Is the 0.01% Spending Rule Smart or Risky? A Financial Planner Weighs In
Written by
Gabrielle Olya
Edited by
Molly Sullivan
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Ever agonized over buying a $40 sweater? A new, trending spending rule claims to be the key to helping you determine whether or not you should make that purchase. According to the 0.01% rule, if a purchase costs less than 0.01% of your total net worth, it’s considered a minor expense and can be made guilt-free. Based on this guideline, a person with a $500,000 net worth would be able to make any purchase under $50 without having to think twice.
But do experts agree with this logic? Here’s what Erica Grundza, a certified financial planner at Betterment, had to say about this spending rule.
Why the 0.01% Rule May Hurt Your Long-Term Financial Goals
Grundza believes that the 0.01% spending rule focuses too much on the short term, which can hurt your finances in the long term.
“The rule prioritizes casual spending over the disciplined budgeting and savings plan required for long-term financial health,” she said. “It can undermine financial goals by encouraging poor spending habits, [especially] if done on the regular. It’s a rule for spending existing wealth, not a strategy for building it.”
For anyone in the wealth accumulation phase, this rule doesn’t have much value, Grundza said.
“It promotes a mindset that is at odds with the discipline required to identify and follow a personalized savings and spending plan,” she said.
Prioritize Saving Over Spending To Build Wealth
It’s hard to achieve financial goals if you’re regularly spending your money rather than saving it.
“Key financial goals like saving for a down payment, funding education or preparing for retirement require consistent, intentional saving,” Grundza said. “The cumulative effect of small, frequent purchases can significantly delay or derail major financial objectives, as these will add up over time.”
Even relatively small purchases can make a bigger difference than you might realize.
“Because financial discipline is built through consistent, mindful choices, rules that provide a justification for impulsive spending can erode the habits necessary for long-term financial success, which can become a slippery slope,” Grundza said.
“While some financial rules of thumb can serve as a basic guide, they can also be harmful when they’re oversimplified,” she continued. “The 0.01% rule is a prime example of this, offering a permission slip for spending that can have long-term consequences if you’re not tuned in to your current financial situation.”
Smarter Ways To Decide What’s Worth Buying
“Instead of relying on trendy spending rules, consumers should build a personalized financial plan centered on their own goals,” Grundza said.
She recommended adopting goal-based budgeting as an alternative to the 0.01% rule.
“Frame spending and saving decisions around specific financial goals,” Grundza said. “Before making a discretionary purchase, ask yourself, ‘Does this move me closer to my goals?’ If it doesn’t, you likely shouldn’t be buying that item.”
She also recommended practicing intentional spending.
“Rather than looking for reasons to spend, it’s more effective to be mindful of where money is going,” Grundza said. “This involves regularly reviewing expenses to ensure they align with personal values and bring genuine happiness.”
More From GOBankingRates
