In today’s environment, protection against financial risks forms an integral part of a financial plan, and the risk of losing one’s regular stream of income is one of the major risks facing every working individual. Insurance can protect one against the financial impact of any disaster; Job loss insurance as a category of products is not available in India. However planning a second stream of income in such a way that it does not interfere with the regular occupation could help in managing this risk in a long way.
Internal factors include risks such as death or disability while external factors are those factors which are outside the influence of the individual like the economic conditions leading to downsizing in the organisation etc. which might lead to one losing his job in the short term.
Hence it is very important to create sources that can be monetized either regularly or at the time of need at a short notice so that the financial exigencies arising out of such events can be efficiently managed.
There are several avenues which may help in generating a second income based on the interests and skills of the individual. These can be categorised as follows:
Investments
Investment refers to setting aside savings from the income in chosen asset classes for the purpose of future consumption. These assets range from fixed deposits in banks to equity shares. The returns generated on these assets can form a second stream of income for an individual.
Buying real estate in this regard can be a very good option, because in addition to giving benefits in the form of returns, it helps an individual save taxes by utilising the provision of Income Tax Act, 1961 which offers deduction from taxable salary to the extent of Rs 150,000 in case of a self occupied property while there is no upper limit if the property is rented out.
However the actual/notional rent is added to the income of the assesses. Investment in equity does not attract taxes if the investment is for a period of more than one year and for the period which is less than one year, short term capital gain tax is charged at the rate of 15%.
Investing in debt would enable the investor to avail tax benefits through indexation. However, investments should be done in consultation with an expert like a Certified Financial Planner or CFP professional who is equipped to guide one to avail the optimum levels of risk return trade off with taxation benefit.
Generally it can be said that devoting one third of income towards investment should be appropriate. Equally distribute the remaining two third between debt repayment and expenses.
Commercial Assets
Purchasing a commercial asset may ensure a higher cash flow during the working life of the asset thus creating additional cash flows. The income generated on these assets is mainly in form of current yield except commercial real estate where the capital appreciation is also substantial. Other commercial assets which may be purchased and used to generate income may include commercial vehicles like cars or buses which can be plied as taxis or passenger vehicles, farm or industrial equipment which can be leased out. Commercial real estate at good location will give good income in the form of rent if leased out and can be liquidated at good prices at the time of requirement.
Skill Enhancement
One can also invest in the time in acquiring certain skills which can be monetized with a low level of involvement. An example of the same can be photography. If somebody has an interest in the same, it can be enhanced to the professional level and the assignments can be taken in such a way that they do not interfere with the working routine of the regular occupation. Teaching, dancing, art which people pursue as a hobby can also be the areas in which competencies can be enhanced to such a level where they can be monetized.
Entrepreneurship
And finally starting an additional line of occupation without disturbing the current one can be a good option.
(About the Writer: Ranjeet S Mudholkar, is Vice Chairman and Chief Executive Officer, Financial Planning Standards Board India. The views expressed here are personal, and do not necessarily represent that of the organization.)
