How to budget on irregular or variable income

Budget on irregular income by budgeting the money that has already arrived, never the income you expect. Set the monthly plan to a floor, close to the lowest month you would reasonably see in a year. In months that bring in more, the surplus goes into a buffer account, and the buffer pays you the floor in the months that bring in less. The result is a steady paycheck that you write to yourself from a lumpy one, and a budget that works the same way in a $2,200 month and a $6,000 month.

Why a normal budget breaks on variable income

A monthly budget assumes the month's income is known. Commission, freelance and contract work, gig income, tips, and seasonal work break that assumption every month. A $6,000 month followed by a $2,200 month has a respectable average and still produces a crisis, because the bills arrive at the same pace whichever month it is.

Budgeting the average is the usual attempt, and it fails in the low months. Budgeting the high months is worse. The problem was never the average; it is the order the months arrive in, and the fix is to take the order out of the picture.

Find your floor

1. Pull twelve months of income, as deposits that actually landed, not invoices sent or hours worked.
2. Sort the months from lowest to highest.
3. Set the floor at the second- or third-lowest month. Not the lowest, which is usually one bad month you shouldn't plan your life around, and not the average, which the low months can't reach.
4. Check that the must-pay bills fit under the floor. If they don't, the floor is telling you that the fixed costs are too high for the income's bad months, and no buffer fixes that for long.

Set a two-tier plan

Split the budget into what has to happen every month and what happens when the money is there.

• Tier one is everything that must be paid whatever the month brought in: rent or mortgage, utilities, insurance, minimum debt payments, groceries, gas, and the phone. Tier one has to fit inside the floor.
• Tier two is everything else: dining out, shopping, travel, extra debt payments, and savings goals. Tier two is funded only from what the buffer holds above its target, never from the month's deposits directly.

The buffer's target is two months of the floor, one for the coming paycheck and one for the low month after it. Until the buffer reaches it, tier two waits, and so does the paycheck schedule.

Run the buffer, step by step

1. Open a separate account for income to land in. Every deposit goes there and nowhere else. This is the holding account, and it is the buffer.
2. On the first of the month, transfer the floor amount to checking. That transfer is your paycheck, and it is the same figure every month. Begin the schedule only once the holding account holds two floors, one for the coming transfer and one to cover a low month after it, so that no transfer ever depends on when that month's deposits land. Until then, live on the deposits as they come and put every good month's surplus into the holding account.
3. Pay tier one from checking, and budget checking as if the floor were a salary, because from checking's point of view it is.
4. When the holding account rises above its target, release the excess to tier two: a goal, a debt, or the month's discretionary categories.
5. In a low month, transfer the floor anyway. The buffer absorbs the gap. That month is what the buffer was for. If the account ever holds less than the floor on transfer day, transfer what is there and treat the gap as the sign that the floor is set too high for the year you are having.

A worked 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, taken at the third-lowest month, is $3,100.

Tier one comes to $2,820: rent $1,400, utilities $180, insurance $130, car payment $260, phone $60, groceries $450, gas $140, and minimum debt payments $200. It fits under the floor with $280 to spare, which goes to savings each month as part of the paycheck. The buffer's target is two months of the floor, $6,200, and the example starts with the buffer at that target, since the schedule begins only once it is.

Checking received $3,100 every month, including month 2, when the deposits were $900 short of it. The transfer on the first of month 3 came from the $5,300 already in the account, not from month 3's deposits, which is the point of the two-floor start. In three of the four months the buffer ended above its target, and each release was a decision rather than a good month that felt good.

Keep it working

Set aside taxes before anything counts. If no employer withholds for you, move the share of each deposit that your last tax return implies into a separate tax account before it reaches the buffer. Income that is owed to the tax authority was never yours to budget.

Revisit the floor twice a year, from the most recent twelve months. Raise it only after the buffer has stayed above its target for three months in a row, and lower it the month the deposits say to.

Keep the paycheck boring. The whole point is that checking sees the same number every month. Skipping the transfer in a good month, or doubling it, puts the lumps back.

Common mistakes

• Budgeting the average. The average is what you earn over a year, not what arrives in any month.
• Budgeting invoices instead of deposits. An invoice is a hope with a due date. Money counts when it lands.
• Spending the good month. The $6,000 month is the buffer's income, not yours.
• Keeping the buffer in checking. It blends into the balance and reads as spendable, and the low month finds it gone.
• Fixed costs above the floor. A buffer covers a bad month, not a bad lease.
• Forgetting taxes until a quarter's worth is due at once.

Common questions

How big should the buffer be? Two months of the floor for most variable incomes, one for the coming paycheck and one for a low month, and three if the swings are seasonal, with a slow season that lasts a quarter. Set the target, and let tier two wait until it is reached.

What if my floor is below my must-pay bills? Then the bad months are not survivable on income alone, and the buffer only delays finding that out. Either the fixed costs come down, or the floor has to be raised by changing the work, or a second steady income covers the gap. Knowing which is the value of the calculation.

Once the buffer is full, can I raise my paycheck toward the average? Yes, gradually. Move the paycheck up a few hundred dollars at a time, only after the buffer has held its target for several months, and move it back down the first month it dips below.

What if my partner has a steady income? Budget the steady income as the floor, or as most of it, and let the variable income flow through the holding account into the buffer. Tier one then rarely depends on a good month at all. See How to budget as a couple with separate accounts for how the shares work.

How do I handle a month with no income at all? The paycheck still transfers, from the buffer. A zero month costs the buffer one full floor, which is why the target is more than one month. Two zero months in a row are the signal to cut tier one, not to hope.

How Zypper handles this

Zypper budgets income the way it budgets spending, 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, with $X remaining for what you still expect this month and $X extra when the month brought in more than you budgeted. For income with an unpredictable amount or frequency, turn on the category's Variable switch; its panel then 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 tier one fits under the floor. 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, and a category whose balance should build in good months can roll over. See Creating your budget and Tracking your spending pace for the details, or get started with Zypper to budget your own floor.