Need To Save Money? The “1% Rule” Will Help You Avoid Impulse Buys

It’s easier than you think to justify an expensive purchase or a random splurge. You had a bad day, you work hard, you deserve a treat, etc. And you know what? All of the above is true. The only issue is these purchases eat into your budget — and your savings — in a big way, so it’s always smart to think twice before swiping your card.

One way to curb your spending is with the 1% rule, originally shared by Glen James, host of My Millennial Money. The idea is that if you want to spend on a non-necessity, like a bag, an Apple watch, shoes, a plane ticket, etc., and the cost exceeds 1% of your yearly income, you should pause and wait a day before going through with the purchase. If you make $50,000 a year, that would mean anything over $500 requires a second look.

As you wait out the 24 hours, you should also ask yourself a few important questions, like, “Do I really need to do this?” or “Will I actually use it?” and even “Will I regret paying for this once the shine wears off?”

While it seems obvious that $500 is a pretty penny, it’s not unheard of to justify splurges in the heat of the moment, like when you’re standing in a store looking at the latest phone or eyeing a gorgeous bag online, especially if there’s only one left in stock or it’s suddenly on sale. Here’s why the 1% rule can help, according to a finance expert.

The 1% Rule Will Help You Save Big Time

According to Bobbi Rebell, CFP, a certified financial planner and personal finance expert at CardRates, the 1% rule helps you keep your budget in mind when you’re on the verge of a splurge. While a purchase that’s 1% of your yearly income can still be expensive, it may not put a huge dent in your savings.

“While it isn’t anything ‘official’ that you need to stick to, the 1% rule is also a good way to keep things in perspective and get a sense of whether it’s going to derail your finances,” she tells Bustle. It also reminds you to stop and think the purchase through, which may be just what you need if you’re lusting after a must-have item.

If you’ll actually use the purchase, that’s fine. If it’s your birthday and you’ve been eyeing an item for years, OK. But if it’s just a heat-of-the-moment urge or something you can live without, that’s when the 1% rule might help pass up the item — and ultimately save big.

The 1% rule can also apply to your savings account. “I love the idea of instead of spending 1% on a splurge you don’t need, you intentionally put the money into savings instead,” says Rebell. “Think of it as a gift to your future self!”

The 1% Rule In Action

Let’s say you make $70,000 a year. If you want to buy designer shoes that are $750, that’s more than $700 or 1% of your income. In that case, you’d either pass them up, save up, or look for a pair that better fits your budget.

When applying this rule, “you would hit the restart button in your mind and start looking for shoes that fit your one percent ‘splurge’ budget of under $700,” says Rebell. “However, if you got a raise and were making $80,000, the same shoes would then fit into the parameters, and after careful consideration, you could go for it.”

One thing to keep in mind? The 1% rule shouldn’t be used every day — or even regularly. “If you apply the 1% rule over and over, you can end up spending a tremendous amount of money,” she says. “It’s not a rinse and repeat kind of thing. It has to be used very sparingly.”

Who Should Try The 1% Rule?

The 1% rule is a good savings hack for anyone, but it’s extra helpful if you’re saving for the future, if you have a tendency to splurge, or if you shop without parameters or guard rails on a regular basis, and then regret it later.

It also works if you have friends who all have higher incomes. According to Rebell, the 1% rule could help prevent “lifestyle creep,” which is when you start spending more than you mean to to keep up, or when you get used to treating yourself all the time.

“Many of us wrongly assume that we have the same means as our friends, or that our friends are spending responsibly,” she says. “We see a friend buying something pricey, and naturally, we want it ourselves. It’s human nature! But when we apply the one percent rule, we realize it may not be something in our budget. The math will never lie to us. Running the numbers gives you the data to stay true to your budget and priorities.”

Source:

Bobbi Rebell, CFP, certified financial planner, personal finance expert at CardRates