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How to Smooth Out Irregular Income
Posted By Jim On 06/18/2012 @ 7:10 am In Banking | 9 Comments
Some of you know that Bargaineering is my full time gig and one of the most common questions I get is how did I handled the irregular nature of the site’s income. It’s actually not an uncommon problem since a lot of professions have “bumpy” irregular income. Teachers get paid ten months out of the year (you can opt to have it smoothed out to twelve months, but isn’t it better to get your money asap?), salespeople and other commissioned folks get paid uneven amounts, and freelancers find themselves in and out of work on a regular basis. It’s a common problem and one I believe is easily solved, especially with the advent of online banks.
So if you’re wondering how to smooth out irregular income and “fake” a regular salaried job, in terms of regular paychecks, here’s a very simple way to do it.
Account Setup: First, you’ll need to find a bank that will let you create at least two accounts and the ability to make automatic transfers between them. When I was researching this, I found ING Direct to be the most user-friendly for this but you can use any bank that permits regular transfers.
Next, create two accounts (name them whatever you like):
Smoothing Step: You will deposit all income payments into the Incoming Account and you will do all of your spending from the Spending Account. Visually, it would look like this:
The idea is that all of your income will flow into your Incoming Account and you’ll “pay” yourself a regular salary, at whatever interval you want, into your Spending Account. This “smooths” out your income. If you can use a high yield savings account as your Incoming Account, you can even earn a little bit of interest as your money sits there, waiting to be smoothed out.
Next, you need to decide what your “salary” is going to be and how often. This is the tricky part if your income is especially unpredictable. If you have a have a predictable salary, like a teacher, you can simply take your annual salary and divide by the number of payments. You get paid for ten months into your Incoming Account and the Incoming Account pays you for twelve.
If you have especially unpredictable income, your best bet is to look at your income last year and make adjustments to how well you think this year will be. Since you can adjust the transfers as often as you’d like, all you need to make sure is that you don’t transfer more than you’ve been paid. If you aren’t paying yourself enough, it’s trivial to go into your account and manually transfer more funds out.
For example, let’s say you estimate you’ll make $52,000 a year from your freelancing business. You want to be paid weekly so you “pay” yourself $1,000 a year. It’s been an especially good year and you realize that, through half the year, you’ve already made $60,000 with 26 weeks left. Nothing stops you from “paying” yourself a little extra.
As I mentioned earlier, ING Direct makes it really simple but any bank with automatic transfers will work. ING Direct calls it an “Automatic Savings Plan” and you can set up transfers from anywhere, including other banks. I had a checking account with Bank of America where all the deposits were made (later moved to a business account) and the automatic transfers were made on a monthly basis. ING Direct lets you transfer every week, bi-weekly, bi-monthly (15th and end of the month), as well as monthly.
Once you set things up, you’ll find that smoothing out irregular income is extremely easy with the banking tools available today.
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