How to budget with irregular income

How do you budget when your income changes every month?

Plan from your costs, not your income. Work out the least you need each month, your baseline, and build a buffer of several months of it. Set tax aside from every payment the day it arrives, then pay yourself a steady amount from the buffer, so good months carry the lean ones.

A normal budget starts from a salary that arrives on the same day for the same amount. With irregular income you know neither, so this method starts from the other end: what you have to pay, and how long you can keep paying it. It has four steps.

1. Work out your baseline month.
2. Build a buffer of several baseline months.
3. Set tax aside from every payment.
4. Pay yourself a steady amount, and review it a few times a year.

What is a baseline month?

Your baseline month is the least you need to spend in a month to keep life running: housing, utilities, food, insurance, transport, phone and the minimum payment on each debt. It leaves out anything you could pause in a lean month. The rest of the method is built on it, so be honest.

Take your last three to twelve months of bank and card statements and list what you paid that you couldn't have skipped. Use the monthly amount for monthly bills, and divide yearly bills by twelve.

• Housing: rent or mortgage, and any service charges.
• Utilities, phone and internet.
• Groceries, but not eating out.
• Insurance, transport, and childcare if you pay for it.
• The minimum payment on each debt.

Leave out holidays, eating out, new clothes and subscriptions you could cancel. There's nothing wrong with spending on them; they just aren't baseline. In a good month they come out of what's left once the baseline is covered.

How big should your emergency buffer be?

A common rule of thumb is three to six months of essential costs. With irregular income, aim for the top of that range, or beyond it if one client pays most of your income or you're the only earner at home. Count the buffer in baseline months, so you always know how long it lasts.

The buffer is money kept to pay your baseline when income doesn't arrive. Counted in months, it tells you something useful: how long you can wait for a late invoice, or look for new work, without borrowing.

Keep it in an account separate from your spending money, where you can reach it within a day or two. If you're starting from nothing, aim for one month first, then add a share of every good month until you reach your target.

How much of each payment should you set aside for tax?

There's no single right percentage. It depends on your country, your income, what you can deduct and whether you pay social contributions as well as income tax. Find your own share from last year's tax bill or your tax authority's guidance, then move that share out of every payment the day it lands.

When no tax is taken from your pay at source, the whole bill arrives later, and in some countries part of it is due in advance during the year. If the money has been spent by then, the bill becomes debt. The fix is dull and it works: treat a share of every payment as never yours.

To find your share, divide last year's total tax and contributions by last year's income before tax. In your first year, use your tax authority's own guidance or ask an accountant, and round up rather than down. Setting aside too much leaves you money to spare after the bill. Setting aside too little leaves you a bill you can't pay.

How do you smooth out irregular income?

Pay yourself a salary. Let every client payment land in one holding account, set the tax share aside, and once a month move the same amount to your everyday account. Start with your baseline. When the buffer is above its target, raise that amount a little; when it falls below, go back to the baseline.

Smoothing turns lumpy income into a steady one you can budget against, like anyone on a salary. The holding account absorbs the swings: a large payment tops it up, a month with nothing draws it down, and your everyday spending doesn't notice either.

Review the amount every three or four months, not every month. Changing it after each payment brings the swings straight back into your spending.

What should you do in a lean month?

Pay the baseline from the buffer, cut flexible spending first, and chase any late invoices. Keep setting tax aside from whatever does arrive, and don't refill the buffer by borrowing. If lean months keep coming, lower your steady pay or look again at your baseline before the buffer runs out.

A lean month is what the buffer is for, so using it isn't a failure. What matters is how many months it has left. If that number drops below the time you'd need to find new work, act early, while you still have choices: follow up leads, take a shorter contract or cut a cost.

How can Let's Save help with irregular income?

Let's Save, our own app, does this guide's arithmetic from your real transactions. Its forecast shows how many months your money will last when you spend more than you earn, a savings goal can hold your tax money, and client payments in other currencies are converted at the rate from their own date.

The forecast is on the Plus and Pro plans. It fits a trend to your monthly income and spending and projects it 6, 12 or 24 months ahead, with a band that widens as the future gets less certain. What-if levers let you try a three-month gap between contracts without changing your records.

Make a goal called Tax and move money into it each time a client pays. The goal shows what's set aside, apart from what you can spend. Goals are on every plan, including Free.

A client who pays in euros, pounds or yen is converted at the rate for the day the money arrived, so March's income stays what it was when the exchange rate moves in April. At the end of the year, Plus and Pro print a profit and loss report for your accountant.

See how the forecast works

Let's Save for freelancers