Throughout the brain, sparse ensembles of neurons, termed “engrams,” are responsible for representing events. Engrams are composed of neurons active at the time of an event, and recent research has revealed how these active neurons compete to gain inclusion into a subsequently formed engram. This competitive selection mechanism, called “memory allocation,” is the process by which individual neurons become components of the engram. Memory allocation is crucially influenced by neuronal excitability, with more highly excitable neurons outcompeting their neighbors for inclusion into the engram. The dynamics of this excitability-dependent memory allocation process have important consequences for the function of the memory circuit, including effects on memory generalization and linking of events experienced closely in time. Memory allocation arises from cellular mechanisms of excitability, governs circuit-level dynamics of the engram, and has higher-order consequences for memory system function.