Source Allocation

briefcase

One of the most interesting models for corporate savings and debt repayment that I have read reminded me of the Christian tithing model.

In the traditional tithing model, 10% of every income is set aside for giving. Although there are variations of application, the general mindset is the money does not “belong” to you so it is deducted from source and given out before any other money is spent. I have adapted this for what I call the Source Allocation Model.

The Source Allocation Model can be successfully applied to business savings and debt repayment. It was propounded in detail in George S. Clasfon’s book – Richest Man in Babylon.

The model goes thus – As you earn income, you should set aside a fixed percentage for savings or debt repayment. As you cannot spend what you do not have; once the money leaves your account, you will be forced to work with whatever is left. But, always peg the deducted amounts to something specific and transfer immediately towards that use.

For example, if a percentage is dedicated to debt repayment, immediately money comes in, transfer the agreed percentage to the contractor or bank you’re owing. If it is meant for savings, tie the savings to a specific project e.g new equipment. Structure a payment plan so you can transfer the money to the supplier in batches as soon as income hits your account. Never leave the money lying fallow or else you’ll spend it in an emergency. If there’s no specific project yet, transfer it to an interest bearing or investment account for which you are NOT a sole signatory. That way, you cannot access the funds in an emergency without the sign-off of the co-signatory.

This principle of Source Allocation will help you maintain spending discipline and be more creative about handling competing needs & wants in the face of limited income.