Deciding in advance where captured capital goes, so allocation is not re-argued under pressure each month.
Key principle
An allocation rule written in a calm month governs the decisions made in a stressful one.
Lesson
Content
Captured capital still has to go somewhere. The framework's position is that this decision should be written down once, reviewed on a schedule, and followed in between — not reconsidered every month in response to headlines, moods or the most recent conversation.
A written allocation rule states three things: the order in which capital is directed, the proportion directed to each destination, and the conditions under which the rule changes. The order follows the framework sequence covered across the remaining modules — protective reserve first, then high-cost liabilities, then productive assets and long-horizon reserves. The proportions are the household's own; the framework does not prescribe them. The change conditions are what prevent drift: a rule that can be changed at any moment is not a rule.
A workable rule fits in three sentences. For example: capital is directed first to bringing the protective reserve to its target; once funded, a stated percentage goes to reducing liabilities above a stated interest rate; once those are cleared, a stated split goes to productive assets and long-horizon reserve. Review each quarter and after any income change.
The rule's value is not optimisation. It is that it converts dozens of small, pressured decisions into one considered decision, revisited deliberately.
Illustration
Educational example(s)
An illustrative rule: "While the protective reserve is below three months of obligations, 100% of captured capital goes to the reserve. Once funded, 70% goes to liabilities carrying interest above 8% until cleared, and 30% to productive assets. Once those liabilities are cleared, 80% goes to productive assets and 20% to the long-horizon reserve. Reviewed each quarter." Figures are illustrative only and are not a recommendation.
Examples are illustrative only. They are not forecasts and do not reflect any individual result.
Common mistake
Writing a rule with no change conditions. Without stated conditions, every unusual month becomes a reason to deviate, and after a year the rule describes nothing that actually happened.
Risk explanation
A written rule reduces decision volatility; it does not reduce market, credit or employment risk, and it does not make any destination safe. Directing capital according to a rule can still produce loss of value in any asset that carries risk. The rule is a governance tool for your own behaviour, not a protective mechanism for your capital.
Do this
Action step(s)
Write your allocation rule in three sentences, include the review cadence, and save it alongside your dated surplus figure.
Reflection question
What event in the past two years would have caused you to abandon the rule you just wrote, and should that event be written into it as a condition?
The same material reads differently depending on what your capital needs to do next. You may be in more than one phase at a time.
Capital Building
Read this as a question about direction: which surplus, which income stream, and which asset should the next dollar move toward — and what would make that move durable rather than opportunistic?
Capital Conversion
Read this as a question about productivity: what is the capital you already own currently doing, what cash flow could it support, and what drag, liquidity or liability constraint has to be handled before it can do more?
Capital Preservation
Read this as a question about durability: what could force a sale at the wrong time, how much liquidity keeps that from happening, and how is purchasing power protected without abandoning growth entirely?
