Financial Planning for the Self-employed

Here are a few tips for Financial Planning for the Self-employed:

Financial Planning for the Self-employed

With individuals quitting the regular jobs, Self-employment has become the new in-thing. It offers a lot many opportunities to follow one’s passion. An entrepreneurial pursuit can be rewarding for an enthusiastic and creative individual.

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Self-employment allows you to be your boss. It gives you immense freedom to chalk out the career path. You can work at your own pace from places unimagined before. It gives you the autonomy to experiment with the ideas unheard before. All the gains and losses are to your account.

Self-employment is not as easy as it seems. On the face, it might look exciting and unconventional. But deep down under, a business owner is under constant stress and pressure; to set things right. After all, when it’s your baby, you have to do everything to keep the show going on.

At times, it can be so consuming that entity between the business and the owner blurs. Especially, things may get complicated when it comes to finances. If you are self-employed, then you might constantly be under the dilemma.

You can’t help it! The intermingling of business finance and personal finance makes matters worse. You keep using saving bank account and current account interchangeably.

Whether it’s your expense or business expense, money has to go from your pocket. You are confused where to draw the line.

Which expenses are relevant and which ones are irrelevant?

Where to cut the edges? Where to give a leeway?

These perplexities emerge because of inconsistent income. Now, you don’t have the comfort of a regular salary. Sometimes, it can be very intimidating. You get so much used to the monthly salary regime. And from one fine day, you don’t get to see fixed amounts being credited to your account every month.

So, in the absence of regular income source, money management can become a nightmare. How to go about a proper financial plan; when you are unsure about the state of affairs in the ensuing month.

On this front, self-employment can be a risky career. Start-ups often take years to gain a foothold. Moreover, looking at the pace of technological disruption, your venture may become redundant if it’s not futuristic.

As a self-employed professional, you need to manage the cash flows prudently. In this way, you may avoid any possible financial jeopardy.

But before that, it’s critical to know what you would be missing out as a business owner.

Also read: Are you a victim of financial infidelity?

Financial Risks faced by the Self-employed

1. Saving for retirement

Being a business owner, you might feel invincible and a passionate worker. But you need a reality check at this point. It’s true that you don’t have to retire at a particular age. However, you can’t expect the same effect when you turn 70 years old. Moreover, you can’t bet on health condition in future.

Hence, it makes sense to think of retirement planning. Business ownership involves lots of sacrifices regarding personal life. At some point in time, you might desire to hang your boots. For that, you need to make preparations sooner or later.

Regular jobs offer you multiple benefits which come handy towards saving for retirement. You will have a Provident Fund, gratuity and pension (in the case of government jobs). Moreover, the employer would be contributing equally to your retirement fund.

But when you are self-employed, it’s a different world. You miss out on these perks available in case of regular jobs. Now, you have to be even more proactive when it comes to saving for retirement.

2. Coverage for life and health risks

The business owner journey is full of shocks and surprises. There’s a thin demarcation between what you own and what your business owns. There might be times when you will have to borrow to manage the affairs.

Moreover, your property and health might always be at risk. You don’t have a compulsory health/life cover extended by your employer. Unprecedented illnesses and disabilities may be hazardous for your business. Your sudden demise may put your family in financial troubles.

To avoid your passion becoming a burden on your dependents, you need be wise risk-wise. You will have to take self-initiative to identify what all types of insurance coverage are required.

3. Paying for emergencies

As a self-employed person, you need to shoulder both business and personal expenses on your own. You can’t be sure of the business generating revenue from day 1. Moreover, there will be ups and downs throughout the gestation phase.

There might be some months when you are flush with funds. Then there would be dry months also of zero revenue. But the fixed costs have to be paid even at that time.
Where will the money come for those expenses?

To ensure that you don’t run out of cash, you need to envisage a fund that will take care of the emergencies.

4. Tax Planning

Tax calculation of a self-employed is different from that of an individual. As a business owner, you enjoy the flexibility to manage your taxation entirely. You can claim a range of deductions by taking full control of planning income and expenses to reduce tax incidence.

For that to happen, you need to be aware of the tax incentives introduced by the government for self-employed professionals. Moreover, you need to meticulously maintain a record of all the tiny details of business accounts.

5. Lack of financial understanding

The business owners falter in financial concepts like opportunity cost and return on capital employed (ROCE). The opportunity cost of carrying on a business is the salary. ROCE is the extra return that you need to earn to justify the excess risk assumed.

If you are unable to recover the opportunity cost and earn a reasonable ROCE, then surviving will become unviable. Also, the effects of inflation on profits can’t be ignored.

Financial Planning tips for the Self-employed

Financial Planning for the Self-employed

1. Pay yourself first

You must be feeling blessed being your boss. Always trying to be optimistic and seeking ways to keep the show running. But have you provided for yourself first?

It’s ok that you are no more an employee. But that doesn’t mean that you have to be stripped of a regular income. You too must be having your own set of expenditures. Where will the money come from to meet those? You have got a life apart from the daily business of yours.

So, start paying yourself out of business. Fix a monthly sum that you would credit to your account. It will help you to keep your personal life in good shape. Then, you won’t have to stay anxious or borrow for your expenses.

2. Create emergency fund

Emergencies are bound to strike you and your business. It can come by way of sudden illness or an unpaid telephone bill. Where are you going to manage funds for these?

As you know that business revenue keeps fluctuating, you need to have a buffer. You can create a separate emergency fund for business and personal use. Firstly, you need to assess the monthly business expense and own expense.

Then set aside an emergency fund to take care of at least 6 months of expenses; in case there’s no business revenue or to cover up business losses.

3. Get insured

Risk management is an important part of being self-employed. Identify your various insurance needs. To cover the risk of sudden death, you may go for a term insurance. The sum assured required based on the number of dependents, the extent of liabilities, amount of savings and household expenses.

In case you are married, you may take insurance under Married Women Property Act (MWPA). It will prevent the life insurance amount from being utilized towards payment of debt upon your demise.

Additionally, you may buy adequate health insurance and property insurance. Health insurance would ensure that your hospital bills don’t drill a hole in your hard-earned income.

4. Retirement Planning

You are not going to be the same young and energetic fellow 30 years down the line. Your efficiency to run the business might also get affected. It’s very critical to start planning for a comfortable retirement.

The earlier you start, the better it is. You can assess the money that you will require upon retirement. Accordingly, explore investment options like mutual funds and allocate money regularly to retire rich.

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5. Seek help of financial advisor

You might be brilliant at managing business finance. But that doesn’t take care of your financial management. Your CA may help you sail through the trouble of maintaining accounting records. However, he would be an unsuitable guide as regards financial planning.

If you are unable to manage your personal financial life, seek the assistance of a financial advisor. He will facilitate in formation and achievement of financial goals. is an award winning personal finance platform. It helps you aggregate all your personal finance accounts like FD, Equity, Mutual Funds, PPF EPF, NPS including, Credit Cards & Loans etc. It's one place where you can track, plan and invest seamlessly. empowers you to invest in zero commission direct plans of mutual funds thereby helping you generate higher on investments. The best part is it comes with a lifetime Free plan.

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