The Laws of Allocation

An excerpt from the book Rich Habits, by Tony Melvin

Just like the English language fails to define the two different types of debt (investment debt and killer debt), so too are we left with only one word—“income,” to describe the types of money received, when in fact there are two types of income.

There are plenty of words used by accountants and governments to describe income, but we certainly don’t want to use any of those terms because they are apt to change, to make profits more, or less, depending on who is receiving the report.

We need new and simple terms that will help you allocate correctly and apply the Rich Habits.

The types of “income” are:

1. Money Received - the total amount of money received for a given period, such as a week or month.

2. Unusable Income - Money Received that does not belong to you and must be set aside before any other allocations occur.

3. True Income - the remainder leftover from Money Received, after Unusable Income has been removed.

With the above definitions the formula for True Income is easy to follow:

Rich Habits Formula

True Income = Money Received less Unusable Income

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The Entire Allocation Process

Allocation is an exact process. It has its own laws that are very precise. Violation of these will drive you down the Rich Continuum into the deep. 

At the top of the Rich Continuum, the Rich allocate naturally; at the level of Broke, there is no allocation whatsoever, money is spent without plan and if continued, the person drops further until eventually, at the level Poor, income is seized by debt collectors, which is a method of enforced allocation by another. Therefore, it can be observed that allocation will occur and the more one violates these laws, the less control a person has over their income. Just as a person will fall if they jump from a tall building, a person who never allocates will eventually find themselves at the bottom of the Rich Continuum. On a brighter note, strict adherence to these principles will help you soar with the eagles. I can tell you, from personal experience, being at the top of the Rich Continuum is much more enjoyable, so know the laws well. 

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The Laws of Allocation

  1. To allocate is the action of separating money for a specific purpose and using it only for that purpose.
  2. Never spend unallocated money. Always allocate before you spend.
  3. Each allocation must have its own bank account. Never put money with a different purpose into the same account.
  4. Allocation is a three-step process:
    • The first step of Allocation is to work out how much money was received.
    • The second step of Allocation is to remove Unusable Money (money that does not belong to you) and allocate each to its own bank account, leaving only True Income remaining.
    • The third step is to allocate to all remaining True Income.
  5. When an individual is insolvent, elimination of all killer debt is the primary focus; therefore Basic Personal Allocation includes only:
    • Investment
    • Killer Debt
    • Living
  6. When an individual is solvent, True Personal Allocation includes (in order of priority):
    • Investment
    • Killer Debt
    • Living
    • Education or Personal Development
    • Emergency
    • Fun
  7. Business Allocation includes (in order of priority):
    • Promotion
      ⁃ Investment
      ⁃ Killer Debt
      ⁃ Business Fix Costs
      ⁃ Emergency
  8. You can create an allocation for anything.
  9. Choose a specific time each week to allocate.
  10. If you don’t have a enough income to allocate, you are not viable. Allocate to the fund that will help you increase your income or in the order of priority. 
  11. Borrowing money to pay bills does not make you viable; it make you less solvent and sends you tumbling down the Rich Continuum towards Poor.
  12. If you are not viable, the solution is to MAKE MORE MONEY.
  13. The more you allocate, the richer you become.