Life Fright

For those frugal or anxious spenders, this one’s for you! I learned about this rule from the book The Wealth Ladder and the 0.01% rule essentially covers the daily amount that you can spend worry free.

The dollar value is derived from taking your net worth and multiplying by 0.0001 or dividing by 10,000. The 0.01% is determined by assuming that your net worth will continue to grow by 4% annually. Taking that 4% growth rate and dividing it by days in a year (365) equals 0.01%. In other words, if you spend exactly that 0.01% net worth value daily, by the end of the year you will have made no dent in your net worth assuming that 4% annual growth has been achieved. This is a useful metric to know and a way of re-framing whether something is within your budget and how little or long you should spend fretting over the purchase!

I used to gauge my spending in terms of how much I make in an hour at work. And this works for some time while the hourly wage is low. But after a while with raises and the transition to salaries, lifestyle creep kicks in and it is hard to curb spending when there is no longer a strong enough measure to overrule the subsequent trigger-happy purchases made.

Another popular approach to justify spending is whether you can afford to buy the item or experience twice or thrice over. If you can, great! If not, then don’t do it. Similarly, another way to avoid spending is to pose the question “Would you rather have the item or the x dollars instead?”. While these are great ways to refrain from spending by imposing new hurdles, it is not the best at settling on making those purchases in the end especially if you highly value collecting money over spending it to acquire things.

I hope this post served as some food for thought as to how you justify purchases or whether more intention is called for. I would love to hear about your strategies and thought processes in the comments below!