Irregular income

Irregular income is not the same as low income. A year of freelance work can add up to a respectable salary and still produce a crisis, because a $6,000 month followed by a $2,200 month averages $4,100 while the rent is $1,400 in both. The problem is the order the months arrive in, not the average, and the fix is to budget on a floor month and hold the surplus from the good months in a buffer that pays the floor in the bad ones. Often nothing is withheld from it either, so part of every deposit belongs to the tax bill.

In a sentence

• "On irregular income, a $6,000 month and a $2,200 month average $4,100 and still produce a crisis, because the rent is due in both."
• "A salary is the same on every payday; irregular income is known only after the month is over."
• "Commission is irregular income with a regular payday: the date is fixed and the amount is not."

How it works

The method for all of them budgets the money that has already arrived, never the income expected.

1. Pull twelve months of deposits, as money that landed rather than invoices sent, and sort them from lowest to highest.
2. Set the floor at the second- or third-lowest month. Not the lowest, which is usually one bad month, and not the average, which the low months cannot reach.
3. Fit the must-pay bills under the floor. If they do not fit, the fixed costs are too high for the bad months, and no buffer fixes that for long.
4. Land every deposit in a holding account, and on the first of the month transfer the floor to checking as a paycheck. Start the schedule once the account holds two floors, one for the coming transfer and one for a low month after it.
5. Release what rises above the target to savings, debt or the discretionary categories, and in a low month transfer the floor anyway.
6. Set aside the tax share first when nothing is withheld, into a separate tax account, before a deposit reaches the buffer.

An example

Twelve months of deposits, sorted: $2,200, $2,800, $3,100, $3,400, $3,600, $3,900, $4,200, $4,500, $4,800, $5,200, $5,600 and $6,000. The average is $4,108, the floor at the third-lowest month is $3,100, and the buffer's target is two floors, $6,200, where the example starts it.

Checking received $3,100 every month, including month 2, when the deposits fell $900 short of it; the buffer absorbed the gap and month 3 refilled it. The $5,500 released across the four months is the period's real surplus, paid out as decisions rather than as good months that felt good.

Why it matters

A monthly budget assumes the month's income is known, and irregular income breaks that assumption every month: budgeting the average fails in the low months, budgeting the good months is worse, and spending follows the good months up without following them down. The floor takes the order of the months out of the picture and turns a lumpy income into a steady paycheck. Two other numbers change with it: the emergency fund is sized larger, because it covers the gaps as well as the emergencies, and a tax share is set aside from every deposit, because nobody withholds it.

Irregular income versus a salary

A salary is a fixed annual amount paid in equal installments on a schedule, with the tax withheld by the employer; irregular income varies in amount, in timing or in both, and often arrives with nothing withheld. A salaried budget runs on the paycheck, and an irregular one runs on a floor the earner pays themself from a buffer, which is a salary built by hand. The two meet in the freelancer who routes every client payment into a business account and pays a fixed amount out of it on the same two days each month; see How to pay yourself a salary from freelance income.

Common questions

Is irregular income the same as variable income? Yes; the terms are used interchangeably. Where a distinction is drawn, variable describes an amount that changes on a fixed payday, such as commission, and irregular an income whose timing changes too, such as freelance work.

How big should the buffer be? Two months of the floor, one for the coming paycheck and one for a low month after it, and three when the swings are seasonal.

Do I need a bigger emergency fund on irregular income? Yes. Six months of essentials is the usual figure for freelance or commission income, and it stays separate from the buffer: the buffer pays you the floor, and the emergency fund pays for emergencies.

How much should I set aside for taxes? When nothing is withheld, a common starting point is 25% to 30% of each payment, kept in its own account and paid through quarterly estimated payments; the first full year's return shows the real rate.

Go deeper

• How to budget on irregular or variable income finds the floor from twelve months of deposits and runs the buffer month by month.
• How to pay yourself a salary from freelance income routes every client payment into a business account and pays a fixed salary from it on two fixed days.
• How to budget with a side income or a second job keeps a variable side income out of the monthly plan by giving it one job decided in advance.

Where it shows up in Zypper

Zypper budgets income as an expected amount per category with what actually arrived shown against it. An income category can be set to a frequency of Twice per month, Every two weeks, Every week or Every month, and its row shows Earned against the amount; for income with an unpredictable amount or frequency, the category's Variable switch shows what you have earned with no pill or pace bar to be behind on. Left to budget is your expected income minus everything budgeted for spending, which is the check that the must-pay bills fit under the floor, and the monthly transfer from a holding account to checking is recognized as a movement between your own accounts, so it never counts as income a second time. See Creating your budget for the details, or get started with Zypper to budget your own floor.