Treasure parcels are shared among the whole group, not one per character.
- The entire party has a level 2, 4 and 5 magic item to share between themselves. This means in a group of four level 1 characters, only three magic items have dropped, and one person may not have their own magic item yet.
- You do not have 5 potions and 720 gold. You drop the potions instead of a portion of that gold.
This is the Treasure Parcel for Party Level 1, found on DMG page 126:
This has ten treasure parcels, and with a four-person party, you ignore parcel #3 (as you've discovered). Over the course of level 1, you should drop each of these once (except parcel #3).
Parcels 1 to 4 are magic items. Parcels 5 to 10 cover currency, potions and valuables. Each of those lists options of what to drop, and you only drop one of those options for each parcel. The first option is the pure gold option, whilst the other options involve substituting a portion of that gold for potions and/or valuables worth the same amount as that portion of gold.
So for parcel 5, your party would receive either 200gp, or two 100gp gems, or two potions of healing (worth 50gp each) + 100gp. They would not receive all of that. No matter what they get, though, parcel 5 gives them 200gp worth of stuff.
No matter what option you pick for each parcel, since they work on an equivalent-exchange basis, your party will end up with 720gp worth of stuff by the end of level 1 (on top of their magic items). This is the "Total Monetary Treasure" value referred to in the top right.
So at the end of the level, your party might have:
- 720gp (if you only ever dropped plain gold)
- 720gp worth of valuables and currency (if you dropped gold and valuables)
- Five potions of healing and 470gp (if you dropped as many potions as possible, and pure gold otherwise). Potions being worth 50gp each, this adds up to 720gp too.
- Or a bunch of gold, valuables, and potions, all adding up to 720gp, depending on what you chose for each individual treasure parcel.
... as well as the level 2, 4 and 5 magic items.
The DMG and Rules Compendium each have guidance on treasure to be awarded by level. I'm not going to reproduce the whole table here, but I'll provide the first level from the RC for your benefit.
(11–14) 2d6 × 100 sp; (15+) 2d6 × 10 gp;
(18+) 1d2 gems worth 100 gp;
(20+) one art object worth 250 gp;
(13+) one magic item of level 1d4 + 1
Roll 4d20, add or subtract two for each party member over or under 5. Each line represents a separate roll. If the roll for the line meets or exceeds the target then you add that item to the parcel. For magic items an odd roll is common, even is uncommon and a natural 20 is a rare. You should provide about 10 parcels per level for your adventurers.
Another note: please don't give your players random magic items as part of these parcels, if you want to give random treasure, do it separately. The power progression is keyed around folks getting items they will use.
Best Answer
Let me start with two assumptions in answering your question. The party has 5 characters and they are 3rd level each. I am doing this deliberately to help you focus on the mechanics of the system and then take those mechanics back to your group.
Standard XP rewards are basically setup to work on an 8-10 encounter basis. This means that within 8-10 encounters a typical party of 5 characters will go up 1 level. The treasure parcel system is a way to parallel this. Remember that encounters are NOT the number of rooms/areas explored or passed through they are the number of fights, traps, skill challenges or other events that require characters to worry about their health.
DMG 1 Page 126: During the course of gaining that level, expect a group of five characters to acquire four magic items ranging in level from one to four levels above the party level. In addition, they should find gold and other monetary treasure equal to the market price of two magic items of their level.
A 3rd level party would receive 4 magic items (levels 4, 5, 6, 7) and about 1350gp in monetary items. Looking at the parcel system as shown on page 126 of the DMG1 you will see this laid out in exactly that fashion. 10 parcels nice and neat. There is a guide on page 125 for adding or removing gp value and magic items based on actual party size. The PHB1 on page 223 has nice table of the gp vaule of magic item by level.
Now here is the trick. While this is a good guide of what to give out it is not a hard-set-in-stone law. You can combine, rearrange, add to or delete from this guide list to adjust for what makes sense for your campaign. You can give out 1 parcel per room or all at once or anything in between. Do what makes sense. Fighting 8 rooms of humanoids and 1 room with a dragon and all the treasure is in the dragons lair might just make sense.
As for how to pick magic item for characters I use three methods that overlap.
Special items I want in the campaign. This might be unique items I have created or special cool things I think that a character would use that they do not know about. (Not everyone has all the books, magazines and supplements - except me of course).
Character wish lists. Every player is required to give me a list of 10 items that they would like to see in their characters possession. It must contain magic items for each level starting at 1 level higher than their current and going to 5 levels higher. Limit 10 items on the list. They do this as part of leveling up. They have to include source and page number too.
Player pick. About once every 2 levels or so I let the player pick a magic item instead of having a specific item in a parcel. That item is only 2-3 levels higher than their current character level. This allows the player to 'customize' a magic item selection to fit their goals, skills or feats that they have chosen, and takes the pressure off of me for that area.
I have found that using the parcel list a basis and then tweaking it to fit the campaign really simplifies my game prep time. Using the 3 methods of magic item selection has given the party good balanced selection items that they can use and like to use.
NOTE: Be sure to rotate the highest level items in your parcels to be given out equally among the party characters.