Certified Financial Planner
Few weeks back I met a couple in one investor awareness program. Both husband and wife were self-employed. Husband was a practicing doctor and wife was an interior designer. Both of them earned well but were apprehensive about getting into a financial planning process. Their main concern was that they were not sure what their true income was. As they were not getting a fixed monthly salary their thinking was that a fixed process may not work well for variable cash flows. So they felt it could be quite difficult for them to get into financial planning, even though they understand its importance.
In the name of financial planning they had invested to save taxes as recommended by their accountant. They had bought some insurance policies in the name of children and pension plans for themselves, as advised by their banker. And of course they held number of properties which can easily be expected from a person of their income and work profile. There was no clear guidance on future. Even after having so much of assets they were not sure where their life is heading to.
Their worry was very easy for me to understand as I myself am a self-employed professional, and face the same issues of uneven cash flows, but still I am managing the things well as required for my personal wellbeing.
Financial planning is not about tax saving only. It definitely does not mean tax evasions, which most of the self-employed professionals do by hiding their actual income and then deploying that money into assets like real estate and gold. Neither does it mean having insurance policies in the name of every family member. It is all about organizing your financial life, so you can enjoy, use and distribute your wealth comfortably.
But it is also true that you need to follow a structured approach to achieve your goals. So how do you form that structure in the case of the self-employed, let us figure that out.
In the case of self-employed professionals the main challenge lies in separating the business and personal expenses. Personal expenses get funded on "as and when" basis out of business income and personal investments gets withdrawn to support business needs. This is because from an accounting and taxation perspective there is not much difference between using your personal or business proprietorship account, so you find it easy to pay everything from one business account. But this way you dilute your hold on personal expenses.
Understanding of personal cash flow is very important for a proper financial plan, so first things first list down the details of your personal spending. Make a list of items you spend on like rent, EMIs, grocery, clothes, petrol, vacations etc. It's not that difficult once you start working on it. To make your cash inflow clear, start paying yourself a fixed salary every month. Yes, start imagining yourself as employee of your firm and pay yourself whatever you feel like you deserve, or may be enough to fund your personal expenses. Create a decent emergency fund at business level so that your salary payment should not get stopped in case of any slowdown period.
Creating emergency funding at personal level is also very important to manage personal expenses in case you stop getting regular salary from your own business.
Once you get hold of your cash flows and create separate emergency fund at personal and business level, look for insurance cover. Having adequate insurance coverage gains more importance when you are self-employed. As you are your own employer so your absence from work will definitely cost a lot at your business as well as personal level. Insure yourself and your family for health and accidents, so the hospitalization cost should not be a burden to your business. Take adequate life insurance cover, so your personal goals and expenses, and even your business liabilities gets comfortably paid off from insurance proceeds in case of untimely demise. If your business involves taking heavy loans and which includes your personal liability too then better to buy life insurance under Married Women's Property Act.
After completing your risk management by keeping and maintaining emergency funding and having adequate insurance coverage it's the time to start saving for your goals. Many times self-employed people feel that there's no retirement age for them and they will keep on working as long as they can. But what they ignore is that they will not be as effective at work when they are 65 as they are today. And moreover who knows what's the future has in store. So it's better to stay planned always. Fix your financial goals like children education, marriage, own retirement etc. or whatever you want to save for and start allocating your money into suitable investment options. Take note of all options available, be in touch with professionals and invest as per your financial plan and risk tolerance.
You should understand the difference between accountant and adviser. Every profession is specialized in a specific area. Some may be expert in your business accounting and some are expert in managing your personal finances. Now being into a business, you should know whom you should approach for what questions. Engaging with a financial planner for your personal finances is as important as engaging with a Chartered Accountant for business needs.
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