6 money movements for the self-employed to achieve financial freedom

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The sharp increase in private sector medical expenditure highlights the importance of purchasing an adequate health insurance policy.

The income and cash flow dynamics of the self-employed are different from that of employees. Self-employed workers have lower income certainty than salaried employees. In addition to this, they also have to make arrangements for social security, health and retirement themselves.

Following these financial tips can help self-employed people achieve financial freedom:

1. Build and maintain an emergency fund sufficient to meet financial demands

Employees are often advised to maintain an emergency fund large enough to meet unavoidable expenses for at least six months. Self-employed people should aim to retain a comparatively larger body of work, at least for nine to twelve months, due to greater uncertainty of income. Without an adequate emergency fund in place, any unforeseen financial emergency may force you to resort to more expensive loans or liquidate investments intended for critical financial purposes.

Park your emergency fund in highly liquid instruments such as high yield savings accounts or high yield fixed deposit accounts to ensure instant access.

2. Purchase adequate term insurance to serve as replacement income for your dependents.

The main goal of purchasing a life insurance policy is to provide replacement income for your dependents in the event of an unfortunate death. Ideally, you should purchase life insurance coverage equal to at least 15 times your annual income. The best instrument to buy such life insurance coverages at a lower price is a term insurance plan. A term plan will not only help your family meet day-to-day expenses, but also meet critical financial goals like your child’s college education or marriage-related expenses.

3. Purchase an adequate health insurance policy to cope with rising medical costs

The sharp increase in private sector medical expenditure highlights the importance of purchasing an adequate health insurance policy. Without health insurance coverage, a single incident of hospitalization can put your lifelong savings at risk. In addition, as the self-employed do not have collective employer health policies unlike their salaried counterparts, purchasing adequate health coverage becomes even more important for them. Self-employed people should take out floating family plans to cover themselves, their parents, spouses and wards at a much lower price.

4. Create a financial plan to achieve your critical financial goals

Financial planning helps design a money management strategy to achieve a variety of financial goals based on your risk appetite, investment time frame, and cash flow. In addition to providing direction to your investments, financial planning also helps implement an appropriate asset allocation strategy for your investment.

Self-employed workers must first estimate the amount required to meet each of their critical financial goals, an assumed rate of return, an assumed inflation rate, and the investment horizon remaining to achieve those goals. They should then use the SIP calculators to estimate the monthly investments needed to meet those financial goals.

5. Start investing early to build your post-retirement corpus

The lack of employee provident funds (EPF) and other retirement benefits makes it important for the self-employed to build their own post-retirement corpus. However, most investors, especially younger ones, generally tend to postpone their investments for their life after retirement. Instead, they prioritize more immediate financial goals like building up vacation funds, arranging a down payment for a home loan or car loan, and more. Avoiding early investment in building a retirement corpus would either lead to an insufficient corpus or excessive financial pressure in the later phase of life. to build a sufficient corpus in a shorter period of time.

Start the process by using online retirement calculators to determine the monthly contributions needed to build a retirement corpus. Since planning for retirement is a long-term financial goal that spans over a decade, start investing your monthly contribution in equity funds through SIP. As stocks are an asset class, they can beat fixed income instruments and other asset classes by a wide margin over the long term. Once you are 2-3 years from retirement age, estimate your expected monthly expenses after retirement. Then activate the systematic transfer plan (STP) in equity funds to automatically transfer the amount to debt funds at monthly intervals. This will consolidate your capital gains from equity funds and reduce the market risk for your retirement corpus while leaving you sufficient exposure to equities for the future growth and longevity of your retirement corpus.

6. Use a credit card to establish your credit score

Those with a credit score of 750 and above are more likely to get loan and credit card approval. Many lenders have also started offering preferential interest rates to those with higher credit scores. Since there can be no credit score without a credit history, self-employed people without a credit history can establish their credit score by using their credit cards in a disciplined manner. Transactions made through credit cards are similar to using loans and therefore are reported to the credit bureaus. Credit bureaus use these transactions to calculate your credit score.

Self-employed people who turned down credit cards due to insufficient income, unusable locations, etc. can avail secured credit cards to establish their credit score.

(By Gaurav Aggarwal, Senior Director, Paisabazaar.com)

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