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Go Back to Main Page Managing Your Finances

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Don't Mix Finances

Congratulations! You have now decided to be your own boss and set up a business. Even as you make preparations for your start-up to take off, you will need to have a plan ready on how to adapt your finances to the new realities.


As you make your life’s most radical shift, ensure that funds for business and personal use remain separate. This is despite the fact that initially it will be your own funds that would get you started, with institutional funding such as those from banks, likely to remain inaccessible. Dipping into your personal finances for running the business should be the last thing on your mind. Keep budgets and accounts separate for personal and business funds as it will help you track things better. Make arrangements for funding your regular expenses and your goals such as children’s higher education or your own retirement. This will help you manage your expenses better and also let you have realistic business targets.

How To Adapt Your Finances


Augment emergency funds. You can increase it up to 9-12 months of living expenses, so that the household expenses and other commitments like EMIs and premium payments continue even if business income takes time to come in. Maintain this level of emergency funds by keeping at least four months’ requirement in your savings account and the rest in liquid and short-term mutual funds.

Ensure that you have adequate insurance cover. Critically evaluate your business plans and look at the kind of risks involved. Accordingly, provide for protection to property, employees, business continuation and fiduciary liability to be secure. Keyman insurance comes handy in getting protection for business liabilities through pure term insurance, while premiums paid qualify for tax benefit in business accounts. Besides this, ensure that you and your family have adequate coverage for life, health, disability and assets. As an entrepreneur, account for any additional business liabilities or loans that you have to repay. Plan your finances in a way that the creditors can in no way have access to your personal funds if you have a setback in business.Investments. While entrepreneurs typically reinvest all their earnings from business back into it, you need to ensure that your personal finances, especially your goals-long-term or short-term-are not under threat. Use systematic investment plans (SIPs) of 3-5 diversified equity mutual funds and earmark them for long-term goals, such as children’s education or retirement. You can use SIP calculator online to calculate your return on investment for mutual funds investment options. Remember, the approach should be: Income-savings - Expenses. Alternatively, you separate some savings before you spend even if it means pruning some of your expenses.

If you have lump sum earnings, direct them to existing mutual fund folios to make tracking easy. Balance growth investments with low-risk investments such as Public Provident Fund (PPF) and debt funds. Besides the huge tax benefit, a PPF account cannot be attached by a court or creditors. Tax savings. As an entrepreneur, you would have income under the head ‘Income from business’ for taxation purposes. Your net income, even after taking into account all the allowable expenses could end up being taxable. Make use of Section 80C investments by investing in tax-saving mutual funds, PPF and others to reduce tax outflows and save for long-term needs. Succession plan. More than ever, you need to earmark assets to various family members through nominations and a Will so that your successors are not left in the lurch in the event of your untimely demise.

A transition from employment to self-employment calls for a realignment in your finances. You and your dependents are better off keeping this in the picture.

Next To Come: You Take The Wheel