Why a normal budget breaks on irregular income

You will be able to explain the base-pay method and why it works better than budgeting month by month on uneven income.

Most budgeting advice assumes one thing you no longer have: the same amount arriving on the same day every month. Take that away and the usual methods start to wobble. You set a budget in a good month and overspend in the next one. You tighten up after a bad month, then relax when a big invoice lands, and the cycle starts again. Nothing is wrong with your discipline. The method was built for a payslip.

Here is what that looks like with made-up figures. Say a freelance designer earned 3,000 dollars in January, 9,000 in February, 2,500 in March and 6,000 in April. If they budget from whatever came in last month, they spend freely in March off the back of February and then have almost nothing to live on in April before that month's payment clears. Over the four months they earned a reasonable 20,500 dollars, yet it felt like a crisis twice.

The fix is to stop living on your income and start living on a salary you pay yourself. This is the base-pay method: all your income goes into one holding account, and you pay yourself the same amount from it on the same day each month. Your spending is planned around that fixed figure, just as an employee plans around a payslip. The holding account absorbs the swings so your personal account never sees them.

The key decision is the size of that salary. The tempting choice is your average month, but an average quietly assumes the good months will always come in time to cover the bad ones. Set base pay near what you earn in a lean month instead. Then most months bring in more than you pay yourself, and the extra builds up in the holding account. When a thin month comes, the holding account covers the shortfall and your salary still arrives.

Before you set base pay, two things come off the top. The first is business costs, such as software, equipment and travel to clients. The second is tax and MediSave. As a self-employed person, nobody deducts these for you, and the bills arrive months after you earned the money. If you leave that money sitting in your spending account, it feels like income and gets spent. So a fixed share of every payment goes straight into a separate pot the day it lands. Module 2 shows you how to work out that share.

In practice the system needs three or four accounts. Client payments go into the holding account. A share moves to the tax and MediSave pot. Your base pay moves to your personal account on a fixed date. Some people add a fourth account for business costs, which makes record keeping easier at tax time.

The holding account also tells you how the business is doing, more honestly than any single month can. If its balance keeps rising, you can consider raising base pay. If it falls quarter after quarter, you have a pricing, volume or cost problem to fix, and you have spotted it while there is still money to fix it with. A budget based on last month's income cannot show you that.

The method has one hard requirement. Base pay has to cover your essential spending. If your lean-month income cannot support that, a bigger salary is not the answer. The answer is in your prices, the amount of work you take on or your costs, which later modules deal with directly.

For now, start with the raw material. Write down what you earned in each of the last twelve months, or your best estimate if you are just starting out. Mark the three lowest months. In the next lesson you will use those numbers to set your first base pay figure.

All the figures above are a made-up example. Your own numbers are the only ones that count.

Your task: list your income for each of the last twelve months, circle the three lowest, and write their average at the top of the page.

Write down your income for each of the last twelve months, or your best estimate, and mark the three lowest months.

Course

• Self-employed and freelance: money with irregular income