The 0.01% rule

[srblanco7]

From WSJ. The 0.01% rule says that if you're torn about making a purchase, you don't need to stress about the decision if the value of the purchase is less than 0.01% of your net worth. For example, someone with $1M net worth could spend $100 worry free according to the rule (in essence a trivial amount of money for someone with that level of net worth).

The rule derives from the assumption (perhaps cautious) that your assets will have a long term real return of a bit under 4% per year, or about 0.01% per day.

Obviously, those living on a tight budget likely have a more keen understanding of what they can spend. As such, the rule is likely more applicable to those with a higher level of assets who may have trouble transitioning from a "savings" mindset to a "permission to spend" mindset.

Not sure the world of personal finance needed another "rule" - but interested in thoughts from the Forum.

[disneysteve]

This comes from the book "The Wealth Ladder" by Nick Maggiuli. I haven't read the book yet but I did listen to an interview with him on the Afford Anything podcast recently: https://affordanything.com/629-nick-...imb-past-four/

It's pretty interesting and I have to admit it has changed how I view our spending. Now that I've been retired for over a year and seen how our money is managing, I've started loosening up the purse strings for mundane everyday expenses that simply don't matter in the big picture. Our NW is about $4.5 million. It is inane to avoid getting an iced tea at lunch because I don't want to spend $4 for it. With the 0.01% rule, I could get 100 iced teas and we'd still be just fine.

[myrdale]

Decimal points manner. To confirm we are talking about 0.01%, One Hundredth of One Percent.

If your net worth is $100k, then don't sweat $10.

If your net worth is $1M, then don't sweat $100.

Making the assumption that I am worth around $0.5M I've got enough of an emergency fund set up that if I need to spend $5k tomorrow I could do it and not break a sweat.

After purchasing my house, I had a network of arguably - $100k, but if I needed to spend $100 at the time, again I didn't sweat it at all.

I get the point, I just think it's really out of tune. I think the number is probably closer to 1-5%.

[disneysteve]

I get the point, I just think it's really out of tune. I think the number is probably closer to 1-5%.

No. His "rule" is 0.01%/day. If your NW is $1M, you can spend up to $100/day on discretionary stuff without tanking your finances.

Obviously, you're unlikely to actually do that on a daily basis but if you did, at the end of a year, your NW would still be about $1M. It might not grow much but it likely wouldn't shrink significantly either.

[ua_guy]

My other half has this mindset about the .01% and we break on this idea often. I don't want to become totally comfortable with mentally writing things off to adjustment code, "it doesn't matter". While I know small expenses individually typically don't make a difference, they do add up. Maybe not meaningfully in comparison to net worth, but those expenses still add up to things of value. And I think having a mindset of minimizing expense, not under a threshold, but all expenses, is still important.

Many of the "post your wins" themes in the thread we keep on here are examples of the little over/under games we play mentally as frugalists.

[disneysteve]

My other half has this mindset about the .01% and we break on this idea often. I don't want to become totally comfortable with mentally writing things off to adjustment code, "it doesn't matter". While I know small expenses individually typically don't make a difference, they do add up. Maybe not meaningfully in comparison to net worth, but those expenses still add up to things of value. And I think having a mindset of minimizing expense, not under a threshold, but all expenses, is still important.

Many of the "post your wins" themes in the thread we keep on here are examples of the little over/under games we play mentally as frugalists.

You're right, but that's also not what this is about IMO.

Hang out on the early retirement forum for a while. Many people there have more money than they will ever possibly spend in their lifetime. They have 7-figure portfolios but also have SS and pensions that cover 100% of their spending because they've continued to be as frugal as ever. Or they are spending from their portfolio but the balance is still growing. That's actually our situation. I retired in May 2024. We are living off of our savings now. Despite that, and despite it being our most expensive year ever with the kitchen remodel, year to date our portfolio is UP over $350,000 after all of that spending is accounted for.

When that's where you find yourself, is there really a point to standing in the supermarket aisle and deciding whether to buy brand name Cheerios or store brand? That $1 difference is inane to even think about.

Using Maggiuli's 0.01% rule:

If your net worth is $10,000, you can ignore a $1 spending decision.
If your net worth is $100,000, you can ignore a $10 spending decision.
If your net worth is $1,000,000, you can ignore a $100 spending decision.

At 10K, you can just go ahead and buy the Cheerios.
At 100K, you can order the steak instead of the chicken at the restaurant.
At 1M, you can book the room at the Marriott instead of the Comfort Inn.

I think the 0.01% rule can help you frame "how much is too much?" when making day to day spending decisions. Frugality is great. I've certainly practiced it my whole life and still do. That transition from saving to spending is one of the hardest parts of retirement, but at some point if you've done everything right along the way, you reach a point where you're never going to outlive your money and it's time to start enjoying it more and stressing about it less.

[Fishindude77]

Or they are spending from their portfolio but the balance is still growing. That's actually our situation. I retired in May 2024. We are living off of our savings now. Despite that, and despite it being our most expensive year ever with the kitchen remodel, year to date our portfolio is UP over $350,000 after all of that spending is accounted for.

We've got the same thing going on.
Our IRA investments are actually worth more than when I retired eight years later, and we've been drawing $4k per month from it.

[disneysteve]

We've got the same thing going on.
Our IRA investments are actually worth more than when I retired eight years later, and we've been drawing $4k per month from it.

Exactly. We've all been so frugal and been such dedicated savers, which is great and allowed us to get where we are today. But now we've got more money than we know what to do with. The goal was never to die with as much money as possible. At some point, you need to turn off that frugality and enjoy what you've got.

Says the guy who still rips dryer sheets in half to save money

[ua_guy]

You're right, but that's also not what this is about IMO.

Hang out on the early retirement forum for a while. Many people there have more money than they will ever possibly spend in their lifetime. They have 7-figure portfolios but also have SS and pensions that cover 100% of their spending because they've continued to be as frugal as ever. Or they are spending from their portfolio but the balance is still growing. That's actually our situation. I retired in May 2024. We are living off of our savings now. Despite that, and despite it being our most expensive year ever with the kitchen remodel, year to date our portfolio is UP over $350,000 after all of that spending is accounted for.

When that's where you find yourself, is there really a point to standing in the supermarket aisle and deciding whether to buy brand name Cheerios or store brand? That $1 difference is inane to even think about.

Using Maggiuli's 0.01% rule:

If your net worth is $10,000, you can ignore a $1 spending decision.
If your net worth is $100,000, you can ignore a $10 spending decision.
If your net worth is $1,000,000, you can ignore a $100 spending decision.

At 10K, you can just go ahead and buy the Cheerios.
At 100K, you can order the steak instead of the chicken at the restaurant.
At 1M, you can book the room at the Marriott instead of the Comfort Inn.

I think the 0.01% rule can help you frame "how much is too much?" when making day to day spending decisions. Frugality is great. I've certainly practiced it my whole life and still do. That transition from saving to spending is one of the hardest parts of retirement, but at some point if you've done everything right along the way, you reach a point where you're never going to outlive your money and it's time to start enjoying it more and stressing about it less.

Understood. However, many of us have not yet reached our retirement goals/target age, so portfolio gains and additional savings all go to supporting that number.

[disneysteve]

Understood. However, many of us have not yet reached our retirement goals/target age, so portfolio gains and additional savings all go to supporting that number.

Absolutely, but even when you're in the accumulation phase, especially so, you need to have a good handle on your spending decisions. How much is too much? What amount of discretionary spending is okay and won't derail you from meeting your goals?

We often hear about the "latte factor" that David Bach came up with years ago. Just stop getting your daily latte and you'll be rich. Well, that's not quite what he said but that's how it came to be used. The reality is more nuanced. If you're just starting out and your net worth is low like 10K or 20K, that $4 daily latte is too much relative to your situation. But once you're a little more established and have been funding your retirement savings for a number of years and paid down debt, that $4 latte might be just fine when viewed through the lens of your now 300K net worth even if you're nowhere near retirement yet.

There generally comes a time in your saving life that portfolio returns become the main driver of growth rather than additional contributions. Adding new money barely moves the needle as your balance grows. I think that at least once you've reached that point, which should be well before retirement, the day to day spending decisions become much less important or impactful. So early on, frugality is super important. Later on, less and less so.

[myrdale]

No. His "rule" is 0.01%/day.

That is the piece I was missing.

[LivingAlmostLarge]

Understood. However, many of us have not yet reached our retirement goals/target age, so portfolio gains and additional savings all go to supporting that number.

UA_Guy read the magguli book or better yet just listen to the afford anything podcast for an hour. It's faster and quicker and you can skip the boring parts . It really highlighted my spending decisions this summer and going forward. I really struggle with the guilt of spending still. A lot. I mean a neighbor said "LAL you are frugal but only spend on travel." It's a known thing I like to travel, but usually cheaply.

This summer something really struck me with the afford anything podcast (and I wanted to read the book beforehand). Nick told the woman Rung 4 is $1-10M. Rung 5 is $10-100m, and Rung 6 is $100M+. Rung 6 has 10,000 families in it or so. He didn't find one in the data set. Rung 5 there was like less than 1% in the dat set. Rung 5 is 2% of people. And 18% of people are in rung 4. So like 1 in 10 in rung 4 ever move to rung 5.

Here's the big takeways. It takes 28 years to get to rung 5 from rung 4 saving $100k @ 5% average over 28 year. A very reasonable number when you consider you scale back as you get closer and build usually a cash reserve. This is AFTER 17 years to get to rung 4 or $1m. So to get from $1m to $10m it takes almost 3 decades. It takes $300k @ 5% 18 years. So still a LONG time. Most people GIVE UP. They say they have enough in rung 4.

It hit me. That's exactly how i've been feeling and felt. No matter how much I have been saving and it's been more than $100k, the needle isn't moving. I am not moving much faster to rung 5 than before. The stock market returns are helping more than me worknig and saving. Being frugal isn't moving the needle. It's been the past 5 years of staying in the market that has paid the dividends off. he said most getting to rung 5 do something big.

Some sort of outsized risk and I truly believe you need this to happen. Very few and most like 99% of the people I know will not hit $10m and they will end up staying in rung 4 and are happy. Only one other friend is aspiring to rung 5 and he and his wife make 7 figures combined and are saving a lot to move the needle. He even said it's taking longer than he imagined and wants to hang it up.

So when i heard Nick put into words what I've been feeling, i realized that i have to stop and reflect on my spending. Saving 35% isn't going to move my needle more than saving 20% really. I might as well enjoy it. I have felt a lot of guilt these past 5 years "only" saving a 2 x 401k and 2 Roth IRA and 2 ESA. Before we saved much more. But now we spend most of our income. I think we save like 20-25%. Why am i making myself crazy trying to save more? For what? To get to $10M? what is the purpose?

So I decided that's it. I'm done. I am done saving at the rate I thought I should be saving. I was done being mustachian. Instead i was going to save at a normal rate and enjoy spending the rest. I let everything go. Want to eat out? Okay. Want to buy new clothes kids? Okay here's the budget. Want to go away for weekend? Okay. I bought business class tickets on our most recent flight. I bought nicer hotels. I paid for better seats on a train.

I'm not saying you should blow your money or not care. And I've always beena pay yourself first. We deposit what we want to spend every month and that's it. But the amount deposited is increasing fast. I said enough, we save X, we don't have to penny pinch or scrimp. Instead we just save X and that's enough.

We will get to our number. In fact from modelling we are going to blow our number out of the water just because we are going to work through the kids going to college. if we stop at 2030 we'd have enough. If we work until 2034 we'd have more than we could ever spend. It's possible at 2030 we'll more than we can spend.

So the balance is we need to start spending now. We need to relax and enjoy it now. And the 0.01% rule gives me comfort that yes I can order a drink when I got out. Yes I can order a coffee. Yes I can go out to lunch instead of only eating at home. All these little decisions I did the right thing before. Now I'm not going to think about it. It's how many not on this board live. They eat out every lunch. They order drinks. They travel where they want no matter the cost.

These are hard frugal habits/muscles to break. but you have to flex the spending muscle or else it'll atrophy. I'm trying to flex mine now. It's pretty wild how hard it can be to spend. it's also crazy to realize how easy life is when you don't worry about saving.

[disneysteve]

LAL, that's a great review and really highlights how Maggiuli's work is meant to be applied.

When you're just starting out and essentially broke, every dollar or $10 or $100 that you can stash in savings DOES move the needle. You should be frugal. You should watch your spending carefuly. Later on once you've built a decent nest egg, not so much.

I referred to this in the ebay thread recently. I've started backing off on my reselling. I realized that going at it at the pace I had been doing, I might earn 15-20K this year but I also realized that our portfolio value changes by that amount on a daily basis. What I'm earning from reselling, even if I put every penny of it into savings, won't matter one bit. Maggiuli also proposed another "rule" that you probably shouldn't take on income-generating activities if they won't increase your net worth by at least 1% or else it isn't really worth your time. That weighed into my decision since if I earned 20K from reselling, that would amount to less than 0.5% of our NW. I was spending a lot of time on it for very little reward. Our life will not be meaningfully different if I don't make that 20K.

Saving early in life is critical to success because of the power of compounding. Saving later on isn't nearly as impactful. Most of the regulars here are older and later in their careers. You're likely already at that point where additional savings is a very minor driver to portfolio growth. At that point, spending more on a day to day basis, within reason (0.01%), can increase enjoyment of life without altering the end result financially.

[ua_guy]

LAL, that's a great review and really highlights how Maggiuli's work is meant to be applied.

When you're just starting out and essentially broke, every dollar or $10 or $100 that you can stash in savings DOES move the needle. You should be frugal. You should watch your spending carefuly. Later on once you've built a decent nest egg, not so much.

I referred to this in the ebay thread recently. I've started backing off on my reselling. I realized that going at it at the pace I had been doing, I might earn 15-20K this year but I also realized that our portfolio value changes by that amount on a daily basis. What I'm earning from reselling, even if I put every penny of it into savings, won't matter one bit. Maggiuli also proposed another "rule" that you probably shouldn't take on income-generating activities if they won't increase your net worth by at least 1% or else it isn't really worth your time. That weighed into my decision since if I earned 20K from reselling, that would amount to less than 0.5% of our NW. I was spending a lot of time on it for very little reward. Our life will not be meaningfully different if I don't make that 20K.

Saving early in life is critical to success because of the power of compounding. Saving later on isn't nearly as impactful. Most of the regulars here are older and later in their careers. You're likely already at that point where additional savings is a very minor driver to portfolio growth. At that point, spending more on a day to day basis, within reason (0.01%), can increase enjoyment of life without altering the end result financially.

This is also where I'd be inclined to deviate from the advice about income-generating activities. Are you really Ebaying to generate income, or are you doing it because it fills gaps of time and provides some enthusiasm and satisfaction -with the benefit of a little extra cash trickling in?

While I agree that yes, someone in their 40's or 50's should definitely have meaningful money saved for their goals, it's not wrong to maintain that "every dollar counts" mindset - even if by the .01% rule, or the 1% rule, it doesn't. I'll also provide a counter example to where savings will have an outsized impact compared to growth. In discussing retirement goals, it was calculated my spouse and I will need to save $2 Million over the next 4 years to hit our targets. Our portfolio growth will certainly not come close to outpacing that. Now, excuse me while I forego that $4 latte and brew my own cup of coffee at home! lol - because that's what it feels like needs to be done in order to hit that monumental number in such a short amount of time.

[disneysteve]

This is also where I'd be inclined to deviate from the advice about income-generating activities. Are you really Ebaying to generate income, or are you doing it because it fills gaps of time and provides some enthusiasm and satisfaction -with the benefit of a little extra cash trickling in?

Sure, I do it for fun and to keep busy. But over the past year I've gotten much more serious about it and really ramped up the business. It was getting to a point where it felt more like work. If the money was significant to our future well being, I'd be fine with that, but it just isn't, so why spend so much time and energy doing it?

While I agree that yes, someone in their 40's or 50's should definitely have meaningful money saved for their goals, it's not wrong to maintain that "every dollar counts" mindset - even if by the .01% rule, or the 1% rule, it doesn't. I'll also provide a counter example to where savings will have an outsized impact compared to growth. In discussing retirement goals, it was calculated my spouse and I will need to save $2 Million over the next 4 years to hit our targets. Our portfolio growth will certainly not come close to outpacing that. Now, excuse me while I forego that $4 latte and brew my own cup of coffee at home! lol - because that's what it feels like needs to be done in order to hit that monumental number in such a short amount of time.

I don't disagree with you at all. If you need to save up $2M in 4 years for some reason, you've got to be earning serious money and saving serious money. Every dollar will count with a goal that large. You need to add 500K/yr which is quite a lot.

I don't know how big your portfolio is currently but I can tell you that our portfolio was up over 450K last year and is up over 350K so far this year. If the market behaves, it is quite possible to see pretty major gains over a 4-year period if your bucket is big enough without adding a penny in new savings.