Use the 1% Spending Rule to Save Money

As a way to contain impulsive spending, many people have a 24-hour wait rule for large purchases, but one problem is that this may not be practical since “big purchases” are not defined. This is where the 1% spending rule helps: you still wait a day, but only for purchases that make up more than 1% of your paycheck. This is how it works and why it can save you money.

What is the 1% spending rule?

As CNBC first reported , the rule comes from Glen James, host of the Australian financial podcast My Millennium Money . The idea is that if you want to spend money on a nonessential item like a new watch or sunglasses, you will have to wait one day to complete a purchase if it exceeds 1% of your annual gross income (for example, $ 300 if you make $ 30,000). ).

The 24-hour buffer acts as a period of calm during which you can ask yourself if the initial dopamine rush of impulsive shopping is clouding your judgment. But this rule will only be practical if you actually follow it, which can be a problem for small purchases. For example, if a friend offers to watch a movie, are you going to go home and sleep the day in your wallet because it’s a discretionary purchase?

The 1% rule is a smarter approach and also provides clear fences that can protect you from overspending. Plus, it’s easy to remember: if you make $ 50,000 after taxes, you will always know that $ 500 is your 1% threshold. Even if you only change your mind about buying once (and you can bring yourself to do so), the rule will save you money.

There are some caveats here: it works best if you make less than $ 200,000, your debt payments are already manageable, and you already maintain a budget that tracks monthly spending on minor items (since a series of small purchases can still lead to overspending). Of course, nothing is set in stone, and you should customize the rule to suit your needs. As Glen James put it, “You can change it to the 0.5% rule. Whatever the percentage, it should make sense based on your financial situation, needs, goals and priorities. “

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