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If you agonize over every purchase — whether it’s organic strawberries or a trip to Paris — the 0.01% rule might help put things in perspective.
Essentially, the rule states that it’s safe to spend 0.01% of your net worth on a splurge without wrecking your budget.
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Personal finance author, blogger and data scientist Nick Maggiulli (1) developed it as a way to help people determine exactly how much they can spend on an indulgence without hurting their overall wealth.
It’s designed for people who experience anxiety around spending on even small things. Some may even exhibit a behavior called “consumer hyperopia” — opting to save for long-term goals like retirement, even though they can afford an occasional present-day treat.
It makes sense that a data scientist like Maggiulli would come up with a quantitative yardstick to do so.
Featured in his new book, The Wealth Ladder, the 0.01% rule has been making headlines, including a recent Wall Street Journal article (2).
But while it might work for people who sweat over spending, that doesn’t mean it’s the right fit for everyone.
Here’s how to calculate your own 0.01% and what to consider before applying the rule in your own life.
How to calculate your 0.01%
First, determine your net worth by adding up all of your assets and subtracting your liabilities.
For example, if you have $150,000 in your investment accounts and $25,000 in credit card debt, your net worth would be $125,000. To make the process easier, you can use an online net worth calculator.
Next, divide your net worth by 10,000 to calculate what your daily 0.01% spending allowance would be.
For example, if your net worth is $500,000, 0.01% of that would be $50, meaning you could spend $50 on small splurges.
With that said, $50 a day can add up. Maggiulli, now COO of investment firm Ritholtz Wealth Management (3), only recommends using this guideline for rare splurges.
In a recent podcast, The Money with Katie Show (4), Maggiulli gave the example of deciding whether or not to splurge on cage-free eggs or spring for a latte as a treat.
“The idea here isn’t that you should spend this every day,” Maggiulli said
“It’s just that, hey, when this occasional expense comes up, you can just pay for it … You don’t have to think about it. It’s just a trivial expense.”
If you’re looking for more room in your budget so that trivial expenses can truly be trivial, Monarch Money is one way to find that financial freedom.
If managing a budget feels overwhelming to you, apps like Rocket Money can simplify the process.
Rocket Money tracks and categorizes your expenses, providing a clear view of your cash, credit, and investments in one place. It can even uncover forgotten subscriptions, helping you cut unnecessary costs and save potentially hundreds annually.
For a small fee, the app can also negotiate lower rates on your monthly bills, making it a valuable tool for keeping your finances on track.
Read more: Warren Buffett used 8 solid, repeatable money rules to turn $9,800 into a $150B fortune. Start using them today to get rich (and stay rich)
Should you use it?
As Maggiulli notes, applying this rule daily could cloud your judgment and encourage unnecessary spending. And that could actually hurt your finances. If you spent the full $50 a day at a net worth of $500,000, you’d end up spending just shy of $20,000 over 365 days.
If you’re digging yourself out of debt and have a negative net worth, this rule is definitely not an option.
Given that the average American has $6,473 in credit-card debt, according to Forbes (5), many won’t benefit from the spirit of this rule. But it might come in handy after you pay off the debt.
Finding room in your budget to pay down your debt — and switch your net worth from negative to positive — may feel like it’s an almost impossible task, but you can get started investing your money with your spare change when you sign up for Acorns.
Acorns is an automated investing and saving platform that automatically rounds up the price of each of your purchases to the nearest dollar and deposits the difference into a smart investment portfolio. Your daily purchases can add up to hundreds or thousands of dollars in a year, plus Acorns allows you to set up automatic monthly contributions if you want to supercharge your portfolio. Instead of a $50-a-day splurge, you could consider a $50-a-month contribution.
And the best part? If you sign up with a minimum of $5 per month, you can get a $20 sign-up bonus. Suddenly, your daily matcha fix is a guilty pleasure minus the guilt.
Still, those who are anxious about non-essential purchases can see good use from the 0.01% rule.
For example, when an unexpected expense pops onto your radar, like lunch with friends, you can use this rule to help say yes without feeling the need to triple-check your bank account.
Hopefully, your net worth will grow along the way, and with it your ability to spend more on little splurges that make you smile.
More ways to find your 0.01%
While it can be tough to grow your net worth, you can make meaningful contributions to your savings by cutting down on the cost of your essential expenses.
With insurance prices on the rise, maximizing your savings while still getting comprehensive coverage is a must. One way to save money that’s often overlooked is to shop around for a better deal on your car insurance.
OfficialCarInsurance.com could help you save hundreds each year, with some rates as low as $29 per month. The platform aggregates deals from trusted insurers like Progressive, GEICO and Allstate to help you instantly sort through the best policies from car insurance providers in your area.
To get started, all you have to do is fill in some key information, such as the make and model of your car. Then you’ll get a list of the top insurers in your area in just minutes.
While you’re thinking about setting aside 0.01% for a rainy day, make sure you also have a fund for emergencies — because when it rains, it pours.
To get started, a high-yield account, such as a Wealthfront Cash Account, can be a great place to grow your emergency funds, offering both competitive interest rates and easy access to your cash when you need it.
A Wealthfront Cash Account can provide a base variable APY of 3.50%, but new clients can get a 0.65% boost over their first three months for a total APY of 4.15% provided by program banks on your uninvested cash. That’s over nine times the national deposit savings rate, according to the FDIC’s November report.
With no minimum balances or account fees, as well as 24/7 withdrawals and free domestic wire transfers, you can ensure your funds remain accessible at all times. Plus, Wealthfront Cash Account balances of up to $8 million are insured by the FDIC through program banks.
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Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Morningstar (1); The Wall Street Journal (2); Ritholtz Wealth Management (3); Money with Katie (4); Forbes (5)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.