be calculated and bought. You may also aim for broad coverage of 10-20 times your annual income. Any negligence on your part may adversely affect your family's future prospects and living standards. Term plans are economical, and you can get them quickly.
Investment in Systematic Plans
While SIPs (Systematic Investment Plans) are an easy option for people with regular incomes, how can people with irregular incomes invest properly? They can invest their surplus incomes in lump sum in debt funds first. In turn, they can use Systematic Transfer Plans (STP) to transmit to equity funds, which generate a monthly fixed amount. An artificial regularity is brought about in equity investing. In this way, you can achieve a large part of your long-term financial objectives.
For those who are not able to avail of the benefits of the Employees’ Provident Fund (which is for salaried persons), alternative options are:
- Public Provident Fund (PPF)
- National Pension Scheme (NPS)
You can invest lump-sum amounts in these instruments to diversify your portfolio.
If you are a self-employed person, your financial goals must differ from a salaried person. While a salaried person has a regular income, you don't have one. If you have clients, then you get paid. To iron out this uncertainty, you must be prepared for the contingencies by creating a large emergency fund. While the salaried persons are advised to keep an emergency fund of six months, self-employed persons should create emergency funds that would help them sustain for at least 12 months. You can maintain over one emergency fund.