Irregular Income Budget: Start With Your Slowest Month

How do you budget when you don't know what next month pays?

You might be thinking, "Ralph, just use the average." Please don't. The average is the number that gets you in trouble.

A listener wrote in this week. He's a freelance web designer in Boise. One month he made $9,500. The next, $3,400. He asked how anyone plans around that.

Budget From the Slow Month

His bills: rent of $1,650, a car payment of $386, and about $650 in groceries. That's $2,686.

Take that from the $3,400 month and you have $714 left. It's tight, but it works. Build your irregular income budget on that month, and every good month becomes extra instead of a rescue.

Pay Yourself a Paycheck

Every dollar goes into one holding account first. Then you pay yourself a set amount on a set date, like a real paycheck.

The good months fill the account. The slow months draw it down. The account does the smoothing so you don't have to.

Pull the Taxes Out Right Away

Nobody withholds taxes on freelance income, so you have to. Move your tax money the day a payment lands. Most self-employed people also need to pay estimated taxes four times a year.

Send Windfalls to Reserves

He also has a $4,200 card balance. A big month will tempt you to wipe it out in one shot. Pay it down, sure, but build a reserve alongside it. Reserves are what keep a slow month from landing on the card again.

Three Numbers to Write Down

1. Your slowest recent month. Look back a year and find the lowest one.

2. Your bills total. Rent, car, groceries, and the rest.

3. Months of runway. Divide your savings by that bills number.

Start With the Numbers, Not the Shame

Irregular income isn't a character flaw.

It's a math problem.

You solve it one number at a time.

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