Why self-employed individuals need to manage their finances more efficiently?

As income dynamics of people who are their own bosses are a tad different from the salaried class, the subject also needs to be approached differently.
As income dynamics of people who are their own bosses are a tad different from the salaried class, the subject also needs to be approached differently.(Photo:Shutterstock)
As income dynamics of people who are their own bosses are a tad different from the salaried class, the subject also needs to be approached differently.(Photo:Shutterstock)
Updated on Dec 22, 2020 05:20 PM IST
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Hindustan Times | Byhindustantimes.com

The media and popular culture tropes rarely go beyond the razzmatazz of entrepreneurship but ask any entrepreneur about his/her experiences and the descriptions will surely have words that are synonymous with challenge. The world of start-ups is not just a microcosm of passion, hard-work, unrelenting dedication and the zeal to not give up. On some days running businesses can seem like waging a lost battle and the proverbial light at the end of the tunnel may seem invisible.

Given the circuitous path of entrepreneurship, money management for business owners and self- employed individuals can assume a new dimension. As income dynamics of people who are their own bosses are a tad different from the salaried class, the subject also needs to be approached differently.

However, for many entrepreneurs it is easy to give into wrong investment choices when their ventures are doing well.

Sidestepping what is popular

For many entrepreneurs and self-employed individuals, a lot of incorrect investment strategies are primarily driven by a lack of understanding of investment avenues. There is a tendency to jump on to bandwagons that may or may not be suited to their situations and goals. Arjun Chhabra, a practicing chartered accountant, whose clientele includes self-employed individuals and businesspersons says, “I have worked with so many people running successful ventures and a common trend is to follow the advice of friends and family members. If an entrepreneur has a friend, who is also an entrepreneur and decides to invest in a commercial property, chances are others too will be interested and may consider investing there solely because of the recommendation without thinking that maintaining the property may prove to be a loss magnet in some cases. It is extremely important to not give into cookie cutter solutions like these.”

Differentiating between your business and personal accounts

The perception that building a business is akin to raising a child can indeed be the secret ingredient in keeping entrepreneurs motivated but when it comes to money management it is imperative to not let your vision being clouded. Rachna Sharma (name changed), an entrepreneur based in Ranchi says, “In the early days of my entrepreneurship journey, I made the mistake of not segregating my personal finances from the business’s funds and the resulting mess took a while to clear. It is extremely important to always remember that your business is a separate entity because not only does it lend more credibility to your business but you will also be spared a lot of troubles if something bad were to happen tomorrow. You will also make better investment decisions once you demarcated the finances for the two – what you need for your personal finances aren’t going to be congruent with the financial decisions you need to make for your business.”

The beauty in simplicity

The path of entrepreneurship can be riddled with uncertainties and the constant need to be in the fight or flight mode can make it extremely daunting for entrepreneurs to actively monitor investments and review wealth management strategies from time to time. Parvathy Iyer, Chief Investment Officer at femwealth.com says, “It can be difficult to find the time and motivation to search all possible investment avenues, then understand them and finally pick the one most suited to them. Investment should be made in simple assets - assets that are transparent and easy to understand. They should be easy to buy, easy to sell. It should not require a lot of maintenance or checking up on. And calculating the value of the investment should just take a few calculator steps.”

Iyer advocates that given the convenience afforded to mutual fund investors, it can be an attractive option for entrepreneurs and self-employed individuals. She says, “A “fill it and forget it” passive approach on mutual funds is a good strategy. It is important to determine the distribution between equity and debt based on risk tolerance. The investment can be made in a couple of direct index equity funds, plus a couple of direct short term debt funds that manage large sums of money. This ticks all the above boxes and is a low expense, low maintenance portfolio. It is also a portfolio where mistakes can be avoided.”

Considering entrepreneurship in itself can be an extremely demanding role, making simplicity one’s mantra in the realm of money management can go a long way in helping entrepreneurs spare a lot of time and energy. “This kind of passive portfolio is especially well suited to entreprenuers short on time, attention span or inclination. All this can be done online which is easy and convenient,” Iyer asserts.

The next time you plan your investments, keep these points in mind:

 Do not give into cookie-cutter investment solutions: Always understand how a particular investment is going to help your case and then go for it. Buying commercial or residential real estate in different parts of the country might not always be the best way forward.

 Segregate personal finances from the business’s funds: It is extremely important to always remember that your business is a separate entity because not only does it lend more credibility to your business but you will also be spared a lot of troubles that come with overlapping of finances.

 Invest in simple assets: Investment should be made in assets that are transparent and easy to understand. They should be easy to buy, easy to sell. It should not require a lot of maintenance or checking up on. Mutual funds are a convenient choice for entrepreneurs and self-employed individuals.

This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund

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Tuesday, January 25, 2022