Whenever self-employed people start thinking about financial planning, they are faced with a major problem. They are unable to answer about their true income. It is not that they don’t want to answer; the issue is they are not into a fixed monthly salary job. They have to deal with variable cash flows, and therefore it is extremely tough for them to design a financial planning process.
Most of the people just invest to save taxes and buy some insurance policies and pension plans in the name of financial planning. However, they fail to understand that financial planning is not restricted to tax saving. They even opt for tax evasion considering it as a form of tax saving. They forget that the tax saving instruments and the idea of tax evasion are two entirely different concepts.
Self-employed professional should never hide their real income. Instead, they should follow a structured approach to have an organized financial life. The first-step, self-employed professionals should take, is to separate personal and business expenses. The professionals should prepare a list of personal expenses. They should even decide a fixed amount from their business income as their monthly salary. It will help them to keep a check on personal as well as business expenses.
The self-employed professionals should create emergency funding corpus in both personal as well as business front. They can continue with their personal expenses when business is slow, and they can invest more in their business when the time demands so.
Apart from emergency funds, self-employed professional should have adequate insurance coverage so that they can take care of unseen problems on personal as well as business front. It is a risk-management technique in financial planning process.