Six financial planning tips for the self-employed

India is a country of entrepreneurs and self-employed individuals, be they farmers, owners of small, family-run businesses or vendors. Official estimates indicate that nearly half of India’s working-age population is self-employed. Including farmers, this figure rises to almost 80 percent -- a significantly higher proportion compared to other major economies.

In recent years, self-employment has become even more prevalent due to limited job opportunities, a decline in manufacturing, and rapid growth in the services sector. It has led millions of Indians to either launch their own ventures or join family enterprises.

These entrepreneurs and self-employed people need financial planning to manage their finances and secure a comfortable retirement. However, most financial planning advice in India is tailored for salaried employees with a consistent monthly income.

In contrast, self-employed individuals often face fluctuating incomes, with busy and lean earning periods. It is, therefore, challenging to apply traditional salaried financial advice directly to them.

Active financial planning is crucial for the self-employed since they lack the social security benefits available to salaried workers including provident fund, gratuity, paid sick leave, group medical and life insurance, and post-retirement pensions.

Self-employed professionals and business owners must plan and save independently to meet these needs. Financial planning isn’t overly complex and can be done through financial discipline and some general guidelines. 

Here are some essential financial planning tips for self-employed individuals to maintain robust personal finances:

1. Separate Personal and Business Accounts

For family-owned businesses or solo ventures like consulting, it can be tempting to use a single bank account for both personal and business transactions. However, this approach risks financial confusion in the long term. Open two accounts—one for personal income and expenses, and the other solely for business activities. 

This setup creates a "salary-like" structure, allowing you to invest personal earnings wisely to secure your family’s financial future. It also enables you to monitor your business's financial health separately, ensuring your family’s finances are protected from potential business downturns. Structuring finances this way means that, in the unfortunate event of business failure, your personal finances remain intact.

2. Save and Invest to Stabilize Income

Income irregularity is a common challenge for self-employed individuals, especially in young or developing businesses. To counter this, use surplus income during busy periods to invest in assets that provide a steady secondary income. Options like mutual funds with income plans, post office monthly income schemes, non-cumulative fixed deposits, high-dividend stocks, or insurance products with periodic income can help balance cash flows during lean months.

Also Read: 10 equity mutual funds that gave over 60% returns in the last one year

3. Consult Financial and Tax Experts

Self-employed individuals often reinvest all their savings into business growth, which can strain personal finances. Seeking guidance from financial and tax consultants can help strike a balance, ensuring your business grows without compromising personal financial stability. Advisors provide an objective view of both business and personal finances, offering essential protections against unexpected legal or tax issues.

4. Keep Family Members Informed

In salaried jobs, employers generally have details of employees’ family members, making it easy to support them in emergencies. However, self-employed individuals often operate independently, which can create complications for family members if an emergency arises.

Regularly update close family members about key business and financial details. Joint holdings, nominations, or other transparent financial arrangements can simplify matters, and legal or financial advisors can assist with this process.

Also Read: Five tips to save money for buying your dream home

5. Draft a Financial Will and Plan for Succession

Many self-employed individuals hold personal assets outside their business, such as real estate, precious metals, and other non-traditional investments. Without a financial will, these assets can lead to disputes within the family after their passing. Creating a financial will and a succession plan ensures assets transfer smoothly to the next generation and supports business continuity for family and non-family investments alike. 

Also Read: Five reasons why you must write a Will

6. Establish an Emergency Fund

One crucial aspect of financial planning for the self-employed is establishing an emergency fund. The irregular income streams common among entrepreneurs and freelancers can lead to financial stress during unexpected downturns or personal emergencies. Setting aside a designated emergency fund, separate from other savings and business accounts, provides a financial safety net that can help cover essential expenses during lean periods without compromising business operations. 

Ideally, this fund should cover at least six months of living and operational expenses; additionally, for those who frequently send money to India to support the family or settle business expenses, ensuring that your emergency fund accounts for these transactions can safeguard against sudden financial obligations overseas. Building this fund gradually can be less daunting, allowing you to maintain a healthy cash flow and minimise financial disruptions.

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

Also Read: 5 steps to kick-start your financial planning for retirement

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