Should we set our income to the total of all our monthly expenses and then adjust from there?
Still unsure what to pay yourself? Here's how to set your income when it swings every month, without the panic.
What you need to know
- Starting from your expenses is a reasonable place to begin, but it’s only half the picture.
- The bigger problem is usually that business and personal money are tangled together, so you never know what’s actually yours to keep.
- Two behavioural ideas, mental accounting and commitment devices, can make this feel a lot more manageable.
If you’ve ever looked at your business account, seen money in there, and still felt like you were behind, you’re not imagining it. The money came in. You worked hard. And somehow it’s just… gone. No clear wage. No real sense of what you made. Just a vague, low-level panic that never quite goes away.
A lot of self-employed people I speak to describe exactly that feeling: earning decent money, genuinely good at what they do, and still not knowing where it’s going. Coaches, consultants, freelancers, tradespeople. The income is real. The chaos is also real.
So you ask a very sensible question: should you set your income to the total of all your monthly expenses, and adjust from there? It’s a good instinct. Let’s talk about what it gets right, what it misses, and what to actually do with it.
The quick answer: yes, your expenses are a useful starting point for working out what to pay yourself, but they’re not the whole answer. The real work is separating what belongs to the business from what belongs to you, before any of it has a chance to blur together.
What you might be telling yourself
“We make good money, but it is so stressful.” Income and calm are two different things. You can earn well and still feel chaotic if there’s no clear system for where the money goes once it lands.
“I’ve never drawn a proper salary because my income has never been consistent.” Many people hold off paying themselves for exactly this reason, and it feels logical in the moment. But inconsistent income doesn’t mean no salary. It means you need a different way of working one out.
“Some months I have to empty the business account just to pay the bills.” When business and personal money are in one place, the bills always win. There’s nothing left to call a wage because the wage was never separated out first.
“Today I found out I owe taxes and had no idea.” Tax on self-employment income doesn’t get taken before you see the money. So if you spend what comes in, the tax bill is already spent too. That’s just how the timing works when you’re self-employed.
“The more money I make, the more I owe.” This is what happens when the structure doesn’t scale with the income. More revenue, same chaos, bigger consequences.
“I was always behind.” That feeling is usually information about the gap between what arrived and what got allocated. Not a verdict on you.
Why this hits harder when you run your own business
When someone employs you, a lot of this is handled before the money reaches you. Tax is deducted. Your pay arrives on a set date. The amount is predictable. You can plan around it.
When you’re self-employed, none of that happens automatically. Money arrives in lumps, often at different times, sometimes in different amounts. Nobody pays you a wage. Tax sits quietly in the background until it doesn’t. And if you’re like most small business owners, your personal and business money are in the same account, or close enough that it feels the same.
So when a client pays you, that full amount feels like yours. But it isn’t, not quite. Some of it belongs to tax. Some belongs to business costs. Some belongs to the next slow month. And if you haven’t set it aside before spending begins, it’s gone.
A missing structure is usually what’s doing this, not a character flaw.
If you want to dig into what budgeting actually looks like when income swings around, How do I budget when my income is different every month? is worth a read.
A scene you’ll probably recognise
It’s a good month. A couple of invoices clear, maybe a new client pays upfront. The account looks healthy. So you relax a bit, pay some overdue bills, buy the thing you’ve been putting off. Then two weeks later it’s lean. No new work came in. The tax deadline is coming. And you’re back to that hum.
The money was real. The spending was real. But there was no moment where you said: this is mine to spend, and this isn’t. So it all became spendable.
What happens to the money once it arrives
This is the part most people don’t see, or don’t see clearly. When revenue lands in your account, it’s already carrying obligations. Tax is the obvious one. Business costs are another. Then there’s what you want to put aside for the slow months.
What’s left after those three things is what you can actually pay yourself. Not the full invoice amount. The amount after the business has taken what it needs to keep running and what the tax authority will eventually ask for.
So the question “should I set my income to my expenses?” is asking the right thing. Your expenses tell you the minimum the business needs to produce for your life to function. But the income you actually take home needs to account for tax, for quiet months, and for the business itself.
A simple way to think about it: when money arrives, split it. Put a portion aside for tax the moment the invoice clears. Put a portion into a buffer for slow months. What’s left is the pool you pay yourself from. That’s the bit you get to call yours.
The behavioural ideas behind it
Two ideas from behavioural economics are genuinely useful here.
Mental accounting, developed by economist Richard Thaler, is the tendency we all have to treat money differently depending on where it is or what we’ve labelled it. We spend money in a “spending” account more freely than money in a “savings” account, even if the amounts are identical. You can use this in your favour. When you put tax money into a separate account the moment an invoice lands, it stops feeling like yours. It becomes mentally tagged as the tax authority’s money. You’re less likely to spend it.
Commitment devices work in a similar direction. Ashraf, Karlan and Yin showed in their research that people save more when they make a binding decision in advance about how money will be used, rather than deciding in the moment. Setting a fixed transfer to a separate account on the day income arrives is a commitment device. You’re not deciding whether to put the tax aside this month. You’ve already decided. The behaviour follows the structure.
Build the split so it happens automatically, before you’ve had a chance to see the money as one big whole. The architecture does the work that willpower can’t sustain.
One thing to try today
Before you open your banking app, write down the last invoice or payment that came in. Next to that number, write two figures: what you’d put aside for tax (talk to a qualified accountant or tax professional in your country about the right percentage for your situation), and a second amount for your slow-month buffer.
Whatever is left is your starting point for your wage. You haven’t done anything yet. You’ve just looked at the split in writing, with the money still sitting there. That small act of naming it, before it gets spent, changes the relationship you have with it.
Ready to go deeper?
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Or if you want to work through this properly, book a free Cash Flow Session to find out about The Money Story Method, my 12-week 1:1 programme.
Joel
Questions people ask
How do I work out what to pay myself when my income changes every month?
Start with the lowest month you’ve had in the last year and use that as your baseline wage. In better months, top up your buffer rather than your spending. That way your take-home stays predictable even when income doesn’t.
Should I have separate bank accounts for business and personal money?
Keeping them separate makes it much easier to see what belongs to the business, what belongs to tax, and what you can actually spend. How you set it up will depend on your country and business structure, so it’s worth getting advice from a local accountant about what’s right for your situation.
What percentage should I put aside for tax?
That depends on where you live, how your business is set up, and what you earn. A qualified accountant or tax professional in your country is the right person to give you a specific figure. The behaviour that matters is putting something aside the moment income arrives, rather than waiting.
Why does it feel like I’m always behind even when work is coming in?
Usually because the money isn’t being split before it gets spent. When everything sits in one account, the expenses fill the whole space. Separating tax, buffer and wage as soon as money arrives is what creates the feeling that you’re actually keeping some of it.
Is it normal to feel physically sick thinking about my finances as a self-employed person?
Very common. The avoidance that comes with money stress is something financial psychologist Brad Klontz has written about under the term money avoidance. The instinct to not look is a response to the anxiety, not a sign that the situation is unfixable. Looking at one number, just one, is usually enough to start shifting that feeling.