Ramit Sethi Warns: You 'Run the Risk of Being Overwhelmed With Expenses' if You Make This Home-Buying Mistake
- Buying a home can help you build wealth in certain circumstances.
- In other cases, it can make growing your net worth harder.
- Ramit Sethi has some advice on avoiding a common home-buying mistake that could cost you: spending too much.
Don't jeopardize your future security to own a home.
Buying a home should ideally help you improve your financial situation. If you buy the right property, you build equity as you pay down your mortgage and you end up owning a valuable asset. Ideally, your home's value will also rise, so you'll get richer just by owning it.
Unfortunately, things don't always work out perfectly for home buyers.
In some cases, you could jeopardize your financial security and your other goals if you make a mistake when purchasing your property. Ramit Sethi, author of I Will Teach You To Be Rich, warned about one common error you'll absolutely want to avoid if you don't want this to happen to you.
This huge mistake could cost you
According to Sethi, one of the biggest mistakes you could make is spending too much of your take-home income on your home.
"Your total housing costs should be less than 28% of your gross income," he said. "When housing costs exceed 28%, you run the risk of being overwhelmed with expenses if something goes wrong."
Sethi is absolutely right that devoting more of your income to your housing costs could be a financial disaster. Things can easily go awry when you are a homeowner. For example, you may need to make expensive repairs such as putting a new roof on the property or fixing the HVAC system. If you are devoting too much of your monthly income to just paying the mortgage, you may not have enough left over to deal with these types of disasters.
Not only that, but if a huge percentage of your monthly income is devoted to your home, you may not have enough left over for retirement, saving for big purchases, or covering other key costs. Living on a budget overall will be harder, and you may really find yourself struggling to cover big housing costs and do anything else with your cash.
Are there exceptions?
Although Sethi believes you should generally keep your housing costs under 28% of gross income, he acknowledges this may not be possible in all circumstances and has provided details on some situations when you may want or need to exceed this limit.
"If you live in a HCOL (high cost-of-living) area like NYC or Los Angeles, many people stretch the 28% number to 35% or even 40%," Sethi said. While this is not ideal and you still face the risk of not being able to cover your costs, you may have no choice if becoming a homeowner is really important to you.
Sethi also said you could spend as much as 33% of your income on housing if you have no other debt such as car payments or credit card debt. In these circumstances, you would be tying up less of your total income in monthly payments. But, of course, you'd also want to make sure you steered clear of these other debts during the time you were repaying the mortgage.
Finally, Sethi said you could consider spending more than 28% of gross income on housing if you expect your income to go up soon. You would want to be absolutely certain you would definitely see a salary boost, though, as you don't want to bank on making more money only to find out that doesn't happen and your house isn't affordable.
By following these tips, you can make sure your home purchase doesn't leave you so overwhelmed with expenses that you can't afford to do other things with your money that matter to you.
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