How do I budget on an irregular income?
Pay yourself a fixed salary from a buffer account, sized off your worst month, not your average. On a year that ranges from $2,100 to $6,800 (average $4,100), a $3,200 salary needs $1,100 in the buffer to start and ends the year with $11,900. Pay yourself the average instead and the buffer bottoms at -$2,400.
The example
A freelance year: twelve real-shaped months, some fat and some thin. Every payment goes into a buffer account; on the 1st, the buffer pays the checking account one fixed salary and the bills are paid from that.
| Amount | |
|---|---|
| Lowest month | $2,100 |
| Highest month | $6,800 |
| Average month | $4,100 |
| Whole year | $49,200 |
| Essential bills, per month | $2,900 |
| Salary you pay yourself | $3,200 |
| Buffer needed at the start | $1,100 |
The year, month by month
| Month | Income | Buffer, paying yourself $3,200 (starting at $1,100) | Buffer, paying yourself the $4,100 average (starting at $0) |
|---|---|---|---|
| January | $2,100 | $0 | -$2,000 |
| February | $3,900 | $700 | -$2,200 |
| March | $5,200 | $2,700 | -$1,100 |
| April | $2,800 | $2,300 | -$2,400 |
| May | $6,800 | $5,900 | $300 |
| June | $4,100 | $6,800 | $300 |
| July | $3,300 | $6,900 | -$500 |
| August | $2,600 | $6,300 | -$2,000 |
| September | $5,900 | $9,000 | -$200 |
| October | $4,400 | $10,200 | $100 |
| November | $3,000 | $10,000 | -$1,000 |
| December | $5,100 | $11,900 | $0 |
Read that table twice
Read the third column first. Starting with $1,100 and paying yourself $3,200, the buffer touches zero once, in January, and never again; by December it holds $11,900. The salary is $300 above the essential bills every month, thin and thin, so the thin months are boring. That is the whole design.
Now the fourth column. Paying yourself the average sounds fair and it is the version that overdrafts: the buffer is -$2,400 by April, because the average is a number the year hits in June, not in January. An average tells you what the year was worth. It says nothing about which months the money arrives in, and bills arrive in all of them.
The $1,100 is the price of admission. It is the gap between a $3,200 salary and the thin months at the start of the year, and until it is saved the system does not work; it just moves the overdraft into the buffer. After that, the $10,800 the year ends up ahead is the raise you give yourself next year, once you have seen it happen.
The honest recommendation
- Set the salary just above the essentials, off the floor month, and leave it there for a year. $3,200 against $2,900 of bills here. It will feel low in May. May is not the month that decides anything.
- Save the $1,100 before switching to the system. Run the simulation on your own twelve months; the deepest dip below zero is the buffer you need first. Starting without it is the old problem with a new account.
- Raise the salary once a year, from evidence. The year closed $10,800 ahead of the salary. Some of that becomes next year’s raise; some stays as buffer for a year that is thinner than this one.
- Do not pay yourself the average, and do not pay yourself the good months. Both put the overdraft in the bank’s hands. The average bottoms at -$2,400 on this year; a salary set in May would be worse.
Where these numbers came from
A running balance, month by month: buffer plus that month’s income minus the salary. The third column starts at $1,100, which is exactly the lowest point the same run reaches when started from zero, so it is the smallest buffer that never goes negative. The fourth column starts at zero and pays the $4,100 average. Nothing is smoothed or annualised; the months are the months.
Forgenta forecasts the checking balance forward month by month and keeps a floor under it, so the salary you pay yourself is checked against the real bill dates instead of against an average.