Financial planning for the Self-employed!!

We encounter many people who think financial planning is only for salaried people & not of businessmen & self-employed professionals.  But nothing could be further to the truth than that. Financial planning is a must for everyone, including the self-employed.  Financial planning is not a one size fit all service, but rather the advice changes from person to person. We at Fpguru.com would like to share a few points, self-employed professionals & businessmen should keep in mind with regards to their personal finance.

Contingency fund is a must!

Though a contingency fund is a must for everyone, it is even more important for the self-employed as unlike salaried people they may not have a constant monthly inflow in the form of a salary. They may have a huge cash inflow whenever there is a major sale or deal cracked as in the case of real estate agents, chartered accountants, etc. Many professionals like photographers, software programmers, website designers, etc work on project basis & may receive their dues once project is over.

But sadly expenses don’t wait accordingly. Food, grocery, rent & all such essential expenses need to be paid regularly. EMI’s don’t wait a day also. So to take care of these, it is essential that you keep atleast 6 month’s expenses & EMI payments as reserve in liquid instruments to utilize in case of such contingencies.

Insurance to take care of the unexpected!

When we talk about insurance, we are not just talking about life insurance, but also general. If you have financial dependents, you may need life insurance. However as a self-employed it is general insurance which is mandatory. A mediclaim & critical illness policy is essential as falling ill does not only have medical cost attached to it for you, but also cost of business lost due to ill health!

A personal accident policy too is a must if your work involves a lot of travelling & physical strain. This works as income replacement insurance incase of temporary injury & a lumpsum payment incase of permanent disablement.

If you are a professional like doctor, engineer, accountant, stock broker, etc you may need to buy a professional indemnity to take care of any litigation against you related to allegation of negligent service. This is internationally the norm & soon will be very important in India too.

Insurance of your office, shop or warehouse is a must incase of loss due to theft, fire, etc.

Disguised Retirement!

Disguised retirement is what I call the retirement of businessmen & self employed. Usually they think retirement planning is not something they need. They say they will work till they can as they have no stipulated retirement age as salaried employees. That all is true but the fact is that they too face a form of retirement.

Many professionals, who are past their prime, go to office everyday but business is not the same. A man of 70 years will not have the same energy & enthusiasm to get more & more clients like a 30 year old. So though you are going to work, work is not paying the same as earlier.

Previously we had joint family systems taking care of the patriarch who was still head of the family & business. But now children have their own dreams & your business may not figure in those dreams.

The solution to this is to plan your retirement as if you are not going to have any income past a certain age. Your investments made should take care of your retirement.  That does not mean you won’t work, it just means now you will have funds to take care of you if your business is not paying you as well as when you were younger.

Investments !

Investments need to be made for achievement of goals as well as wealth creation. But whereas the SIP mode is the best method for most, many self-employed persons find it difficult to set aside a certain amount every month. This is especially true for professionals who get lumpsum payments few times a year.

In that case the best way to proceed is to commit a certain part of your lumpsum cash inflow to invest. So instead of you investing in a regular monthly SIP, you are investing quarterly, semi-annually, etc. It works same as a regular SIP. The important thing is you are investing!

Tax Planning is your trump card!

It is here where self-employed professionals have a certain edge over salaried employees. A salaried employee first pays tax on his income & then can spend the rest. A businessman can first spend from his income & then pay tax on what is left. This is something which can be used as well as abused by some people.

The  most important & ethical thing to do is ensure you show all expenses & income related to your business & draw your books of accounts. Self-employed professionals & sole proprietors come under slab rate category of Income tax act, so unlike a company or partnership which has to pay tax @30% of profits, you need to pay as per your slabs.

Sharing important financial information with your spouse!

Many businessmen do not find it important to inform their spouses about their various bank accounts, investment, important contacts, etc. This may due to various factors such as spouse also busy with his/her work, thinking that spouse being a housewife will not understand, etc. This is a very risky thing to do. In case of an unfortunate event, the spouse won’t know how to take things forward. Even finding investment details may prove difficult.

It is essential that you inform them about your work & financial details. Also it is essential to update nominations & make a will for smooth transition.