Financial Planning For Freelancers & Small Business Owners

The writer is a Delhi, India based Certified Financial Planner CFPCM, conferred upon by the
Financial Planning Standards Board. If you are an Indian resident looking for a financial plan prepared according to your needs & goals, write to her at shruti(AT)
There are many advantages of being a freelancer or a small-business owner like setting your own work hours & being your own boss. But there is one major drawback – you don’t get that fixed paycheck every month like salaried people do.

investment advice for self-employedIrregular and unpredictable income is part and parcel of a freelancer’s life. One month you might earn a windfall, the next month your earnings could be minuscule. On the other hand your expenses remain pretty much the same month after month. This mismatch between income and expenses could cause financial trouble if you don’t have a plan in place.

In order to avoid any such trouble and to manage your finances properly, for not only now but also for the long-term, follow the below mentioned financial planning steps:

  • Keep personal and business accounts separate
    This is the first and most vital step. Always consider your business as a separate entity. Never mix your personal expenses with your business expenses. It will do you no good if you pour all your earnings back into business without taking out your share of income. Nor will spending all your earnings on personal expenses going to work for you. Decide the suitable amount of income you need to withdraw (covering at least your expenses could be the starting point), and then add the rest back into business.
  • Create a budget
    In order to manage your income and expenses properly, its important that you have a proper functional budget in place. Here is a tip for you: Since your income is irregular, try allotting percentages of your income for different categories of expenses instead of numbers. For example, decide that 10% of your income will be spent on groceries every month or that 20% of your income will be set aside for an emergency fund. So if you earn 50,000 in a month, you can spend 5,000 on groceries. This approach will help you divide your expenses proportionately to your income. But keep an upper limit to this strategy & don’t start overspending during high income months. If the 50,000 budget worked great for you, stick to it for the month where you earned 75,000. Instead, increase the percentage of emergency fund allotment or invest that extra income from productive months. This will help you fulfill your future goals.
  • Have a larger emergency fund
    For small-business owners and freelancers the importance of emergency fund increases twofold. The money set aside in this fund will not only come in handy in case of emergencies, but it will also help you during those low-income months. Therefore, following the general rule of thumb of keeping 6 months of expenses as your contingency fund will not be a good idea. I would recommend atleast 9-12 months of expenses as your fund amount. The more unstable your income, the higher should be your emergency fund amount. Also, don’t forget to keep replacing the amount used, so that you always have an adequate amount of money for future use.
  • Get Insured
    Since you are the key person of your business, you can’t ignore insurance. If you fall ill, you won’t be getting any paid sick-day leaves. So apart from medical bills, your income also gets affected. Therefore, it is important that you should protect yourself from such unforeseen expenditures by taking an adequate health insurance. Also, due to your erratic income it is highly possible that you might not have created a suitable financial cushion for your family and dependents. Hence, you should get a proper term insurance plan in place quickly, so that your loved ones don’t have to suffer financially if something were to happen to you suddenly.
  • Invest via STP route
    As discussed earlier, after taking care of your needs, you should invest the surplus money in suitable investment vehicles so that you can enjoy life. But due to unpredictability of your income, you won’t be able to invest through SIP mode. This is because you can’t afford to park a fixed amount of money every month in mutual funds. SIP or Systematic Investment Plan works best for salaried people who know how much they will be getting each month and can plan to invest according to a schedule. Still, you can let market volatility work for you by selecting a Systematic Transfer Plan (STP). Whenever you get a surplus income, you can park the extra amount as lump sum in debt funds and set up an STP  to invest in equity funds systematically over a period of time from your lump sum contributions.

Managing one’s finances as a freelancer can seem overwhelming but you have proved by choosing your own path that you can handle almost anything. You must take control of your finances as well by following the above guidelines. But, in case you are not so sure, you can always get help from a Certified Financial Planner for guiding you & sorting your finances properly. 🙂

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