These days a large number of people are working as self employed. Self employment gives you the freedom of working as per your schedule, saves you from traveling to and from office daily and you don’t have to deal with office politics or tantrums of your boss.
These positives might make you want to jump the ship too but things are not that simple! The cash flows are not regular till you are established and it might take you 4-5 years to establish yourself. So, managing finances won’t be easy. You will have to plan your finances differently from that of a salaried person.
The following are four key financial planning steps a self employed person should stick to:
- Make a budget
Calculate your income which is more certain and utilize it towards paying your non-discretionary expenses. You have to be highly disciplined about your spending habits. In the initial years of freelancing, it’s better to avoid long-term commitments. Avoid taking long-term loans with high equated monthly installments (EMIs).Have two bank accounts. Receive all your income in one account and then transfer a particular sum from it to another bank account to cater to your monthly requirement.
- Create an emergency fund
As your income will be very irregular, it’s better you create a fund to meet any emergencies arising in future such as not receiving a cheque for the work done in a month or it being delayed for some reason. It is advisable to have a buffer of 6 – 12 months of your expenses in your bank account which is not used to meet your monthly expenses. You can transfer monthly into such an account or put some of the lump sum payments you receive in this account.
- Do a proper tax planning
The tax planning for a self-employed person will be different from that of a salaried person. Your income will fall under the head—Income from business or profession.
In such case all business-related expenses such as salary, rent, travel cost, phone bills can be deducted from your income. You can also claim depreciation on work related assets such as laptops or computers, furniture and UPS or your vehicle.
Apart from this a self employed person is also free to claim deductions that are available to a salaried person such as deduction up to Rs 1.5 lakh under Section 80C for investments in PPF, tax-saving mutual funds, National Saving Certificates and deduction under Section 80D for the school fees of your child.
So, use the deductions available to a self employed person for improve your cash flows.
- Evaluate your insurance requirements
Salaried persons generally get a health insurance cover from the employer but as a self-employed person you won’t. You should buy a health insurance for yourself. If you have a family, evaluate which one of the two options— family floater or individual policies for each member, will cost you less.
As far as life insurance is concerned take a term insurance policy as it is cheaper option. You can also opt for a monthly or quarterly premium payment option to align it with your cash flow and avoid paying lump sum.
- Start investing
Once you have got hold of your cash flows and have enough funds to meet emergency cash requirements, you should start thinking to invest the surplus money. Set your goals and evaluate the various investments options— PPF, mutual fund, NSC etc available and start investing.
If you follow these four pointers diligently, you are on course to a secure self-employment career. Enjoy your job-less days without worrying about the money!