Everybody dreams of being their own boss, but only a few have the courage and persistence to follow this dream. I am fortunate enough to know one such guy – Dinesh. My senior in college, Dinesh was always an energetic extrovert person, who’d always be excited about new ideas. Even as a student, he was always bright and promising, but he never played by the rules. The lecturers loved him for his brilliance and wit, but got annoyed because of his apathy towards sticking to norms. But I can bet, he’s one of the nicest and most determined person you’d meet.
After college, Dinesh decided that he cannot follow the office rules and regulations and decided to work on his terms and conditions, on his own schedule and from a location of his own choice. Being a freelancer, he got all that he wanted. In fact, with his income and schedule, he keeps travelling to different cities throughout India, months at a stretch, and getting to know the local culture, language and food – a life many of us can only dream of!
Lately, he had been in Mumbai and we decided to catch up over a weekend. We discussed college memories and compared it to our current lives. Lively as ever, he asked me about my experiences and talked about a lot of things he had experienced. He loved every bit of being self-employed. However, he admitted that though he feels he should become responsible about money management now that the work has stabilized, he has no clue of where and how to get started. I knew the best guy who could help him to manage money as a self-employed person.
The next day, Narendra, Dinesh and I sat together at my home with pens, papers and calculators. Kidding, we just used our laptops, but old school things have a nice ring to them. Narendra walked Dinesh through a 9-step money management plan for self-employed people. I helped with options and calculations, wherever possible. Here’s what we finally decided upon –
Set an income pattern
The first thing Narendra asked Dinesh was to count all his regular clients and the money he earns through them on a monthly basis. Since some of the clients are not so regular, he also asked Dinesh to add up to one-time projects he get on a quarterly, half-yearly and annual basis. He asked him to calculate an average monthly income as well as predict his high income and low income months.
Estimate basic expenses
Next, Narendra asked Dinesh to calculate all the expenses he makes in a month on basics, as well as luxuries. This included rent, grocery, travelling, utility bills, business meetings, and leisure and entertainment activities. Further, he asked to divide the expenses in two categories – business versus personal. His important advice – KEEP YOUR PERSONAL AND BUSINESS EXPENSES (AND ACCOUNTS) SEPARATE.
Pay yourself a fixed salary
After advising Dinesh to segregate business and personal accounts, Narendra explained that he has all the means and freedom to earn and spend as he pleases. But the first step to manage money as a self-employed person is to put a tab on your expenses. The simplest way to do this is to pay yourself a fixed salary. While this rule protects from overspending during the high-income months, it also helps create a buffer for the low-income months, thus creating a balance to support your lifestyle. At the same time, this rule doesn’t mean that he’d have to cut back on things he need. Narendra suggested that this monthly salary Dinesh pays to himself should cover all your basic expenses and leave a margin for savings and investments.
Plan taxes first
Since Dinesh’s annual income came under taxable slab, Narendra advised him to maintain a detailed account of his income and expenses, and plan for income tax from the very start of a financial year. For this, he said that it’s best to keep a portion of income for taxes and pay in advance so that there’s no room for error in the end. He also gave him some tips to save income tax as a self-employed person.
Create emergency fund
While Dinesh had a fulfilling life as a freelancer, he too admitted that work can be unpredictable at times. At this point, Narendra told him that it might be difficult, but he should create an emergency fund. He said that Dinesh should create a separate account in which he should add money worth an year of his basic expenses, as he had calculated earlier. This would then save him from unnecessary tension during tough times, or emergencies or any other unplanned scenarios.
Narendra elaborated that as a freelancer, Dinesh doesn’t have any access to medical insurance as many employers provide to their employees. It becomes all the more important for Dinesh to then safeguard all that he has. Insurance of different types, like life, medical and term insurance as well as insurance to protect business tools is quite important for self-employed people to recover in case of any unfortunate events. Harsh as it may sound, you can only work well if you keep well.
Set financial goals
Narendra asked Dinesh about his long term and short term financial goals. He insisted that it’s very crucial to know what are you saving money for and how much money do you exactly need to plan it properly. He said that depending on his goals, he can choose to invest money in SIPs, STPs, Mutual Funds, Share Market and more.
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Start investing early
Narendra was quite happy to see Dinesh following his dreams and doing so well, while also being concerned about his finances early on. He said that most of the youngsters think that they should enjoy life to the fullest for a few years before they think about saving or smart money management. But once responsibilities catch up, it becomes very difficult for them to start saving. He advised that as low as Rs. 1000 per month can also be a good start for anybody in their 20s, to start saving and investing. Many liquid investments such as mutual funds offer high return rate and have become quite systematic these days. He insisted that self-employed or salaried, everybody should start investing as early as possible.
Save for retirement
Another significant aspect to having to manage money as a self-employed person is to plan your own retirement. While there’s no limit to the age of retirement for self-employed people, they should plan well in advance to accommodate their current lifestyle as well as a balanced future.
Learning to manage money as a self-employed person is not that difficult, once you begin.
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