The 1% Rule for Spending on Luxury: How to Live it Up and Still Achieve FIRE

Do you know how much you should be spending on luxury? What does it mean to spend on luxury, exactly?

My friends Dror and Jesse have a rule for that and a way to help you define what luxury spending means. Another rule, you ask? Don’t we have enough rules already?

Let’s see. There’s the 1% rule for investing in rental properties. You’ve also got the 10% Rule for limiting lifestyle creep. And, of course, there’s the 4% rule defining what’s likely a safe withdrawal rate in retirement.

Let’s get into the good stuff: the 1% Rule.

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Dror: After I completed my Ph.D., I started thinking about my future and realized that with a long time horizon ahead of me, every dollar that I could save would greatly increase its purchasing value later.

Dror’s Learning Process

While splurging on various things can be fun, I realized that buying myself financial security and independence was far more valuable. Simultaneously, some sense of balance is helpful, and it was nonsensical to skimp on necessities.

I wanted to identify – in a quantitative way – a reasonable trade-off between being comfortable while not being wasteful. To do so, I separated between needs and wants/luxuries. I wanted to fully fund the necessities of life but limit the resources spent on luxuries.

The 1% Rule asks you to keep two sets of books—a schism in your budget. The first post covers all of the necessities of life. It has no upper limit in size. It grows to meet your needs. But spending on non-necessities from this pot is not allowed.

Enacting the 1% Rule

The second pot covers all the luxuries in life. When you are just starting with modest wealth, spending several thousand a year is fine. But you must limit your second pot until your wealth level allows you to do so.

Dror: In many countries and parts of the US, public transport is fine, and you don’t need to have a car. For those people, any car ownership might be a luxury.

How to Define “Luxury”

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