Dubai: If you often find yourself struggling with big impulse purchases that you otherwise might regret, here’s what finance coaches are recommending nowadays as an effective rule of thumb against such a tendency to spend.
The ‘1 per cent spending’ rule is simple: When something you want to purchase exceeds 1 per cent of your annual income, wait a day before buying it. The cap will limit your spending in a day, and the 24-hour waiting period will take the thrill out of impulse buying, finance experts evaluate.
“The 24-hour cool down period with the ‘1 per cent spending’ thumb rule provides time to re-think the purchase. If you really want it, what harm is there in taking an extra day to think about whether you truly need it?” said Andrea Barber, an Abu Dhabi-based financial planner.
“For instance, let’s say the latest version of your favourite gadget is selling for Dh1,600. If you make Dh100,000 per year, it would exceed the 1 per cent limit put on your spending of Dh1,000. In that case, you’d have to wait a day before making the purchase.”
The 24-hour cool down period with the ‘1 per cent spending’ thumb rule provides time to re-think the purchase
What happens when you buy too much on an impulse?
When spending, you may often end up buying items you don’t want and don’t help you reach any financial goals. As a result of buying too much on impulse, you might not be spending money according to your priorities because you aren’t giving enough thought to your choices.
So a waiting period gives you a chance to reflect on a purchase and determine its short- and long-term use, and after going the waiting period, you may realise that the item isn’t really needed, or that you wouldn’t use it as much as you originally thought you would.
“I rarely budget, and I’ve never had any strict spending regimens, but whenever I seem to be buying more than usual on impulse just because I have the money to, I’ve found that often times it helps to enforce a waiting period before I hastily spend,” said a UAE-based corporate lawyer Rebecca Gifford.
“That doesn’t mean I would never spend on anything I want, it’s just that when I find myself standing in the checkout line, or hovering my mouse over that ‘Buy Now!’ button, I take a step back. If I can, I walk away and come back to it a day later and ask myself again if I want to make that purchase.”
Is the 1% spending rule realistic for people of all incomes?
Like most other thumb rules, this rule isn’t for everyone. “For example, for low earners, even 1 per cent may also be too high,” said Dubai-based wealth advisor Mohammad Shaan, while also adding that for high earners, 1 per cent of their annual pay may set a limit amount that’s too high.
“So even through the rule applies to a spending scenario where your purchase exceeds 1 per cent of your annual income, it isn’t a fixed figure. Whatever the percentage, it should make sense based on your financial situation, needs, goals and priorities.” Here’s a real-life instance.
Unlike Gifford, Jaison Wilson, 37, another UAE resident, has been focussing the past many months to pay down his high-interest credit card debt, which meant that he ensures that his leisurely purchases wouldn’t cross a lower limit, unless the want is warranted after a day or even two.
“If anything costs above Dh350, it’s a red flag for me, given my current financial situation,” Wilson said, who estimated this limit to be about 0.3 per cent of his annual income. So given that he is spending a significant portion of his income to pay down debt, he had to lower his purchase limit.
The 1 per cent rule in real estate outlines that your monthly rent should be equal to at least 1 per cent of the total investment in the property. The total investment of the property will include the purchase price, plus any upfront renovations that you have to do.
Just like how it's the relatively small amounts of money you save each day that piles up over time and becomes something substantial, it's very easy to dismiss a small weekly or monthly expense, when it's those expenses that can make the difference between accumulating wealth and debt.
“A solution to curb such impulsive purchases is to wait a day before spending, provided it’s within limits. It can not only help you come over the habit of reckless spending, but it will also help better your decision-making ability regarding your finances,” added Shaan.
“Such small impulsive purchases start messing with your finances over time without you realising it. It's not necessarily about the amount involved – it's about the habit.”
There is a valid reason why ‘wait before making any purchases’ is a classic personal finance tip. Forcing yourself to wait to decide if you actually want to spend money on an item can help mitigate the emotional element of spending decisions.
While a ‘24-hour wait’ rule on big purchases can help curb impulsive spending, , one problem is that it can be impractical, as ‘big purchases’ is ill-defined. That’s where the 1 per cent rule of spending helps: You still wait a day, but only for purchases that are over 1 per cent of your salary.
With the 1 per cent spending rule, the idea is simply that if you want to spend money on a non-essential item like a new watch or sunglasses, you have to wait one day to make the purchase if it exceeds 1 per cent of your annual income (e.g. Dh500 if you make Dh50,000).