How to Spend up Big Using a Tiny Percentage

The world is full of useful money rules—some endure; others fall by the wayside.
One of the more interesting recent rules helps anyone to decide when and how much it is OK to spend without really thinking.
The basic rule was arrived at by Nick Maggiulli, chief operating officer of US financial advice firm Ritholtz Wealth Management and author of the book The Wealth Ladder.
According to Maggiulli, you should work out what your overall net wealth is, multiply that by 0.01% and then simply stop worrying about spending anything less than that number on little spending splurges that give you pleasure.
Spending 0.01% of Your Net Wealth Won’t Move the Needle
The basic principle is that a little bit of additional spending that is less than 0.01 per cent of your net wealth, is not worth worrying about because it can’t really harm your overall wealth.
That relies on another rule – that your real rate of return is likely to be a little under 4% a year which works out at around 0.01% a day – so spending that amount of money now and then isn’t going to have a significant effect on your financial health.
Since the rule has been released there have been some warnings from some quarters that it could result in a lack of financial discipline and even financial trouble if followed too enthusiastically and often.
Others have warned that net wealth is not a great measure to use, given that much of that wealth may be tied up in investments and the idea of selling assets to meet extra spending is also less than ideal.
However, most financial planners think the rule is a good way to work out if a discretionary purchase is affordable or not – and a way to not get too caught up on saving excess amounts that will never be spent, especially in retirement.
As a basic spending benchmark, it seems to work because for someone with $1 million in net wealth, they can spend $100 on a non-essential item while someone with a net wealth of $100,000 can spend up with $10.
The other byproduct of the rule is that it puts a spotlight on thoughtful and proportionate spending.
Many Strong Savers Struggle to Spend
Many people who have successfully put together a substantial nest egg for retirement struggle to spend it because they have been almost hard-wired to save for the rest of their lives.
By giving them a gauge against which to test their discretionary spending, it may help them to loosen the purse strings a little.
The important thing is to know your individual money personality and to act accordingly.
If you are someone who has always struggled with over-spending on discretionary items, this rule could turn into a slippery slope and help you to fall back into bad habits.
Otherwise, though, the simplicity of this rule might give you extra time to concentrate on those important but often neglected pieces of financial paperwork like doing an investment plan, preparing or updating your will or ensuring that your super beneficiaries have been updated.
Not a Replacement for a Budget
The other thing to remember is that the 0.01% rule is only a useful instant reminder and doesn’t replace the need for an overall budget.
Even in retirement many people still use a budget to make sure they keep track of their money – even if it a loose style of budget that allocates certain percentages to need, wants and savings, for example.
As to whether the 0.01% rule becomes ingrained or ends up being a passing fad really depends on its usefulness on the ground.
If many people use it and find it helpful it could stand the test of time but that remains to be seen.
It may actually end up being a rule that is most useful for those who struggle to spend their savings in retirement and those with substantial nest eggs.