Many people have a “24-hour wait” rule on big purchases to avoid impulsive purchasing; however, it can be problematic because “big purchases” are ill-defined. That’s where the 1% rule of spending comes in handy. You still have to wait a day, but only for purchases that cost more than 1% of your income. Here’s how it works and why you can save money by using it.
What is the 1% spending rule?
The guideline comes from Glen James, host of the Australian finance podcast My Millennial Money, as reported by CNBC. The idea is if you want to spend money on anything that isn’t essential like a new watch or sunglasses, you must wait one day if the purchase exceeds 1% of your annual gross income (for example, $100 if you make $10000).
The 24-hour buffer acts as a waiting time. It allows you to think about whether your buying spree was motivated due to the dopamine rush. However, this guideline is only helpful if you follow it, which can be difficult for minor purchases. For example, are you going to go home and sleep on your wallet for a day just because it determines whether it counts as an unnecessary expense?
The 1% rule is a more fair strategy that also provides obvious guardrails to keep you from going overboard. It’s also simple to remember: if you earn $50,000 after taxes, you’ll always be aware that $500 is your 1% threshold. So even if you only change your mind about a purchase once (a challenge you can set for yourself), the rule will save you money.
But this rule has some limitations like: it is most effective when you make less than $20,000. Your debt payments are already manageable. And you already keep track of non-essential spending every month (since a series of smaller purchases can still lead to overspending). Of course, the same rule doesn’t apply to everyone and you should adjust the guideline to fit your own needs. “You could amend it to the 0.5 percent rule,” Glen James says. Whatever percentage you choose, it must make sense in light of your financial status, requirements, goals, and priorities.”
To sum it up
The 1% guideline isn’t suitable for everyone. Just keep in mind that the best money management tactics are the ones that are simple enough to stick with for years. Of course, there are different types of spending restrictions, but many impose a strict limit (i.e., you can’t spend more than $X on something). James’ version is different because it functions as a mental checkpoint. It reminds you to consider before you act, set boundaries, and recognize trigger spots.
Also Read: TOP 5 TIPS TO HANDLE YOUR FINANCES.