How to budget on irregular income

Budget only money you have

The first rule is the same for everyone, and it matters most when income varies: give money jobs once it's in your account, not when it's promised. An invoice isn't income until it's paid, and a good month isn't a raise. Each time money arrives, you assign that money, and you stop.

That swaps a question you can't answer, “How much will I make this month?”, for one you can: “What should this money do?”

Know your baseline

Your baseline is the least you can live on for a month: the bills and basics that get paid however the month goes. Work it out once, from your last few months of spending.

Then list what a normal month adds. Here that's $220 toward yearly bills (see sinking funds), $150 for dining out, $130 for entertainment and $300 for retirement savings: $800, so a full month costs $3,500. Two numbers to remember: $2,700 to get by, $3,500 to live normally.

Give each payment jobs, in order

Decide the order once, so each payment takes a minute to assign:

1. Taxes. If nobody withholds tax from your pay, part of every payment isn't yours. Set it aside first. The example below uses 25%.
2. This month's baseline. Rent, food and the other basics, in the order they're due.
3. The rest of this month. Yearly bills, savings, and the things that make a month normal.
4. Next month. Whatever is left starts next month's budget.

Example: a freelancer's October

Three clients pay in October: $2,000 on the 3rd, $800 on the 14th and $2,800 on the 27th, $5,600 in all. Each payment loses 25% to taxes, then follows the order above.

The first payment covers rent and $100 of utilities. The second covers the other $80 of utilities, groceries, and $70 of the phone bill. The third finishes the baseline, pays for the rest of October, and leaves $700. That $700 isn't spare spending money: it's the start of November's budget.

Get a month ahead

The steady state to aim for: on the first of each month, that month's whole budget is already in your account, earned the month before. You live on last month's income. A slow month can't make you miss rent, because the current month is already paid for. It only changes next month's budget, and you find out weeks before that month starts.

Getting there means saving one month of spending: $3,500 here, or at least the $2,700 baseline. At $700 a month, as in October, the baseline takes four months ($2,800). After that, what you earn in a month funds the next one.

Example: four months, living a month ahead

Once a month ahead, the freelancer budgets $3,500 a month. These amounts are after tax. Anything above $3,500 is kept for leaner months.

February was slow, but February was already paid for, and March's budget used January's extra $600. April was slow too, with less kept to fill the gap, so May's budget is $2,900: the $2,700 baseline plus $200. That was decided at the end of April, not discovered halfway through May.

Windfalls

A big project fee, a tax refund or a bonus feels like permission to spend. Treat it like any other payment: tax first if it's taxable, then whatever is behind, in your usual order.

Say a $6,000 fee arrives while you're still building your month ahead, with $1,200 of next month's $3,500 saved. Taxes take $1,500 (25%). $2,300 finishes next month's budget. The other $2,200 goes to an emergency fund, a sinking fund that's behind, or debt.

If one payment covers several months of work, spread it over them. A $9,000 fee for a three-month contract is $6,750 after 25% tax, or $2,250 for each of the three months.

Taxes when you're self-employed

When no employer withholds tax, the tax on each payment is due later, in larger amounts. Keep it in its own category and leave it alone, so the money is there when a payment is due.

How much to set aside

Start from last year's tax return: total tax divided by profit. If you paid $12,000 on $48,000 of profit, that's 25%. Set aside that share of every payment the day it arrives. Taking it from each payment, before business expenses come off, sets aside a little more than you'll owe, which is the safe side.

In the US, self-employment tax for Social Security and Medicare is 15.3% (12.4% and 2.9%). It's generally charged on 92.35% of your net earnings from self-employment once those reach $400, so it comes to about 14.1% of profit before any income tax. If there's no earlier return to go by, Form 1040-ES is the IRS form for working out estimated tax, or an accountant can help you pick a rate.

When it's due

In the US, you generally have to pay estimated tax during the year if you expect to owe $1,000 or more when you file. The year has four payment periods, and they aren't the same length:

A due date that falls on a weekend or holiday moves to the next business day. Because the periods differ, don't split the year's tax into equal monthly amounts. Set aside a percentage of each payment, and pay each quarter from what the Taxes category holds.

In UrBudget

• Income lands in Unassigned. Record a payment with the category Unassigned (income), or import your bank's statement file. The money shows in Unassigned at the top of the budget, ready to give jobs.
• Assign in your order. Type amounts in the Assigned column, top to bottom. Amounts can be math, so typing 2000*0.25 in Taxes assigns a quarter of a $2,000 payment.
• Budget next month now. Go to next month with the arrow beside the month's name and assign there. The budget shows what's assigned in future months and holds it back from this month's Unassigned, so it can't be spent twice.
• Targets for the baseline. Give each baseline category a target, such as Monthly funding. Select those categories and choose Underfunded under Quick assign: it shows each change, and what Unassigned would be afterwards, before you apply it.
• Lean months. In a target's settings, Snooze for a month takes it out of that month's needs. Snoozed categories are marked, and the Snoozed tab lists them.
• See your pattern. The Income vs. expense report puts each month's income beside its spending, and Income breakdown shows where it came from.

• Sinking funds, explained
• Zero-based budgeting, explained
• Getting started with envelope budgeting