As a way to help curb impulsive spending, many people have a “24-hour wait” rule on big purchases, but one problem is that it can be impractical, as “big purchases” is ill-defined. That’s where the 1% rule of spending helps: You still wait a day, but only for purchases that are over 1% of your salary. Here’s how it works, and why it might save you money.
As first reported by CNBC, the rule comes from Glen James, host of the Australian finance podcasts, My Millennial Money. The idea is that if you want to spend money on a non-essential item like a new watch or sunglasses, you have to wait one day to make the purchase if it exceeds 1% of your annual gross income (e.g. $300 if you make $30,000).
The 24-hour buffer acts as a cool down period in which you can ask yourself whether the initial dopamine rush of impulse shopping was clouding your judgement. But this rule is only practical if you actually follow it, which can be a problem for smaller purchases. For example, if a friend suggests seeing a movie, are you going to go home and sleep on your wallet for a day because it’s a discretionary purchase?
The 1% rule is a more reasonable approach, while also providing clear guardrails that can protect you from overspending. Plus it’s easy to remember—if you make $50,000 after taxes you’ll always know that $500 is your 1% threshold. Even if you change your mind about a purchase just once (and you can challenge yourself to do so), the rule will have saved you money.
Some caveats apply: It works best if you make less than $200,000, your debt payments are manageable already, and you already maintain a budget that tracks monthly spending on non-essential items (since a series of smaller purchases can still lead to overspending). Of course, nothing is set in stone, and you should tweak the rule to meet your needs. As Glen James puts it: “You could change it to the 0.5% rule. Whatever the percentage, it should make sense based on your financial situation, needs, goals and priorities.”
Source link: lifehacker.com