Are you a self-employed professional? Remember the new 10% rule of investing | Personal Finance

Being self-employed is the most thankless way to earn a living. Unlike employees, they do not receive a fixed monthly income, personal days off, sick leave, housing and travel allowances, promotions, salary increments, or medical insurance.

If you think the job security is low for employees, then it's much worse for the self-employed. Employees at least receive a severance package if laid off, but the self-employed receive nothing.

All small-scale self-employed professionals are at risk of bankruptcy if there is a change in the governance regime, local laws, technology, cheap imports, replica products, service quality, or a natural calamity. I know a few who had to close their shops just because of road diversions and metro construction.

Still, why do thousands of well-paid employees quit their jobs to start a small business on their own? The answer is due to freedom. Being self-employed means you are your own boss. You do not have to report to anybody, nor do something that does not align with your interests or beliefs. Since you are the smartest one in the room, you could design and build your future in the way you like it. Being a self-employed professional means you are in control!

Entrepreneurs and small-scale self-employed professionals are the backbone of every country. If you think the big corporations create the maximum job opportunities, it's not true, because any profit-making corporation would love to reduce its headcount to maintain its earnings.

It's the self-employed professional who actually creates the jobs. In a country like India, where job seekers are not always skilled, these MSMEs give them hope and train them to earn an income.

Despite the higher freedom and control a self-employed professional has, they miss out on a crucial process—disciplined investing. It's quite in the nature of the work that they do. They may not have the time or the money to invest. All self-employed professionals would be busy ploughing back capital to get their projects running. Rarely would they have excess to invest. Compare this with a salaried person, who has an advantage, as they can invest through SIPs.

The solution is the new 10 per cent investing rule.

As a self-employed professional, quote an additional 10 per cent margin on your next work order. This excess of 10 per cent can then be used for investing. Even if you take out this money, your existing projects or the capital rolling would not be impacted. Remember, this additional 10 per cent is in addition to the fair margin you require for successful operations.

You might think that if you charge your client 10 per cent more of your operating margin, they might stop ordering from you. The answer to that question is that if you do not have a 10 per cent margin buffer, you are in a highly competitive industry and could be thrown under the bus if a bigger player steps in.

Let me illustrate it with an example. Suppose you submit a quotation worth ₹5,00,000 to your client, and your operating margin is 25 per cent, i.e., ₹1,25,000. All I am asking you to do is revise the quote by adding your 10 per cent extra on 1.25 lakh, 10 per cent of ₹1.25 lakh would be ₹12,500. This means that the revised quote for your work order would be ₹5,12,500.

When the client pays you, remember to set aside ₹12,500 for investing. What remains is your original quote amount of ₹5,00,000, which you can use to proceed with the project.

We shall analyse one more example to get this concept clear. If your quote is ₹1,00,000 and your operating margin is 45 per cent, i.e., ₹45,000, you need to find an additional 10 per cent of ₹45,000, i.e., ₹4,500, for investing. This means the amount you need to charge the client would be ₹1,04,500 (₹1 lakh + ₹4,500). Of this, invest ₹4,500 immediately and proceed to execute the project with the remaining original quote amount.

The 10 per cent investing rule works for projects and engagement with a small budget. If you start overcharging your clients on a big project, it could result in a serious budget overrun. In those cases, you could improvise the 10 per cent rule to 5 per cent or 3 per cent as per your requirements.

The investments you make will always be as lump sums to either mutual funds, ETFs, or stocks, as systematic investment plans would not be the right fit. Interestingly, your investments will be proportionate to the number of projects you execute. If you do 5 projects a month, you can invest 5 times that month. If you do only 1 project in 3 months, the investment frequency will be 1 per quarter.

What this new 10 per cent rule does is to strengthen your investment discipline. The first few transactions may seem odd and difficult, but once you get the feel for it, you will be inspired to allocate more. This new investment mantra will help and guide you to financial independence in 15 to 20 years.

Being self-employed does not mean you cannot discipline your finances. You are contributing so much to the nation and its workforce; choose to let the money work for you while you sleep.

The writer is a SEBI Registered Investment Adviser (INA000021757), SEBI Registered Research Analyst (INH000025054), and author of ‘How to join the top 1% options traders club’.

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The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.