How should the self-employed go about financial planning?
Posted by: Girija Gadre, Arti Bhargava and Labdhi Mehta on Mar 27, 2017, 06.30 AM IST
Gurdeep is a chartered accountant running his own audit firm. His wife is an interior designer. Both earn well but are not very savvy when it comes to financial planning. They diligently make tax-saving investments.
They have bought some insurance policies in the name of their children and pension plans for themselves on the advice of their banker. They own a house that they live in. However, they have little idea about how they should deal with money in future.
Gurdeep and his wife's main worry is that their monthly income is uncertain. As they don't know how much they will earn in a particular month, it is difficult to plan in advance. Will they be able to put a fixed structure in place with variable incomes?
They need clarity on cash flows and in order to achieve that, they can begin by establishing a cash flow pattern. Then they can start paying themselves a salary that they deserve, which should be enough to take care of their personal household expenses.
This exercise will help them earmark surplus funds on a monthly basis that they can set aside for saving.
Gurdeep should aim for 'spend what you save' rather than the other way round. Only then will they be able to create an emergency fund, both at the personal and professional levels, so that the business expenses including their salaries can be met in times of lower revenues.
Once that is in place, they must put in place adequate insurance to include health, personal accident and disability and life cover.
Once the protection aspect is taken care of, Gurdeep and his wife must start saving towards their financial goals, such as children's education, marriage, own retirement or whatever else they want to save for and start allocating their surpluses into suitable investment options.
Even though their retirement is not mandated, they must keep in mind that they may not remain as effective after they are 65-70 years old and plan accordingly.