What Is Income Allocation? Save More Money Today.
What’s Income Allocation?
Income Allocation is the splitting up of your income. It’s the discipline of dividing your cash into multiple areas for unique spending, saving, and investment.
That doesn’t sound very fun now does it. It is an INCREDIBLY important principle though… One that each and every person who strives to manage their own finances should utilize.
What Should I Be Doing?
Before you throw all of your income into a single spending account, consider the consequences of immediate spending… It
Discipline is necessary to any kind of expertise, and allocating your income is no exception. I’ll use my own as my example for this particular lesson, laying out how I allocate my income using percentages for every dollar of that comes into my possession.
Whenever I receive any kind of income — and like I said, DISCIPLINE, so this means ANY kind of income, from my monthly paycheck to a birthday check — I immediately deposit it into a free checking account I have with Wachovia labeled “Spending Account”. From there it is immediately disbursed among several other accounts, each labeled as follows:
- 30% remains in my Spending Account
- 30% is transferred into my Bills Account
- 30% is transferred into my Investment Account
- 10% is withdrawn in Cash and placed into envelopes for my Tithe
Spending Account Example
It’s very simple — My spending Account goes many more places though.
For example, For every purchase that I make with my spending Debit Card, I have one dollar removed from the Spending account and automatically transferred into a Wachovia Way2Save high yield Savings account.
I also use this for longer term accumulation for large spending that doesn’t qualify as an “investment”. What is an example of this? Well, I hope that in the next five years I’ll be blessed enough to ask someone to marry me. So, to prepare for this sort of a purchase, I dedicate 10% of my spending account to an envelope on my desk with a circle drawn on it and no label, so that no one walking in will think I’m jumping the gun… but now you all know. Shoot.
Bills Account
My Bills account gets used for things like gasoline, groceries, etc.
This account is ONLY used for paying off bills. No tapping into this account to cover personal expenses. It’s all a part of that disciplinary lifestyle I keep referring back to.
Investment Account
My investment account is widespread, but ONLY used for purposes that will yield some sort of return. This could range anywhere from purchasing a domain for a website (not a fun website but one I think could yield a return) to a business flight.
Overview of MY Income Allocation
If there’s anything I would encourage you to do before doing ANYTHING else — Set up an income allocation procedure for yourself. This discipline is important because without it, none of these important fields of your personal finance will see a dime of your income. Each of the things that I account for within my list are important and necessary to devote a portion of my income to. If I didn’t make a point to move money into those accounts each and every time I received an income check, I would probably spend it before I could ever place it where it needed to be.
I believe that most Americans are more similar to myself in their irresponsible spending habits than those who can keep all their money together and still manage to plan for retirement and investments.
So to counter my irresponsible tendencies, I force myself to divide the checks immediately. It’s a surefire way to get things done automatically, saving me time, and saving me money.