Lim Kopi Fridays Videos

Ep. 14 - 6 Ways to Effectively Plan Finances for Self-employed Individuals



Self-employment can be an exhilarating experience for some people. This could be the first time that you could spend time with your family without applying for leave or could be the first time that you are seeing financial rewards as a result of a direct effort that you put in. However, on the flip side, most self-employed individuals are experiencing anxiety with regards to their finances on the daily basis.


In this video, I’m going to share with you six ways that self-employed individuals can plan for their finances effectively. Let’s dive right in.


Hello everybody, My name is Adrian and welcome to another episode of Lim Kopi Fridays with Adrian. In the last episode I talked about 7 things that I should have paid attention to before I embark on self-employment journey. In this episode we’re going to talk about how we can effectively plan for our finances. A lot of times self-employment is not all rosy and nice, there could be situations where we may be down, we would be slow in business and that could affect our finances.


However, we should not lose sight of our original intention when we wanted to come out of employment into a self-employment and there could be one or two reasons. Number one, you want to spent more time with your family and number two, you want to have more income or it could be a combination of both that could sometimes come at a cost. By understanding what these costs are, you might be able to better navigate your way around self-employment. The first thing that you have to take care of would be to have a comprehensive medical insurance.


Why is this so? Because with the lack of company insurance, you are on your own and if medical situations arise then you may have to fork out your own money to pay for them. However, having a comprehensive medical insurance would allow you to have a backup fund that you can tap on, a corporation that can help to pay your medical bills instead of coming out of the money from your own.


Having a comprehensive medical insurance would be crucial to ensure that your money is not eroded in the event of medical situations. The second thing that we can do is to keep our body and our mind healthy. Because when we do that, we have less chances of falling sick and we have less chances of taking medical leave or going to hospital and less chances of us spending more on medical. By allowing our mind to be healthy, we can practice mindfulness and sometimes these activities can translate into better results in our self-employment. Do not underestimate the importance of keeping our body and our mind fit and healthy when we are embarking on self-employment job.


Because at the end of the day, our body is what keeps us going and that is our employability or the ability to work is very important for us. Which leads me to the next point of protecting our income. Unlike employment where sometimes they could still give you a fair bit of income for a period of time, if you are not able to work. This isn’t the case with self-employment or entrepreneurship. Because sometimes, we are unable to work, we have a direct hit onto our income. And if your job doesn’t have perpetual income, and it doesn’t give you the additional income from the sides, from things like maintenance, perpetual Commission, then you are in the risk of losing your income over time.


Which is why protecting our income is so crucial to ensure that we have a lifeline to hang on to, even in situations where we are unable to work. The fourth thing that we have to do to plan for our finances would be to track our expenses very closely. To segregate them into fixed and variable expenses. To really understand, That sometimes there could be cyclical expenses as well. That means it comes in different cycles, different season, depending on your industry. By understanding the nature of your expenses, you have more room to play around or to navigate your finances around and to ensure that you do not reach a situation where you have to borrow from others and from the banks in order to cater for that particular situation.


And after you have tracked your expenses, the next thing that you can do is to plan for your own retirement. Because of the fact that there is no CPF unless you contribute on your own, you lose out on the employers’ part of the CPF and for most self-employed that I’ve known, they don’t really contribute to the CPF because they already have so many things to take care of. They have a lot of expenses to take care of, their business direction and they actually spend a lot of resources on their company or on their job, on their self-employment. They do not have the resources to look into their own retirement.


And sometimes, when these people are younger, maybe in their early thirties or late twenties, they don’t see the need to plan for the retirement because to them, it could be something that is very far away. However, if you know about retirement, you know about planning for retirement, then it might be better for you to start younger even in the early days of your self-employment to cater for retirement. One way that you can do is to invest consistently. Because by investing consistently and you could even start with a small amount.


The whole idea is to get you started, but the type of investments that you might want to consider unless your income is very stable, is to go for something that is more liquid rather than having a lock-in. Because having liquid investments will not only allow you to build for your retirement, it can also allow you to build for emergency. And this brings me to the last thing. To plan for emergency funds. Ideally, if you can plan for six months of living expenses or six months of living expenses plus your business expenses, that would be great. I would say that would probably be the minimum that I would encourage you to go for.


Because in self-employment when you are not able to work due to whatever reason, the first thing that will come into play would be your own money. That means you have to use your own money to cater for the fixed cost and your living expenses. And by planning for emergency funds, depending on your industry, six months is generally acceptable. Unless your industry is at risk for something that may be longer, than might want to plan for longer.


It could be like nine months or could even be 12 months. You could also invest your money as a form of emergency funds so it will be liquid in a way and you can use it for emergency. The only thing you may have to be mindful of, is not to use the investments as freely as you want, because after all, it is mainly for retirement. To summarise, self-employment can be an exciting opportunity for some people. But not all can be rosy all the time. You want to avoid putting all your resources into your business, into your self-employment job, and also cater for other aspects of your life, such as getting suitable insurance that can cover your medical bills and they can cover your income.


And to keep your mind and body fit and healthy, to ensure that you do not fall sick that often, and also to really track your expenses and to invest for your retirement. I hope this helps. I’ll see you in the next episode.