buffer account
Also called: income buffer
An account where all irregular income lands and from which a fixed monthly salary is paid, so good months fund thin ones.
A buffer account is the tool behind income smoothing. Every payment lands there first. Taxes leave it the day money arrives, and once a month a fixed salary moves from the buffer to the spending account. Nothing else is spent from it.
The salary is set below the average monthly income after taxes, with a margin. Good months then leave a surplus in the buffer, and thin months draw on it, while daily life runs on the same amount every month.
Two checks keep it honest. A season check: the buffer must hold enough before the thin months to cover them. A stress check: in a year noticeably weaker than the last, the salary should still be payable for a while, and a review a few months in should catch the problem early. Any surplus above what the thin months need can move to the emergency fund or to goals.
Example
Dana's year leaves 381,371.92 UAH after taxes, 31,780.99 a month on average. She pays herself 28,000 on the 1st. If the next year repeats the last, the buffer, started at zero in October, peaks at 78,501.28 at the end of May, loses 37,067.02 over the summer and ends September at 45,371.92. In a year 20% weaker the same salary would take it below zero by December, which the April review would catch.
Common mistakes
- A salary set from a good month. The buffer empties by the end of the thin season.
- No margin. The highest salary that just works on last year's numbers fails in a weaker year.
- Tax money mixed in. It makes the buffer look bigger than it is.
- Spending straight from the buffer. Then it is just another card.
Learn it in the course
- Paying yourself a salary from a buffer · How to pay yourself as a sole proprietor: turn an uneven income into a steady monthly salary with a buffer account, a salary set below the after-tax average, and a test against a weaker year.