- 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.
Ramit Sethi is a New York Times bestselling author, host of his own Netflix series, and the proud owner of a 2005 Honda Accord.
And 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.
Those deliberate choices reflect two of the biggest mistakes Sethi says he 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 said that American society has a "religion" around ownership of these assets that causes most people to overlook the "phantom costs" associated with buying and maintaining them, like interest expenses, repair bills, transaction costs, and even opportunity costs arising 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.
By way of example, Sethi said he rented an apartment in New York City for $3,000 a month that 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 gotten a lot more expensive in recent years. Home values have gone up 50% since the start of the pandemic, according to the Case-Shiller Housing Index. And the median sale price of a home in the US was more than $412,000 in the second quarter of this year, according to data from the US Census Bureau and HUD.
Roll into that rising interest rates, real-estate agent fees, insurance, and a myriad of other expenses, and 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 the savings itself, he said the difference could be invested in a low-cost index fund for an even larger impact.
Sethi similarly criticized the impulse to buy a large SUV "the minute they have kids" — a move that, in many cases, ends up stretching household finances beyond their limits and causing relationship strife.
Car prices have gone up sharply, too — roughly 25% for new vehicles and more for used vehicles, according to Cox Automotive — and loan terms have grown ever longer. Lending Tree estimates the average new car payment to be $735 a month, which can be a significant drag on building wealth. That's a lot of money 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," he said.
Sethi clarified that he's not staunchly for or against renting or owning, and he's a strong proponent of spending lavishly on things that are 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.