Self-employed or starting own business is becoming a popular option due to growing opportunities. Internet has played a big role in creating large number of opportunities in almost all sectors- from healthcare to financials.
As a self-employed or businessman you are deprived of numerous advantages available to the salaried class. Regular paycheck, retirement benefits like PF, Superannuation and many others. There are advantages too like car and other asset expenses which are not available to salaried individuals. But the benefit of regular income and savings exceeds any other benefits. Hence, any adverse situation can lead to ride a huge debt which can crush your self-employment aspiration and can force you in a serious debt management mode.
To avoid crippling debt and common mistakes, a proper financial plan is needed which can help you in managing your finances personally and professionally. Following are the financial factors which should be considered and included in the financial plan before you start journey to become self-employed:
Emergency Fund: As a self-employed or a businessman ups and down will be a common phenomenon. There will be months when you will have sufficient income rolling in while in some months income will be hard to come by. How frequent it happens will depend on the nature of the business. To avoid running out of cash during hard times, create a six month provisioning or emergency fund. This will help in meeting regular expenses thus protecting you from falling in any kind of debt management.
Budgeting: Separating personal financial planning from business planning is very important. Create a budget for both. This will help in keeping track of expenses incurred in your business and personal capacity. Self-employed who starts with a proprietor concern, tend to do expenses for both from the same bank account. This creates problem as reconciling accounts for your business becomes difficult and personal expenses go overboard. Manage separate account for both. This will help in managing expenses within limits you have prescribed.
Pay Yourself: Since your income will not be regular and debt will pile off if there are hard months, pay yourself first. This will help in generating a regular income and keeping a check on the expenses. Decide a regular salary cut from your business income which will help you in saving for yourself.
Goal Identification: Identifying your goals is the key of achieving your financial wellbeing. In personal financial planning every individual have some common financial goals like children’s planning, retirement, buying a house or a car etc. It’s necessary that you identify your business goals and plan accordingly. This will help you in making necessary changes which might occur due to change in circumstances related to your business.
Insurance: Giving protection to your family is as important for a self-employed as to any other professional. In fact a self-employed has higher concern of even protecting his business from all kind of risk which can arise. For personal planning a term insurance, health insurance, and disability are coverage which will protect your family financially. Identify the need and buy the right amount of coverage. Professional Indemnity and asset insurance helps in protecting the business interest. Cover according to your business need. Evaluate your needs in both situations and make necessary amendments.
Retirement: The retirement benefits like PF and superannuation are not available to self- employed or a businessman. Hence, retirement planning becomes very important as risk of living too long is increasing. Although you have flexibility of working till you desire deciding a certain age after which a regular monthly income flows helps in becoming independent. Identify your requirement and save according to the goal.
Investment Planning: Since regular investment is less feasible for self-employed, spread investments so that the burden does not fall in a single month. Follow asset allocation approach which helps in choosing the right instruments. Review investments regularly and do a rebalancing when required.
Tax Planning: Apart from personal income tax benefits, a self-employed can claim expenditures which helps in reducing tax liabilities in the business. Have a proper tax planning and avoid mixing expenses like a family trip with business trip. Keep receipts of all expenditure which can be claimed in the business.
Estate Planning: Who will succeed your business? How should the asset transferred when the child grows? Will there be any legal hurdles if I am not there? are some questions which every businessman cripples with. To safeguard your family from long legal hurdles or any difficulties arising in future, create a proper estate plan for a smooth transition of the business. Write a will identifying your beneficiaries and process of transfer very clearly. Make sure care is taken to make the will legally enforceable.
Discussed above are elements which should be planned well while planning for financial well-being. A self-employed and a business man have both goals to meet- personally and professionally. Mixing two of these leads to mismanagement of finances which impact reaching your dream. Hence, identify your goals for both and plan accordingly.
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This and All the other Articles/Videos on this blog are for general Information and educational purposes and not to be taken as an Investment Advice. Any Action taken by Readers on their Personal finances after reading our articles or listening to our videos will be purely at his/her own risk, with no responsibility on the Writer and the Investment Adviser. Registration Granted by SEBI, membership of BASL and Certification from National Institute of Securities Markets (NISM) in no way guarantee performance of the intermediary or provide any assurance of returns to investors.
Putting the wheel of retiring in motion is not an easy task but with better planning, everything is possible. Many insurance companies are providing best financial planning for retirement.
financial planning for retirement
@ Richard
Financial planning for retirement only through insurance companies is not achievable.The primary reason is the underdeveloped pension market in India.It will take time when we see better products for retirement by Insurance companies.
Well, I guess that will definitely change something in there. I heard they are planning to break out the old rules of financial planning and bringing the new planning. I have taken some loans as per the previous rules on interest of 8%, how is it going to change my interest plan if this will apply soon. It will take 5 month for my all payment.
Personal Financial Planning
Yes things are going to change and in India start has been made by allowing FDI of 26% in Pension funds and restructuring the pension products.However, still along way to go.If you are going to repay your loan liability in five months then it will increase your savings for various goals very soon.The effect comes when you have a very long period and interest rate rise as happening now.It becomes difficult to service EMIs as the rise happens continously and very frequently.Your income do not rise in same fashion.
Hence you should be in a good position after five months if you are repaying your loan liability.