Unsteady income



Keywords: mutual funds,good times,et wealth,centre for investment education and learning,business strategy,arti bhargava
Description: The other way for keeping income volatility in check involves creation of alternate income avenues by way of income-earning assets.

The Bhatts have jobs that bring in uncertain incomes. They might make a lot of money one month, but have very little for the next month or two. However, their fixed monthly expense remains pretty much the same. They don't have to worry when they make more money than their mandatory expenses. Their finances go awry, when they make less. They need to figure out how to make the good times cover the lean periods. There are two ways in which they can deal with this problem.

The first is by examining their occupations and the incomes they generate to identify if there is a scope for a steady revenue stream. For example, a set of core customers in a business can bring in a small but steady income—charging a small recurring fee may create such a revenue steam. Stacking of orders can also create less volatility. Further, if they manage to get an overdraft account, it can help balance fund inflows and borrowings, and can reduce funds volatility. They need to rework their business strategy to secure the inflow of funds.

The other way for keeping income volatility in check involves creation of alternate income avenues by way of income-earning assets. If there are assets such as interestpaying bonds, dividend-paying mutual funds. rent-yielding property or circulating bank deposits, they will be able to meet their expenses via cash inflows from such assets. During the good times, they should take money out of the business to build such assets. The challenge for those in business, is to set aside much-needed capital into assets outside the business. An investment corpus can cushion the family from the risks of wild fluctuations in business income, and provide for its needs. It also serves to diversify their assets.

The Bhatts need to ensure that they work towards securing a minimum level of stable income to run their household, even if it calls for one of them to get a salaried job. The personal finances of the household need to be secure, to allow for business risks.

The content is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.






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