Separating business and family financial planning with correct balancing

Self employment, business or entrepreneurship have a great attraction and advantages that merit it as an income source to many. Different people try their hand at it at different ages and stages in life. The risks associated with it are different too and need to be considered and family kept secure and isolated from such risks as much as possible.

In my many years of mentoring experience I have seen many falter and put their families to great financial hardship and embarrassment in society.

If one decides on self employment option for income generation and gets down to it before marrying the risks are less and one is wise and young to wait to start a family, till he can afford it.

Problems arise with those who are married and not adequately financially secure in their lives while starting self employment or switching from one activity to another.It is difficult for them to separate the risks to the family and business as well as address them well. There are yet others who after being in a job for some years decide to leave the job and get into such activity.For them correctly calculating the risks for the family and dependents are most important.

Based on my experience I will recommend the following to those who have families and dependents and are self employed or getting in to it now after leaving a job:

1. If already in it at the earliest plan to insulate family from business risk by providing the family with a house to stay in and minimum steady income for their normal basic living

2. If getting into self employment after leaving a job and having a family and dependents then make sure that :

l Family has a house to live in and it is not mortgaged or offered as security for any business loans

l Family has a steady adequate income source independent of business activity at least for three years

l Liability of family house or savings should be limited and this is possible only if you have business as LLP or private limited and NOT proprietorship

l Keep the spouse fully informed and mentally prepared to manage the household with the provisions made and support your efforts for at least three years. It is sad to see many efforts being given up before they are given time to mature and succeed to show results.

l Accountants even the chartered ones are still accountants and not the best mentors or advisers on business in most cases.Educate yourself and reduce your dependence on them. Lack of accounting and finances knowledge is one of the common causes for enterprise failures.

With the rapid development of technology there are very good opportunities for the younger generation to explore. Start ups also receive funding from investors of different types thus reducing their personal and family risks.

SAVINGS AND HAPPINESS

For the pursuit of any financial goals, be they financial security, freedom or inclusion in the Financial system, the basic requirements are of saving a part of your income  and investing it correctly. Every one makes a beginning to earn income at some point in his life and that has to be the time when he must start saving. Some times I am asked by people how can they save when their income is so less. These are surely not the hand to mouth people, I remind them of the time when they had no income. If they survived that stage surely they can manage with a little less of their income and save. This is required if you want happiness in life as savings give happiness and debts and loans work the other way around and become a debt trap for many if they have gone wrong in calculating the risks involved while taking loans and its utilization.

To be able to save one needs to control his desires as will become clear from the way I like to define the happiness index.

Happiness Index= No of desires fulfilled / total number of desires * 100

So its entirely in your control to be 100% happy if you control the denominator or close to it.

The way is to gradually increase your desires and progress in life being more happy and does not mean that you should not have ambitions or desires. This way you can save and still be happy in life.Why let desires you can not fulfill destroy your today’s happiness for the pipe dream tomorrow.Do have a few reasonable desires which motivate and spur you to positive action and work to achieve them diligently. This way its possible to live life at your selected level of happiness say at 75 to 80 % or 100% what suits you the best.  

Separation of business income and income required to maintain and support your family is required for those in business as every business has its inherent risk associated with it and risking family home or land as mortgage for business loans is a common mistake which exposes the families to financial hardships. Term insurance covers the risk in the extreme case of death but households need to be insured from business risk by prudent financial planning .I will like  to discuss more about it in some later blog and will also like to discuss how achieving freedom form “Kriya” (working and earning for the livelihood of family)is the first step to be able to do any “Karma” ( selfless public service ) in life, this is required to make your life purposeful one.

HOW TO FOCUS ON SAVINGS WITH FAMILY BUDGET AS THE TOOL

I am asked by some as to why their savings and financial position does not improve despite making a budget some times regularly and some times off and on ?

For those who don’t make and review and analyse the budget the answer is in the question itself partially. But for other who regularly make a budget, review it and analyse it and still can not focus on savings and dont grow their kitty there is a way to do it.

Savings or “Bachat” as we learn in our system is understood as what is left after expenditure from normal income. This is the root cause in my opinion why we don’t  or can not focus on savings. For two reasons

1. When the equation is earning - expenditure = savings the focus tends to be on expenditure

2. Where as when the equation is Earning - savings = expenditure the focus shifts to savings

Secondly in life it is easy to raise your standard of living and increase spending but very difficult to lower it and increasing the earnings in most cases is not within your control and normal salary increases are co-related to the inflation and rarely help to increase the savings.

Savings not getting the focus thus is mainly due to following the wrong equation and belief. For your savings small or big not growing the main reason is most people are one being not aware or educated on financial aspects and secondly investing the savings in instruments which make for returns poorer than the inflation in most cases. Other reasons are inability to take calculated risk while investing , not planning, not having a long term vision, taking irrational decisions and getting influenced by marketing efforts of financial planners, insurance agents and brokers.I plan to discuss in details in the future weekly blogs.

Dos AND DON'Ts TO MAKE FAMILY BUDGET AN EFFECTIVE TOOL FOR BETTERMENT OF YOUR FINANCIAL POSITION.

Failing to plan is planning to fail, I find this is the main reason why so many people at different stages in life are not happy about their financial position. First step in financial planning is making a “good” family budget, after seeing what Family Budget is I thought of stating some Dos and Don'ts which will help you make it an effective tool and a “good” family budget.

Dos,

1. Make a realistic budget based on experience and written down accounts for a few months if making the family budget the first time.

2. If not provided for then first provide for creating emergency fund. Emergency fund should be about six months of your average monthly family expenditure.

3. Make provision for lumpy expenses like a holiday,travel,annual subscriptions for clubs, property taxes,school fees, annual premiums for life and medical insurance,charity contribution and such like annual expenditures

4. Provide for PPF payments as a monthly provision as it suits many but paying PPF as early as possible gets you more interest and if paid before fifth of the month you get interest for that month also.

5. If you are new to family budgeting or your family budget has not matured enough to be stable keeping some cushion of say 5 % to 10 % of monthly expenses initially till the budget becomes more accurate after a few cycles of reviews and course corrections.

6. Expenses must be noted down daily.

7. Share the budget with your spouse and involve the spouse in the budgeting process.  

Donts

1. Don’t postpone or procrastinate and get down to making your family budget on priority basis.

2. Do not indulge in excessive generalization while making the budget and excessive aggregation of expenses while noting down the expenses daily.

3. Don’t trust or stress your memory too much and note down daily all withdrawals and expenses.

4. Don’t forget to account for direct payments by credit/debit cards or by net banking.

5. Don’t forget to compare your budget with the actual at the end of the month and analyse the variances and make corrections. This is very important.