Why Ramit Sethi Says People Miss the Mark When Buying a Home

It's important to think about the finances behind that decision.

The decision to buy a home is a major one. In fact, it's probably the single most significant purchase you'll ever make in your life. But unfortunately, financial guru Ramit Sethi says it's a decision a lot of people get wrong -- and for one big reason.

When emotions guide your decision instead of numbers

Buying a home is a huge undertaking. Not only do you have to cover a monthly mortgage payment, but you also have to cover expenses like property taxes, insurance, maintenance, and repairs. 

All told, the amount of money you spend to own a home might far surpass the amount it costs to rent a home. And your costs of homeownership may be far less predictable. 

That's why it's so important to make sure you can actually afford to buy a place of your own. In a recent tweet, however, Sethi relayed the story of someone who decided to buy a home because they felt like they were throwing their money away on rent. But as Sethi went on to say, when it comes to homeownership, it's often "about feelings, vibes, and almost never a true calculation of renting vs. owning."

He makes an important point. Many people like the idea of homeownership. And renting makes them feel frustrated. But that's not necessarily a good reason to buy a home.

Rather, Sethi insists, it's essential to run the numbers and compare the cost of owning a home versus paying rent every month. You may find that homeownership just isn't within reach because of the many added expenses involved.

How to know if you can afford to buy

If you're going to buy a home, it's essential that you make sure your total housing costs, including your mortgage payments, property taxes, and homeowners insurance premiums, do not exceed 30% of your take-home pay. Going beyond that limit could put you at risk of falling behind on not just your housing expenses, but your expenses in general.

Now, you'll notice the 30% limit does not include expenses like maintenance and repairs. That's because these expenses, unlike the others just mentioned, aren't as predictable. 

But even if you're able to stick to that 30% threshold, you should also have a robust emergency fund to cover unexpected costs related to your home, like things that break and need to be fixed. So when you run the numbers to consider whether homeownership is affordable to you, make sure to look at the big picture.

You might prefer homeownership to being a renter. But if it's not the right time to own, don't take that leap. Doing so could mean setting yourself up for a world of financial upheaval -- and a world of stress.

Finally, remember that when you pay to rent a home, you aren't throwing your money away. You're using that money to put a roof over your head. There's a lot of value in that, even if you're not the one whose mortgage is being paid down.