Priyanka Sarkar, 35, a Delhi-based publishing consultant who edits and commissions books, is a seasoned professional with 11-and-a-half years of work experience. Last year she decided to strike out on her own as she wanted to try out new things. “In a job, you tend to do the same work over and over again year after year,” she says. The freedom to decide which projects she wants to work on has, however, come with a few challenges. Her average monthly income has plummeted to half of what she earned as a salaried employee. Both the workflow and income are at times erratic.
A recent survey by Deloitte (Global Millennial Survey 2019) found that a large percentage of millennials and those belonging to Generation Z — 94 per cent in India—would consider joining the gig economy, rather than hold a 9-5 job. While working independently does offer freedom, it also creates financial challenges. This makes it imperative that freelancers plan their finances carefully to be able to withstand the higher uncertainty they are subject to.
Save meticulously: Since income tends to be erratic, freelancers need to create and stick to a budget even more scrupulously than salaried employees. “Save and invest at least 25 per cent of your average monthly earning,” says Anil Rego, chief executive officer, Right Horizons. In the months when freelancers enjoy a large, lumpy windfall, they should save even more to compensate for the lean months.
Move money from the savings account, in which you receive it, to another savings account labelled (in your mind) as the investment account. Such segregation ensures that money gets allocated every month towards achieving investment goals. Having adequate savings gives freelancers the freedom to stick to interesting and remunerative projects, and turn down the rest.
Independent workers also need to segregate personal and business expenses. Not only will they be better able to curb expenses if they know where the money is being spent, such demarcation will also help in tax planning.
Build an emergency corpus: Since future earnings are always uncertain, freelancers need an emergency corpus for the proverbial rainy day. “This should equal six months of your average monthly expense,” says Abhinav Angirish, founder, Investonline.in.
This corpus should be kept in a sweep account, where money moves from the savings account to a fixed deposit as soon as its level exceeds a threshold. A liquid fund is another option for parking it.
Buy adequate life insurance: One benefit of a regular job is that workers get to be part of group insurance covers—life and health. The freelancer must make sure both his family and she are adequately covered with personal policies.
Buy a term cover early in life, when the cost is lower. “Those in the 20-30 age bracket should have a cover that is 20 times their annual income; those in the 30-40 age bracket should have a cover equal to 15 times; and those in the 40-50 age bracket, 10 times. These numbers are based on the premise that your income will rise with age,” says Vineet Arora, managing director and chief executive officer, Aegon Life Insurance.
Since freelancers’ earnings tend to seesaw, they need to choose their mode of payment carefully. “If you are 30 and have bought a term cover that will last till 60, it is advisable to pay off the entire premium within the first 10 years,” says Arora. When freelancers choose such a limited payment option, their upfront cost is higher, but after a while they are rid of the obligation to save for paying the premium. Freelancers also need to have a personal family floater cover of at least Rs 5-15 lakh. A Rs 10 lakh family floater will cost someone in the 20-30 age bracket about Rs 10,000-15,000.
Get your investment strategy right: Since those in the gig economy do not get the benefit of enforced savings, and matching employer contributions through products like Employee Provident Fund and National Pension System (NPS), they need to begin saving for retirement from an early age. Other long-term goals such as children’s education and marriage too need to be provided for. “If you earn Rs 100, save and invest Rs 25. Of this, a limited amount, say Rs 10, may go into long-term products that come with a lock-in, such as NPS (all-citizens model) and Public Provident Fund,” says Rego. Of the Rs 15 that is left, Rs 3-4 would get spent on acquiring adequate life and health cover for your family. The balance Rs 11-12 should be invested in market-linked instruments such as equity and debt mutual funds,” adds Rego.
Mind your taxes: Freelancers need to budget and save adequately to meet their tax liabilities. “As soon as they get a large project, due to which their income and hence tax liability could go up, they should start building reserves to meet it,” says Roopali Prabhu, head of investment products, Sanctum Wealth Management. She adds that freelancers should use all legitimate means—all deductions and exemptions provided by the government —to minimise their tax outgo. Angirish adds that self-employed workers should not miss out on the benefit of deducting work-related expenses from their income when calculating their tax liability.
Key numbers for gig workers
- Build an emergency corpus equal to six months of expenses
- Family floater health cover should be in the range of Rs 5 lakh-15 lakh
- Save at least 25 per cent of your average monthly income
- Life cover should equal 10-20 times average annual income
- Of the 25 per cent saved, 15 per cent should be invested in market-linked instruments, and 10 per cent in instruments with long lock-in