Today, I’m helping my new client, the Ackermans, work through how to get a handle on their cash flow. Although overspending has never been an issue in the past, with Josh’s student loan payments kicking in soon – they’re a little worried about their budget.

The past several weeks, I’ve been walking you through a case study of how I work with clients. My “clients” in this case study are Josh and Sarah Ackerman. No, they’re not real people. But the issues these fictionalized clients of mine face are very real to a lot of people I speak to and work with. If you’re just hopping in on this post, make sure to start from the beginning here.

Take Stock of What’s Going On

The first thing I’m going to do as the Ackerman’s financial planner is to take stock of their current budget. What are they spending money on? Where are funds allocated to every paycheck? I’m noticing a few recurring trends that, while not terrible, aren’t helping them either.

1. Whenever a check comes in, they pay their bills, then the rest of their funds sit in a joint checking account.
2. At the end of the month, they try to pay off their credit card – but sometimes are forced to only make the minimum payment.
3. They’re not feeling fulfilled by their current spending, and feel like money disappears as soon as it hits their bank account.

There’s nothing wrong with spending. Many financial planners will try to convince you otherwise – but I believe that spending is absolutely necessary to achieve your goals and live the life you want. The key is to ensure you’re spending intentionally. Once you start spending money with intention, you find personal fulfilment and are less likely to blow your budget on something you’ll regret later.

Setting Up a Cash Hub Account

To start getting a handle on Josh and Sarah’s cash flow, I’m going to help them set up a new budgeting system. A “hub account” is something I use with the majority of my clients, and I find that it’s a fairly airtight system. Right now, Josh and Sarah’s money hits their checking account and gets spent out of the same account. All of their bills, dept repayment, saving, and “fun” money come out of the same place. This puts them in the driver’s seat of every single financial decision.

In theory, this makes sense. It’s how most people run their money. But it doesn’t work. As people, we’re not perfect. We’re going to make mistakes. When we see something we want, like a vacation or even a latte from the local coffee shop, we’re willing to put responsible on goals to make it happen. In short, the reason Josh and Sarah feel like money disappears from their bank account immediately is because it does. They spend it.

The hub account fixes this in one simple way: it helps you spend INTENTIONALLY!. Here’s how it works:

STEP 1: We have a conversation about our intentional spending goal for the month.  Most people don’t know this – so we start out using our 20/30/50 Guide.  In this case, the “50” stands for SPENDING 50% of your take-home pay. This should include fun money (coffee, beer, cable, internet) and the necessities (roof over your head, food in your belly, clothes on your back).

STEP 2: Instead of having your paycheck deposited into your personal checking account, it’s deposited into the hub account.  A hub account is an account held at a banking institution that isn’t where your bank account is.

STEP 3: We set all of your debt payments to the minimum and have them pulled directly from the Hub Account.

STEP 4: We recreate a “paycheck” to hit your checking account on the 1^st and 15^th of each month to cover your intentional spending.

STEP 5: We wait. We test the system for a couple months. If our intentional spending budget doesn’t work, we adjust.  If it’s working, we’ll start to talk about the following –

• Does it make sense to pay off debt at a greater rate? (most likely, YES). Our goal is to use 30% of your take-home pay to pay off debt aggressively. This is a high priority.
• Does it make sense to start saving more? Our goal is to save 20% of your take-home pay. It may take time to get there.
• Are you charitably inclined? If so, do we need to start a Philanthropy savings account for Charitable Lumping? Or can we donate monthly? If you’re charitably inclined, our goal is to get to 10% per year of take-home pay (decreasing your monthly spending budget).  It may be tax-wise to lump gifts, but I understand your favorite organization may need funds now.
• What fun things do you want to accomplish? As a Minnesotan, I believe vacation funds are a must. February is not a great month in the North!

Essentially, the hub account gives you greater control while taking you out of the driver’s seat on daily decisions and automates the good financial choices you need to be making – like saving and paying down your debt – while still empowering you to spend the rest of your paycheck the way you want.

Focusing Our Intention

Once we get a good automation system going for Josh and Sarah, we’re going to take a hard look at their current spending habits. Most often, when we feel like we’re bleeding money, it’s because we’re spending in a way that doesn’t line up with our values. By spending intentionally, we eliminate this frustration because our spending is leaving us emotionally fulfilled and we don’t have the same need to continue spending on things that don’t leave us fulfilled.

In our first client meeting, Josh and Sarah uncovered some of their core values. Josh valued family, adventure, freedom, happiness, and money. Sarah valued religion, family, stability, happiness, and education.

I urge them to view the first few months of spending through the lens of their values.  This doesn’t mean sifting through online statements and critiquing every expense.  But it does mean, as a general trend, did you spend money intentionally? Or mindlessly?

Finally, I want Josh and Sarah to know that, even though this plan sounds great, they’re still going to make some occasional mistakes. That’s okay. As long as the general trend is that they continue to spend in line with their values, they’re going to find success in the long run.

I’ll leave you with an analogy – This system is like the white lines on a highway, not the rail of a train track.  There is a big difference… When you fall off the rails, it’s game over. When you go over the line, you learn from it, correct your course, and move on!