How to budget on an irregular or freelance income

When your income arrives in lumps, a big month feels like permission to spend and a quiet month feels like an emergency. The fix is to stop budgeting from what arrives and budget from a steady figure you pay yourself instead.

Separate earning from spending

Freelancers, contractors, people paid by commission and people with seasonal work all have the same problem: the money comes in on its own schedule, but rent and groceries keep theirs. If you spend from whatever happens to be in the account, your spending rises and falls with your income, and a slow month lands hard.

The steadier way is to put two layers between earning and spending:

• A buffer that every payment goes into when it arrives.
• A pay figure, a fixed monthly amount you move from the buffer to your everyday money, the way an employer would pay a salary.

Good months top the buffer up. Slow months draw it down. Your everyday budget sees the same pay figure every month either way.

Step 1: Look back at what actually came in

Go through your statements for as many recent months as you can, six at the very least. If you pay your own tax, take off what you need to set aside for it first; how much that is depends on where you live and how you work, so check with your accountant or tax office. Here is an example after tax:

Step 2: Choose a pay figure below the average

The average, $2,533, is the most you could pay yourself if the next six months look like the last six. Paying yourself exactly that leaves no room for a run of bad luck, so pick something lower. In the example, the pay figure is $2,200 a month.

How far below the average to go is a judgment call. The more your income swings, and the fewer months of history you have, the more cautious it's worth being. You can raise it later once the buffer has grown; cutting it after you've got used to it is harder.

Step 3: Work out the daily allowance from the pay figure

From here it's the same arithmetic as a salary. Take off your bills and anything you save, and divide what's left by the average month, 30.4375 days. With $1,320 of monthly bills:

($2,200 − $1,320) ÷ 30.4375 = $28.91 a day

How to work out your daily budget goes through this step in detail, including yearly bills and saving first.

Step 4: Build and use the buffer

Every payment goes into the buffer when it arrives. Once a month, on the same day, move the pay figure out of it into your everyday money. In the example, if the next twelve months look like these six, about $30,400 comes in and $26,400 goes out as pay, so the buffer grows slowly and is there for months like April.

How big a buffer you want is up to you. Two or three months of your pay figure is enough to ride out a gap like April's without changing anything. While it's smaller than that, keep the pay figure cautious.

Review the pay figure every few months. If the buffer keeps growing, you can pay yourself more. If it keeps shrinking, lower the pay figure before it runs out, not after.

Doing it in Daily Allowance

Daily Allowance works out your daily figure from recurring entries, so the pay figure is what you give it as income. In Quick Setup, enter your pay figure as your monthly income, or add it later as a recurring monthly income entry. The app spreads it across the days of the month along with your bills, just as it would a salary.

The buffer can live in the Kitty Bank, the app's savings:

• When a client pays, open Kitty Bank and use Add. The money goes into the Kitty Bank and your Daily Balance doesn't change.
• Each month, use Spend in the Kitty Bank to take the pay figure out of it, with a label such as "Pay to myself". Spend takes it out of the Kitty Bank without touching your Daily Balance. That's what you want here, because the recurring income is already adding your pay to your Daily Balance day by day.

Why not log each payment as one-off income instead? You can, but a one-off entry lands in your Daily Balance in full on the day you log it, so a big invoice makes your balance jump and the next quiet month starts from wherever it's fallen to. The Daily Allowance figure is also worked out from recurring entries only, so with no recurring income it shows your bills and nothing else.

The rest works as it does for anyone. Unspent money carries into tomorrow, and if you go over, here's what to do on a day you overspend. If the buffer is healthy and you'd rather put more aside, saving for a goal covers how to use the Kitty Bank for that too.

None of this is financial or tax advice. It's a way of smoothing out lumpy income so the day-to-day stays calm.