Financial planning for self-employed individual is must as your business is considered small but you might be facing financial challenges. As a sole proprietor or one person business, you typically earn less than worth on the other hand you are keeping track of your business and personal budget. In India 7.4 Million (7.4 crores) MSME small business across the country had been supported by the government program and generating more than 32.8 crores job all over India. As per recent survey 87% expected to continued business grow. Despite of all such initiative the position of self employed position always remain so and so.

Self employment offers freedom and flexibility, but it creates financial challenges and that needs proper planning and management. Creating financial plan is about secure economic uncertainties regarding your business and personal goals.

Understand your Income Pattern

For any financial planning for self-employed individual it is important to understand income pattern, which may helps you make saving, investment, spending and informed decisions.

Tracing Income fluctuation – A 12 month income tracker may allow seasonal trends and busy period, with this you can assess downturns and income surges, compute your average income for full year and establish a baseline which will help sustainable spending and saving patterns. Most of the self employed find their income follow a specific pattern.

Use digital tools – These system automatically categories transaction and provide real time financial snapshots, such tools not only provide valuable insight but can help you make strategic decisions during the time when rate rises and rate falls. Such small investment in digital tools provides financial clarity and significant return.

Separate business and personal finance

It is important to establish a clear boundary between business finance and personal finance. 

Separate business Bank Account – Current Account is the first step that separate commercial transactions from personal spending. These separate accounts may be utilized for business tax payment like GST throughout the year and build business reserves for investment and contingencies, separate business credit card create clean records of business expenses and it simplifies tax deduction claims. Although some monthly or annual charges are deducted but benefits typically outweigh the costs.

Separate Personal Bank Account – It is always advisable to structure a salary system for personal expenses instead of withdrawing money from the business account. Compute your monthly expenses   ( food, rent and etc.) setup a automatic transfer from business account to personal account, adjust such expenses on quarterly basis  based on your business performance and fluctuation. It will help you to check the actual drawing from the business and profitability of the business.

Emergency fund

Financial Planning for Self employed individual need more emergency funds than traditional employee due to irregular pattern of income. 3-6 Month emergency fund is often advocated for salaried employee, but for self employed it is 6-12 Month. Such extension is due delay payment by the client, business downturn or due to some of any personal reasons. Most financial planners suggest to keep these funds in saving account due to immediate withdraw and with moderate interest rate, but a combination of deposits in bond and saving account is more advisable to maximize the security and return.

A part from personal emergency fund, self employed person should consider additional financial safeguard

Retirement Planning

Without a salaried employer contribution to a pension self employed professional must take full responsibility for their retirement planning. Starting early and contributing consistently is important to build adequate retirement corpus. Retirement planning for self employed professional involves choosing right mix of pension plan by avoiding the following common mistake.

• Once you retire your monthly income will stop, and not your monthly expenses. So calculate your monthly expenses and medical expenses with considering inflation
• Consider the risk involved in your investment pattern, calculate the amount that you need each month to maintain your current life style in your future.
• It is important to select a plan that offer flexibility, allowing you to switch fund adjust premium and boost your investment when needed.

Risk Management

Self employed professional face many risk in their business and personal finance. Such risk could be managed through proper insurance coverage.

• Professional Indemnity Policies – It covers the insured against damages to third party in respect of error and omissions on the part of the insured while rendering professional services. This policy covers the insured against damages to the third party in respect of error and omission while rendering professional services. The cover includes legal costs and expenses incurred but PI policy is not issued with unlimited liability.
• Business Insurance – It is otherwise known as commercial insurance and include fire insurance, marine insurance, engineering insurance and other insurance, self employed professional should choose the best suitable policy for them.
• Personal Insurance – Term insurance for self employed individual acts as a financial shield that delivers a substantial payout to your family immediately after the untimely death. This payout secures their quality of life and handles every expense so they never face the burden of sudden income loss.
• Health Insurance – Health Insurance helps to protect your health and finances by lowering the cost of medical emergencies and ongoing treatment, routine care and unexpected health problems.

Tax Planning and Management

Tax obligation are bit complex for self employed professionals in comparison to salaried in India. Hence self employed must plan tax proactively to reduce liability and penalties, maintaining separate records for business and personal expenses are crucial for accurate tax filing, use of deduction under section 80C, 80D, 44ADA may lower tax. Presumptive taxation scheme offers a simple way to file taxes for eligible professionals and businesses, going digital and seeking professional tax advice ensure better compliances. By implementing smart tax planning strategies you can focus more on financial growth

Conclusion

Although financial planning for self employed professional have unique problems but a strong preparation and disciplinary implementation may built business success and personal security.  Either you are a beginner or looking out to optimize your business, it is the perfect time to review your financial foundation and take steps toward success. Creating financial plan is about secure economic uncertainties regarding your business and personal goals.