Netflix’s ‘How to Get Rich’ Host Reveals 2 Common Spending Mistakes

• The two biggest spending mistakes people make are on homes and cars, Ramit Sethi, a personal finance expert, said.
• Sethi, host of Netflix’s “How to Get Rich,” said Americans have a “religion” around ownership.
• This leads people to overlook costs that might make renting a better financial option for some.

Ramit Sethi is a New York Times bestselling author, host of his own Netflix series, and a proud owner of a 2005 Honda Accord.

While the personal finance expert reportedly has a net worth of some $25 million, he says you won’t find homes or condos factoring into his fortune.

These deliberate choices reflect two of the biggest mistakes Sethi sees Americans making with their spending.

“It’s always the same two things, housing and cars. Always,” he said in a recent interview with Scott Galloway’s podcast. “Americans love housing and cars, and they make the biggest financial mistakes with those two categories.”

Sethi mentioned that American society has a “religion” around the ownership of these assets, causing most people to overlook the “phantom costs” associated with buying and maintaining them, such as interest expenses, repair bills, transaction costs, and opportunity costs from alternative uses of that money.

“Americans are extremely bad at calculating phantom costs. They just take the big number and subtract the small number,” he said, referring to the simplistic way home buyers commonly think about their purchase.

As an example, Sethi shared that he rented an apartment in New York City for $3,000 a month, which he estimates would have ultimately cost $6,600 per month to own as a similarly situated condo over the same period.

Buying a home has become significantly more expensive in recent years. Home values have risen by 50% since the start of the pandemic, according to the Case-Shiller Housing Index. The median sale price of a home in the U.S. exceeded $412,000 in the second quarter of this year, based on data from the U.S. Census Bureau and HUD.

When you factor in rising interest rates, real estate agent fees, insurance, and a myriad of other expenses, writing a monthly check to a landlord might not seem so bad after all.

Of course, individual circumstances vary widely, and numerous calculators are available online to help you decide which path to take.

Beyond the benefit of savings itself, Sethi noted that the difference could be invested in a low-cost index fund for an even larger impact.

He also criticized the impulse to buy a large SUV “the minute they have kids” — a move that often stretches household finances beyond their limits and causes relationship strife.

Car prices have increased sharply, too — roughly 25% for new vehicles and even more for used vehicles, according to Cox Automotive. Loan terms have grown ever longer. Lending Tree estimates the average new car payment to be $735 a month, a significant drag on building wealth. That’s a substantial amount to shell out for an asset that invariably depreciates in value over time.

In some cases, it might be more financially sensible to stick with an existing car, opt for a smaller one, or forgo vehicle ownership altogether.

“They are spending too much on their housing and cars. There’s nothing left over, and yet they don’t know that. They can’t make the connection, so they fight about how much they ate out and spent on appetizers,” Sethi remarked.

He clarified that he’s not staunchly for or against renting or owning, and he’s a strong proponent of spending lavishly on things important to individuals — even luxury supercars if that’s your thing.

“I’m saying simply run the numbers because just buying a house is not the same ticket to an upper-middle-class life that it used to be,” he said.

Source: Business Insider