How to pay yourself a salary when your income is different every month

The problem with variable pay

When you are employed, the same amount lands on the same day and your budget more or less runs itself. When you freelance or contract, one month is £4,000 and the next is £900. Spend to the good months and the quiet ones hurt. Spend to the quiet ones and the money just piles up unspent and unplanned.

The fix is to stop treating each payment as this month's money. Instead you pay yourself a salary: a fixed figure you draw on the same day every month, regardless of what actually came in.

Working out the number

Three steps.

1. Find your real average. Add up everything you were paid over the last six to twelve months and divide by the number of months. Use as long a run as you have; a short window flatters or punishes you depending on where you start.

2. Set the salary below the average, not at it. If you draw exactly the average, the first below-average month puts you underwater. A common rule is 70 to 80 per cent of the average, nudged down further if your weakest month was a long way below the mean. The gap between what you draw and what you earn on a good month is what fills the buffer.

3. Carve the tax off first. The salary figure is a gross number. Before it reaches your current account, move a percentage straight into a separate pot for income tax and, if it applies to you, National Insurance and pension. Twenty-five to thirty per cent is a typical starting point in the UK, but check your own position.

The buffer is what makes it work

The salary only holds if you have a cushion to draw the same amount through a run of thin months. In a good month, the difference between your income and your salary goes into the buffer. In a bad month, the buffer tops the salary up. Aim for three months of salary set aside; build toward it before you raise what you draw.

Doing it without the arithmetic

The Irregular Income Budget System does all of this for you: log each payment, and it keeps a rolling average, works out the salary you can sustain, holds back the tax percentage you set, and shows your buffer runway on one dashboard. There is also a target planner: type the salary you want and it tells you the income lift and the buffer you would need to support it.