Financial planning is essential not just for business, but also for life. Here are some tips for money management which will hold you in good stead.
What’s the biggest challenge of being self-employed? Yes, the uncertainty of income. In the absence of a guaranteed monthly paycheck, personal financial management can become a daunting task. It’s not really about how good or bad you are with numbers. Even the most financially savvy person can get unnerved by the unpredictability of earnings.
My experience as a fintech entrepreneur has taught me that handling financial affairs with acumen and aplomb takes a certain kind of discipline and practice. Here are seven simple, yet highly effective principles to master the art of money management:
Be a stickler for planning
Say, you are off on a drive to a new place. Wouldn’t it help to have your phone GPS on? Planning aids money management in much the same way. It acts as a roadmap through your personal and professional journey.
Financial planning is essential not just for business, but also for life. Start by charting out your expenses, income and savings, right from day one. Keep records of all your financial activities in an organised and easy-to-get-to manner. Knowledge, indeed, is power. Know where you stand in terms of finances and keep reviewing your situation periodically. It helps to have short-term and long-term financial plans.
Build a personal emergency fund
The importance of building a personal emergency fund cannot be overstated, especially for an entrepreneur. Given the volatile nature of work, every self-employed person needs that financial cushion to help weather storms that are bound to strike, sooner or later.
While most entrepreneurs tend to build an emergency fund for business, they ignore the need for a personal cash reserve. Ideally, the emergency fund should be in existence before you kick-start your business and it should cover non-business expenses of at least six months. More, the better. Contribute to the fund on a regular basis and keep it accessible. The idea is to be prepared for the worst. Because prevention, as the saying goes, is better than cure.
Evaluate every risk
Would a professional cricketer go on to bat without wearing his helmet, leg-pad, or arm guard? As an entrepreneur, can you afford to throw caution to the winds? Just as you need to be acutely aware of the financial risks involved in every business decision, personal money management calls for the same level of thoughtfulness in other aspects of life too.
Be conscious of your monetary situation and the repercussions of financial actions at all times. Understand and analyse the risks associated with personal decisions, present and future. For instance, should your mutual fund portfolio be in favour of debts or equities? The answer depends on your risk appetite (and market conditions), assessed from time to time.
Make a budget
This one can be tricky. Make a conservative budget, which just about covers your personal expenses. The challenge is to make it as exhaustive as possible – tax obligations, home loan EMIs, children’s education expenses, etc – yet frugal.
Putting a realistic budget on paper is only half the job; the tougher task is executed. Initially, it can be daunting. However, it gets better with time. Budgeting – estimating costs and cash flow – instils financial discipline and helps entrepreneurs run not just their professional lives, but also their personal lives smoothly. It’s advisable, though, to keep personal and business budgets separate.
Invest in tax-saving instruments
Everybody wants to reduce their tax burden. And entrepreneurs are no different. The success mantra is to optimise resources and opt for smart investments.
In the recent past, equity-linked saving schemes (ELSS) mutual funds are emerging as a popular option, given that they invest in equity funds that provide decent returns and also save tax up to Rs 150,000. Although public provident funds (PPFs) and unit-linked insurance plans (ULIPs) are still viable options, ELSS funds offer the advantage of higher returns, shorter lock-in period (three years), and greater flexibility to invest more and conduct periodic reviews.
You can visit the supermarket every day to buy groceries, or purchase them on a monthly basis. A successful entrepreneur would choose the latter. Because it’s important to not lose sight of the long-term objective.
This is not to say that short-term financial goals are not necessary. Of course, they are, so long as they align with the long-term plan. Sound money management requires that all decisions – personal as well as business – are in sync with your long-term financial goals.
Do not panic
Plans fail, even the best ones do. That’s how life – and business – works. The challenge is to stay calm in the face of adversity; to get up after that unexpected knock. Amidst the recessions, inflations and market collapse, an entrepreneur needs to keep the panic attacks at bay.
The tides will change. You got to have the courage to stand by your plan. Successful money management is essentially about minimising your risks and optimising your returns. “A bend in the road is not the end of the road,” said a wise soul, “unless you fail to make the turn”.
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