The 1% Rule [Make Expensive Purchases Without Feeling Guilty]

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Ever felt a sense of deep shame as soon as you swiped your credit card on something expensive? Personally, I am great friends with buyers remorse. So many times, I thought I needed something, only to get home and feel like I wasted my money.

It can be hard to walk the delicate balance between treating yourself and feeling like you’re overspending. After all, you deserve to spend your hard-earned money on something that brings you joy. However, you also don’t want to hold yourself back from your financial goals.

Naturally, you’re not the only one who has to deal with these worries either. According to Better, nearly 65% of Americans are losing sleep over money.

So, what exactly can you do to find a balance and feel good about making large purchases? According to the experts, you should use the handy 1% rule. This concept was first introduced by Glen James, who hosts one of Australia’s top finance podcasts, My Millennial Money.

We’ll introduce this idea to you so you’ll always know the right time to buy or not to buy. By the end of this post, we hope you’ll become an expert when it comes to large purchase decisions.

The 1% spending rule

While shopping, it can be easy to let your desires govern your compulsive spending habits. As soon as your eyes land on that new luxury watch or those clothes you’ve always wanted to buy, your mind begs you to have it right away. Before you know it, you’ve opened up your wallets and a huge chunk of change makes its way out. Now, you’re wearing a new watch on your wrists and a face of guilt as well.

If you’re especially prone to overspending without even realizing it, you need a way to control this compulsion. That’s where the trusty 1% spending rule comes into play. The essence of the rule is a pretty straightforward concept to understand. If you want to spend your money on something that you don’t need and it costs over 1% of your annual gross income, don’t buy it right away.

Instead, you should wait at least one day before buying and seriously run through the questions below:

1. Do I really need this?
2. Can I afford it?
3. Will I actually use it?
4. Will I regret it?

If you still feel good about buying the item after you’ve considered these questions, then that’s your cue to go ahead and make the purchase. However, if your mind is hesitating on very legitimate reasons not to make the purchase, then you should put the wallet away. The 24-hour wait acts as a buffer period to let the cloudy dopamine rush diffuse and allow you to make clearer judgments.

Example of the 1% spending rule

Let’s take a look at an example. Say you’re currently an individual that makes about $70,000 in your annual gross salary. You decide to complete a few errands and go to your big box store to buy some groceries to feed yourself for the next week.

However, while you are there, you spot a gorgeous new TV that would seriously elevate the quality of the shows you watch. Sounds nice, right? You take a look at the price tag and suck in a gasp – the price is exactly 1% of your gross annual income, at $700.

Yet, despite the high price,  you can’t help but feel tempted to buy it. After all, it’s only just 1%, right? But, before you let your heart completely take over, you intelligently remember the 1% spending rule. With a sigh, you temporarily kiss the TV goodbye and head home to sleep on the decision.

Along the way, you decide to evaluate the potential purchase according to the key questions above.

1st question of the 1% rule: Do I really need this?

Sure, that brand new TV would look super nice against the colors of your room. Plus, it would make the quality of the shows you watch a lot better, saving your eyes from having to squint.

However, it’s not like your current TV isn’t doing an okay job. Though it may have a few scratches and it may not be the latest OLED technology, but you don’t necessarily need the new TV.

2nd question of the 1% rule: Can I afford it?

At the moment, you might be able to afford it. But what about later on? You never know when your landlord might suddenly raise the rent of your apartment or if your car needs a new battery.

You also want to make sure that your purchase here doesn’t majorly impact your further spending and lifestyle. Because of this one TV, will you have to be living much more frugally all of a sudden?

Maybe you’ll have to take on an extra weekend job, which isn’t necessarily a bad thing. There are plenty of great ones.

Or maybe you’ll just have to take a closer look at how you’re allocating your funds. The 70/20/10 budgeting method can be super helpful with this.

But if this purchase means you’ll have to eat double the amount of instant Ramen bowls, then it might not be worth your health.

3rd question of the 1% rule: Will I actually use it?

A lot of the time, we buy things because our emotions take over. We fail to consider that they don’t actually have much of a practical value.

Have you ever bought something that you thought you’d use but basically tossed it to the side as soon as you got home? Now that it’s sitting there collecting dust, you’ve probably stewed in regret with every glance.

Let’s think about the TV again.

Even though it might heighten the quality of the videos and shows you watch, you don’t even have too much time to sit down in front of the TV in the first place. It’s your busy work schedule that prevents you from even taking full advantage of your old TV at all.

Plus, thanks to modern technology, you’ve started to rely increasingly on your phone for all your streaming and entertainment needs.

So, all lifestyle factors considered, it’s unlikely that you’ll actually use your new TV to its full worth.

Pair the 1% spending rule with the 30-day spending rule to be even more financially responsible.

4th question of the 1% rule: Will I regret it?

If you don’t need this TV, can’t afford it, and will most likely not use it, you can heavily bet that you’ll regret it too, later on. After all, what you’re spending isn’t loose change.

Seeing that unused TV every day with its black screen staring back at you might become a constant painful reminder of a decision you made too quickly.

After a night of peaceful sleep, you wake up refreshed and ready to decide once and for all if you want that TV.

Thankfully, your analysis of the questions helps you determine that you should leave the TV in the store where it belongs.

Does the 1% spending rule apply to everyone?

The 1% spending rule isn’t a hard and strict rule for anyone. Rather, it works best when it’s utilized as a guide. However, it does work even better for those who fall within a certain income bracket.

As a rule of thumb, the 1% spending rule works best for you if you earn $200,000 or less. The rule wouldn’t make too much sense for anyone who earns an income any higher.

For instance, if someone had an annual gross income of $3 million, they would have to set a limit of $30,000 for every purchase. In practical terms, that limit could be too high.

Of course, the opposite is true as well. If you may be on the lower end of the income scale, 1% could also be too much.

This goes to show you that nothing is set in stone. When using the rule, you should tweak it to meet your personal needs. 1% could be 0.5%, 4%, or whatever best fits your financial situation.

At the end of the day, the 1% spending rule is designed to be a mental checkpoint that allows your brain to establish a few boundaries before rashly deciding.

It certainly isn’t for everyone, and it might not work with how you manage your finances. However, it’s definitely one of the simplest tools you can begin using in your everyday life. Say goodbye to reckless spending!

The end goal of the 1% spending rule

In the end, the goal of the 1% spending rule is for you to develop a good habit of thinking before making purchases, and set a good boundary for when you should be more careful with your money. Developing good money habits is the best outcome of implementing the 1% spending rule.

Once you have developed good spending habits, the 1% spending rule is not so important anymore, because now you are only going to be spending money when you truly need to.

In conclusion

These days, you’re far from the only one who has to worry about where their money is going and why it seems to disappear so quickly. With so many expenses to take care of, it’s simple to let a few of them slip through the cracks.

That’s why the 1% spending rule has its brilliance. Its use as a convenient mental checkpoint can help curb any shopping compulsion you have and lower your expenses as a whole.

In no time, you’ll be making smarter shopping decisions in the short run and witness a lot more savings in the long run.

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