Financial planning for the self-employed

By: Planswell

You took the plunge and started your own business. Maybe you were born for entrepreneurship, or maybe you’re having to push yourself outside your comfort zone to give it a shot. Either way, you’re trading what might be a more predictable career for one that can be, at turns, both exhilarating and terrifying.

When it comes to financial planning, the entrepreneurial road tends to have more twists and turns than a conventional career. But, like almost all other Canadians, the most basic risk to be avoided is experiencing a lifestyle decline in the future. Think about paying for your kids’ university education, reaching your retirement years, or having a financial setback because of something unexpected, such as an accident or illness.

While it’s vital to stay on top of the day-to-day things like cash flow, invoicing, and managing your receipts, a financial plan is equally important to set you up for long term success. A good financial plan reduces the risk in your life and help maintain your lifestyle no matter what comes along. This article will point you in the right direction.

Get into the passion mindset

The most valuable parts of your lifestyle are your passions. What do you love most? For many people, it’s spending time with family and friends, having a comfortable place to call home, and enjoying the hobbies and interests that make life engaging.

A good starting point for your financial plan is to remind yourself that its job is to maintain those things. For example, if hosting a huge holiday party with dozens of relatives and loved ones is a tradition that you hold dear, then think of your plan as a way to make sure you will always have the home and food and gifts and freedom to continue hosting that party. Maybe even to make it bigger than ever as your family grows.

Tying your plan back to the tangible things in your life that it supports is a great way to give it meaning. And that meaning can provide the discipline you need to make smart financial choices and stick to them.

Build your plan

Here are the three main areas that your plan should address, including some of the special considerations for entrepreneurs:

1. Reduce your borrowing costs.

How much are you currently spending on debt? Can interest rates be lowered or the amortization extended to free up more cash flow? If so, how can that cash flow be reallocated to the investments and insurance that will complete your plan?

As a business owner, you may have business cards, loans or lines of credit. If the money is borrowed for business purposes, are you taking advantage of tax-deductible interest? Are there opportunities to maximize this benefit?

2. Maximize your investments.

How much money will you need for future goals? How much should you be investing on a monthly basis, and which types of investment accounts will leave you with the largest amount of after-tax dollars possible?

As someone in business, your income may be less consistent than a typical employee, but a plan to can help you see what rate of saving and investing to aim for over the course of a month, quarter or year. You may want to take a global view of risk as well. For example, if you’ve invested in a business that you’d consider risky, you might want to offset that with more conservative investments in your RRSP or TFSA.

3. Protect yourself and your family.

What would happen to you if you had to miss months of work due to an accident or illness? It happens to millions of people annually, and the right type and amount of insurance can cover you. If you have kids or other dependents, life insurance is also a must-have to make sure everyone will always be provided for.

When you work for yourself, you generally don’t get benefits. However, there is an excellent alternative with a Health Spending Account that effectively makes all of your healthcare expenses tax-deductible (including Swedish massages).

Corporate-owned life insurance is another unique concept for business owners. Once you build up enough cash or investments inside your corporation, this strategy may allow you to access that money in a very tax-efficient manner.

A good plan will tell you how to take advantage of all of these ideas, and break it down into simple monthly steps. Once you retire someday, you should also spell out how to draw down your various assets in a way to ensure the holiday party extravaganza or whatever else you hold dear remains a tradition everybody can count on.

Your plan grows with you

What happens if your business doubles next year? Or if the stock market goes down or you get married or have a baby or decide to downsize your empty nest?

Life is going to bring change, and that’s why it makes sense to spend a few minutes updating your plan every six months or so. This way, if business takes off, your plan will adjust to maintain your new standard of living. If the market has made any major moves, your investments will adjust to match.

There was a time when only highly-paid professionals could build and update a financial plan for you. Few business owners would even have a plan, and most who did would only set it up once in their lives then hope for the best. Today, Planswell makes it easy to update your plan any time there’s a change in your life and you want to make sure you’re staying on track.


Planswell

Got three minutes? Running a business is full-time job and then some. But if you have people, places, and things in your life that you love and want to fortify with financial security, we think building a free plan with Planswell is the best thing you can do in the next three minutes.

Grow your wealth. Manage your borrowing. Protect your assets. Planswell gives you a free plan that ties investments, insurance and mortgages together so you can maintain your lifestyle throughout work and retirement.