1% Rule for Spending on Luxury: 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?

I think you should hear these two engineers out. If you play your cards right, you could end up with a very large luxury budget to support a fun and very comfortable fatFIRE lifestyle.

Dror’s Learning Process

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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. 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 pot 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 (as Dror did in grad school in 2005 and Jesse did in grad school in 2014) is fine. But you must limit your second pot until your wealth level allows you to do so. Once your wealth is sufficiently high, the pot is capped at 1% of your net worth per year.

But within that 1%, you have absolute flexibility on how you spend the money. In general, the 1% Rule is targeted at somewhat wealthy individuals. A younger person or new FIRE pursuant might only have a 4- or 5-digit net worth. Should we expect that person only to have a 2- or 3-digit luxury budget to cover an entire year?

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