Ramit Sethi's Money Rules: Why Buying a Home Isn't Always Essential

Finance guru Ramit Sethi has fired up When faced with the perspective that owning a home is the premier way to build wealth.

This is really getting on my nerves! he shouted During a guest spot on entrepreneur Steven Bartlett’s show The Diary of a CEO podcast last July 2023.

Purchasers facing skyrocketing home costs are also grappling with persistent mortgage interest rates. A typical 25-year, fixed-rate loan currently stands as follows: 4.74% .

"The top factor we're seeing currently is... monetary policy," clarified the University of Calgary professor. economics professor Trevor Tombe Central banks have direct control over interest rates. By increasing or decreasing the total amount of money available, they aim to meet their primary goal of maintaining low and steady inflation.

While many Canadians are waiting for the right moment to buy a house, Sethi has a different mindset altogether when it comes to homeownership and living a rich life. Without mincing words, Sethi has declared that owning a home “can be a very bad financial decision — and there are far better, far simpler investments.”

It turns out those investments are just as much about personal values as they are about financial decisions; some even include savvy expenditures.

In his best-selling book "I Will Teach You to Be Rich," Ramit Sethi explains why purchasing a home doesn’t necessarily lead to better financial health. To sum up his points, here are Sethi’s personal insights: money rules. Although he authored the book using his personal finance guidelines, many readers concur that his monetary principles can be modified and applied by virtually anyone looking to cultivate wise financial practices.

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1. Maintain at least one year’s worth of emergency savings.

Sethi admitted that saving for one year of emergencies is "more cautious" compared to what many financial advisors typically suggest. However, this approach allows him (as well as potentially others) to rest easier knowing they have security.

"It's in a savings account, completely accessible and that’s precisely its purpose," clarifies Sethi.

Excellent options for storing your emergency fund consist of various types of bank accounts, such as high-yield savings accounts designed specifically for this purpose. Additionally, certain premium checking accounts can be suitable provided they demand maintaining a specific minimal balance to avoid monthly charges yet still offer all standard banking benefits.

Good high-interest savings account options include:

• EQ Bank
• Scotiabank's Enhanced Plus Savings Account
• Simplii Financial High Interest Savings Account

Good premium bank account options include:

• BMO Performance Chequing Account :
• Scotiabank Ultimate Package :

2. Save 10% + invest 20% of gross annual income

Sethi is a fan of investing in the S&P 500 — or similar passive index funds or low-cost exchange-traded funds (ETFs), which tracks the performance of the largest companies in the equities markets. While all equity investing will experience ups and downs, historical returns shows that long-term buy-and-hold strategies consistently trend upwards. For instance, the S&P 500 — the go-to benchmark for the US equity market — has seen gains of around 80% since February 2019.

If becoming an active trader isn’t your goal, beginning with index funds can be quite beneficial. In Canada, the premier choice for such investments is typically the S&P/TSX Composite Index (TSX:SPTSX). Most investors and portfolio managers utilize this particular index fund as their standard measure of market performance.

Sadly, the cost per share for the S&P/TSX Composite Index (TSX:SPTSX) is out of reach for many investors, as each share currently costs around $22,000.

Rather than doing so, seek out exchange-traded funds (ETFs) that follow the S&P/TSX Composite Index (TSX:SPTSX). Suitable choices encompass:

• Vanguard Canada Inc S&P 500 Index ETF (TSX: VFV)
• Vanguard FTSE All Cap Index ETF (TSX: VCN)
• iShares Core S&P 500 ETF (TSX: IVV)
• SPDR S&P 500 ETF Trust (TSX: SPY)
• Vanguard Total Stock Market ETF (TSX:VTI)

Remember, these funds are the Canadian counterparts to those frequently recommended by Warren Buffett and other buy-and-hold proponents as superior choices for passive investing.

To begin your investment journey, you will require an online trading account.

To start investing you'll need an online brokerage account. When choosing, select an account that helps educate you on the assets you're interested in, while keeping your trading and ongoing account fees to a minimum. Good options include:

• Wealthsimple : This online brokerage offers free trades on stocks and ETFs — plus you get the option of starting a brokerage account for stocks , a crypto-trading account or a robo-advisor trading account .
• Questrade Trading fees vary between $4.95 and $9.95, depending on your account type. When using a Questrade account, you can avoid paying these fees entirely when purchasing an ETF, which is beneficial for those who prefer not to engage in short-term stock holdings. Sign up for a Questrade account now .
• Qtrade Customers receive complimentary transactions on a wide selection of exchange-traded funds (ETFs), whereas the cost for trading stocks may be as little as $6.95 for those with elite accounts. Sign up for a Qtrade account today. .

Invest in property markets without purchasing a house

An additional choice is diving into real estate investments. Although buying properties typically demands substantial capital—and as Sethi highlights, locking your funds into a single financial endeavor may not be prudent—a viable substitute might involve engaging with real estate investment trusts (REITs).

REITs provide access to real estate — an excellent substitute for fixed-income investments — while also offering the advantage of liquidity, as they can be purchased and traded just like stocks.

As of 2019, over 40 Real Estate Investment Trusts (REITs) were listed on the Toronto Stock Exchange (TSX). Among them, 19 REITs form part of the S&P/TSX Composite Index (TSX:SPTSX), which serves as a key indicator for assessing overall market performance for many investors.

For instance, the S&P/TSX REIT Index (SPTSRE:IND) trades at just over $300 per share (as of April 2024). This sector-based index created by S&P Dow Jones Indices is comprised of REITs with individual fund weightings capped at 25% (meaning, no one REIT can capture more than 25% of the index). Other options that offer an entry price below $100 per share (as of April 2024) include:

• Allied Properties REIT (AP-UN.TO): Urban office space with holdings in Canada's largest cities. Approximate price per share: $17.35
• Boardwalk REIT (BEI-UN.TO): Multi-family rental communities with holdings from across Canada. Approximate price per share: $72.35
• Can Apartment Prop REIT (CAR-UN.TO): Focuses on residential apartment buildings that include apartments, townhomes and manufactured community sites. Holdings across Canada and the Netherlands. Approximate price per share: $45.30
• Choice Properties REIT (CHP-UN.TO) emphasizes developing work/live spaces throughout Canada. The approximate cost per share is around $13.15.
• Crombie REIT (CRR-UN.TO) specializes in properties such as grocery-focused retail centers, mixed-use projects, and industrial-associated retail spaces. The approximate cost per share is around $12.80.
• CT REIT (CRT-UN.TO) is a closed-end fund primarily invested in income-generating commercial real estate throughout Canada. The approximate price per share is around $13.80.

3. Use cash payments for big purchases

Sethi indicates that major celebrations like large holidays, weddings, and engagement rings belong to this classification.

"This particular approach is contentious," he admitted, yet the tactic of using cash payments achieves several financial goals. One advantage is that purchasing with cash forces buyers to incorporate patience into major expenditures. This practice can help prevent unsecured debts—typically the priciest type, like credit card loans—from accumulating.

To steer clear of using credit cards, Sethi establishes objectives for significant expenses and allocates funds each month to cover the entire cost of the major expenditure.

An alternative approach is to set up an account and begin saving money. Once you have enough savings, utilize a rewards credit card to purchase the item. You can charge the entire amount to the credit card and pay off the balance using your accumulated savings.

4. Never question spending money on books, appetizers, health or contributing to a friend’s charity fundraiser

Sethi has a book-buying rule: If he thinks it’s possible to learn even one transformational lesson from the book, he’ll buy it.

Participating in a friend's charitable fundraising event is a given: It aligns with Sethi's dedication to fostering experiences and communities rather than merely growing a savings account.

But appetizers Sethi mentions that during his younger years, his family rarely ordered appetizers when they dined out because it was beyond their means. However, as an adult with better financial stability, he allows himself to enjoy these little luxuries. To Sethi, treating himself like this feels exceptionally opulent and provides him happiness—highlighting what he believes is the real essence of wealth and making monetary choices.

5. Reserve business class for trips longer than four hours.

Indeed, the seats come at a higher price compared to economy class flights; however, according to Sethi, this cost facilitates a transition for individuals from "feeling disheartened to becoming curious." He mentioned this point.

If purchasing first-class flight tickets seems too costly, think about enrolling in a travel rewards program that can assist you in offsetting the expense of pricier flights via accumulated points or miles.

6. Always purchase high-quality items and use them for as long as you can.

You don't have to spend exorbitant amounts to buy the best, but it does mean doing your research and ignoring the noise around status symbols. For instance, Sethi takes pride in his four-door Honda Accord. The car is more than 15-years-old and still going, simply because it's a very reliable car model. Any savings Sethi has from keeping his car can be applied elsewhere.

7. Avoid restricting expenditures on healthcare and education

Expanding your repository of information positions you for increased achievement.

"I aim to learn from exceptional finance instructors by attending accounting courses," Sethi stated.

Caring for your well-being leads to a higher quality of life. According to Sethi, seeking assistance from a personal trainer, for instance, can aid you in structuring both your exercise routine and diet plan.

8. Make enough money so that you only have to work with individuals you admire and enjoy.

He observed, 'The company you keep matters deeply. Ideas infiltrate your mind, and so do values.'

Should you find yourself paired with an unpleasant colleague at your job, consider requesting a transfer to a new team and potentially under a different manager. Feel free to communicate openly about being receptive to fresh possibilities.

9. Give priority to time spent away from spreadsheets

"Yes, understanding your figures is essential," Sethi stated regarding financial issues.

But at a certain point, he stresses, it’s time to turn the page and live a rich life with friends and family.

I dedicate fewer than 60 minutes each month to managing my finances.

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10. Wed the correct individual

Often, the concept of crafting a life revolves around personal values, like one’s feelings towards raising children or their desired place of residence. Equally crucial is understanding how an individual manages finances and which objectives they deem significant.

Therefore, choosing whom to wed is indeed one of the most significant financial choices an individual can make.

“Maybe the most important one of all,” explains Sethi.

The partner you choose, he contends, “will effect where you live, the house you’ll buy and how much you spend.”

Talk about money early and often with your partner to create harmony around one of life’s most crucial matters.

— with files from Lou Carlozo

Sources

1. Moneywise: Ramit Sethi claims you've been misled, according to Vishesh Raisinghani (December 8, 2023).

2. Diary of CEO: The Financial Guru - "Don't Purchase a Home!" 10 Strategies to Generate Actual Income: Ramit Sethi (July 20, 2023)

3. UCalgary News: A University of Calgary economist states that the effects of increasing interest rates will differ for each individual.

4. Moneywise: "I'll make you wealthy in 10 minutes," by Vishesh Raisinghani (January 28, 2024)

This article Ramit Sethi's 10 guidelines for managing finances (note: purchasing a house isn’t necessary) originally appeared on Money.ca

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The content of this article serves purely informational purposes and should not be considered as advisory. No warranties of any sort are provided with this material.

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