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- 10% is withdrawn in Cash and placed into envelopes for my Tithe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.
This is a well written article.
I think the biggest problem most folk face is to be able to make an allocation at all, because many people are so indebted most of their income goes directly towards servicing debt. The first step for these people should be to lower their living standard and start paying off their debts so that there is money left for investments, tithing, etc.
Nevertheless, you’ve got a very solid system. Almost anyone can apply to his or her finances.
Keep up the good writing!
God bless,
Francois
@Francois Viljoen: Good insight Francois, and perhaps especially so for a large number of our viewers. College students tend to get stuck in a debt-death-trap with credit cards and other companies constantly enticing students into loans and credit schemes.
I think that should be something Use The Dollar should focus on a bit in the future - living below their living standards as you said - or not living beyond your means as I’ve heard lots of others say it.
@Francois Viljoen: Excellent point! We’ll have a post up soon about debt as well. I believe its Dave Ramsey who put forth the “Debt Snowball” method, which essentially says to concentrate everything you have on debt before you start anything else.
Great point! Debt is out of control in the U.S.- Especially for Students!
Thanks Francois! Looking forward to seeing your input on the posts to come.
I like to use percentages, such as saving 10% of income towards retirement. That way, it always allocated according to your income.
Great post. Your ideas and practises are excellent. The one draw back that I can see for the average person is the problem that they will have with the discipline required to do this.
I admire your discipline to operate your accounts in this manner - the question I have is how did you develop this discipline? I’m sure lots of other readers would be curious to know how too. I know that discipline is like a muscle but in order to start working that muscle you need a catalyst - what got you started?
@See My Money: I agree! Too many people fall into the trap of setting preset amounts- Then if you have any change in your income (up or down) then you will likely abandon your allocation method all together. Thanks for the comment!
@Until Debt Do US Part: Really great points! Thank you for all your input. I like that you compared discipline to a muscle. My catalyst to get me working that muscle was the realization that I need to begin saving now. I was watching myself bring in money every month, but at the end of the month I didn’t seem to ever have any of it left. So I decided to make a change. Now, in all seriousness, the ONLY way you can make this work is if you let those around you knmow that you’re doing it. In fact, I found it beneficial to find a friend who had no attachment to my money (not my girlfriend, or anyone else who might benefit from how I spend it) and have him keep me accountable. At the end of the month he would call me and ask me if I had split up the check yet. I hope that answers your questions? If not feel free to leave another comment and I’ll be back to you as soon as I can! Thanks again!