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Where Did Your Paycheck Go?

In more than 18 years as a financial consultant I've rarely met anyone that has created a budget, and is able to stick to it consistently over the long term.

A budget is a way to plan your spending. But for a lot of people it feels like going on a diet.

And just like going on a diet, it's usually for a short period of time before we go off and our spending goes back to the way it was before.


That just causes a lot of stress, and that's why we don't like to think about budgets and use them.


So what do we do?


Creating better money habits.


We all have money habits. We spend it very predictably.

  1. We go to the same grocery store, we buy the same items, and spend the same amount of money.

  2. We have our rent or mortgage payment, car payments, that don't fluctuate month to month.

  3. We buy gas, we go our for dinner, we do the same things, and we spend the same every month.

Managing your money, is really all about managing your habits.

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So why are 2 out of 3 people under the age of 40 stressed about managing money?

It's because we don't know where it goes.


Did you get paid yesterday?

If you're like many people, a big chunk of that pay check is already gone.


Do you know where every penny went?

Probably not. Because, much of our spending is automated, and the rest is subconscious spending.


Does it cause you stress?

Let's change our money habits.


James Clear, in his book Atomic Habits writes that in order to change your habits, you need to create systems.

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So let's create a Cashflow Management System.


First, think about where your money comes from. How much and when do you get it?

If you're like most people it gets automatically deposited into your bank account.


You use the same account for all of your spending, and you transfer money to your savings account if there's anything left at the end of the month. Right?


Using the same bank account for receiving and spending is not a very good system for managing your spending. There's no control, and you don't know where that money goes

So let's do this.


Use the Main Bank Account as the receiving bank account only. This is where all of your money comes in, and no spending happens from this account. None.


Now setup three sub accounts to create boundaries for your three main types of spending:

  1. Your Committed Spending Account. These are items that are the same every month that you are contractually obligated to pay. Cell phone, rent, mortgage, insurance, etc These items don't fluctuate, and are usually on a preauthorized debit.

  2. Your Flexible Spending Account. This is for all of your spending that fluctuates from month to month, and is not a contractual obligation. Groceries, gas for the car, dinner out, and so on.

  3. Your Cash Reserve Account. This is for all of your short term goals (less than 3 years), annual expenses, and emergencies.

Here's how it works,

  1. Total up all of your Committed Spending for the month. Every payday, transfer enough from your main account into your Committed account to cover this expenses until next payday. Then thoughout the month, this account will be depleted, and filled again next month.

  2. Transfer at least 10% of your income to your Cash Reserve as soon as you get paid.

  3. Next, go though all of your Flexible Spending. Transfer the amount that you need into your Flex Account, and use this account for all of your day to day spending.

Note: you will undoubtedly have some Cashflow Leakage in your flexible spending. This is unconscious spending. You do it out of habit, and don't realize that you're doing it.


Now you have accounts and cashflow going in and out of each account. You know whet your Committed Spending, Flexible Spending, and Savings are each month.


Since you only use your Flex account for day to day spending, that's all you have to manage. You've got a limit on what you can spend, and if you run short with a few days to go, you know that you'll have to cut back on some spending.


After a month or two on the system, you'll have learned new habits, and there's a good chance you have money left in your Flex account. Do not carry this forward. Instead use it to add to your savings, or pay down debt.


If you need some help getting organized, feel free to get in touch, and we can get started building your Cashflow Management System.

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