A growing number of millennials are self-employed, and self-employment is increasing across many industries. The ability to work for one’s self is appealing for a variety of reasons, including the ability to work flexible hours and from home, a wide range of opportunities and the desire to potentially earn more money.
1. Separating personal and business accounts.
In a one-man business, it is very easy for income, personal expenses, business expenses, and investments to become entangled. The first step in developing financial discipline is to keep personal and business accounts separate. All business-related expenses, such as assignment travel, project-related expenses, team payments, and so on, must be managed through the business account.
It is worth seeking the help of a third party expert here. When you are running a business of your own, it can be tempting to invest all your money towards growing it further. While growing your business is important, it cannot be done at the cost of personal financial preparedness and stability.
2. Maintain a monthly budget and smooth out the erratic income flow.
Self-employment frequently results in uneven income, resulting in sporadic lifestyle changes that can have an impact on quality of life. Certain monthly expenses, such as home rent, monthly instalments (EMIs), school fees, and utility bills, are unavoidable. To plan ahead, it is critical to create a monthly budget.
This budget will assist in estimating monthly expenses and future savings needs. With a disciplined approach, one can estimate regular expenses for a year and plan for any unexpected expenses. It will enable better liquidity in the short term and longer-term investments.
3. Pay yourself a salary
One of the most important factors in determining your payroll process is the type of business structure. Your business structure would indicate the payment style that is appropriate for your company.
Owners of sole proprietorships, partnerships, and limited liability companies are considered self-employed. As a result, they pay themselves using the owner’s draw.
This means they are not paid on a regular basis. Rather, they withdraw funds from the company for their own use.
If you own a corporation and are involved in its day-to-day operations, you must pay yourself a salary.
4. Establishing an emergency fund
A contingency fund is a safety net that is necessary to protect loved ones’ dreams from unforeseen events. It is best to keep the contingency fund in liquid savings products such as bank deposits or debt mutual funds.
For working people, three to six months’ worth of expenses is sufficient. Given the erratic nature of a self-employed individual’s income, it is best to keep a larger corpus on hand, accounting for six to eight months of expenses. To ensure continuity, self-employed individuals should perform a similar exercise to tide over any unforeseen disruptions in their business. If an emergency occurs, this fund can absorb the temporary financial shock and help one get through a rough patch.
5. Hire a financial and tax advisor
A vetted financial advisor can provide unbiased, valuable financial investment advice for any short or long-term investment decisions you want to make. They can assist you in determining your taxable income and whether you can deduct a business expense. They can also assist you in taking advantage of office deductions and determining whether you are eligible for 401k matching contributions.
6. Plan for retirement
Average life expectancy is increasing, and the proportion of the senior population is gradually increasing in correlation. This highlights the importance of focusing on retirement planning, particularly for those who are currently employed. Lack of retirement can not only extend a self-employed person’s working years, but also keep the uncertainty of income alive for a long time.
Individuals in formal employment receive a pension or a retirement corpus from their employer through PF, VPF, and gratuity. A self-employed person, on the other hand, is at a higher risk of economic insecurity and should begin planning for retirement as soon as possible.
Taking the leap to work for yourself can be daunting but ultimately, incredibly worthwhile for those who plan thoroughly.
If you’re uncertain about your financial planning through self employment, book a free consultation with one of our qualified advisers today.