Ramit Sethi: 4 numbers you need to track if you want to be a millionaire

Ramit Sethi's critical four numbers to track

According to Sethi, financially successful individuals and families only need to track four key aspects of their personal finances:

1. Fixed costs
2. Long-term investments
3. Savings
4. Guilt-free spending

“You don’t need to track [financial] ratios or the price of ketchup, ever,” he says. Track these four numbers and you'll spend less than one hour per month on your finances.

What are fixed costs

For Sethi, the most important number to track is your fixed costs.

Fixed costs includes essential items that can’t be avoided and recur regularly, such as rent, mortgage payments, property taxes, car payments, utilities and essential food.

According to Sethi, fixed costs should take up no more than 50% to 60% of your family’s after-tax income. He also recommends adding a small margin of safety for unexpected or hidden costs, such as car repairs or home maintenance.

Long-term savings

With the bulk of your monthly expenses tracked and controlled, Sethi says you can dedicate 10% to long-term investments

If you ask Sethi, long-term investments are the essential ingredient for success. “That money compounds. It will grow like you wouldn’t believe,” he says. “There will be a point where you will make more from your investments than from your income.”

Most people will prioritize contributions to their registered retirement savings plan (RRSP), when dedicating earnings to long-term savings. This is a good strategy, but it requires you to develop a plan for how those savings will grow over time. In general, it's best to keep your investments in relatively safe, stable and diverse products, such as a balanced exchange-traded fund (ETF) or stock portfolio.

5 low-cost index funds for Canadian investors

• iShares S&P/TSX Capped Composite Index ETF (TSX:XIC): This ETF tracks the performance of the S&P/TSX Capped Composite Index, providing exposure to a broad range of Canadian stocks.
• Vanguard FTSE Canada All Cap Index ETF (TSX:VCN): This ETF seeks to track the performance of the FTSE Canada All Cap Index, which includes Canadian large, mid, small, and micro-cap stocks.
• BMO S&P/TSX Capped Composite Index ETF (TSX:ZCN): This ETF aims to replicate the performance of the S&P/TSX Capped Composite Index, offering diversified exposure to Canadian equities.
• Horizons S&P/TSX 60 Index ETF (TSX:HXT): This ETF tracks the S&P/TSX 60 Index, which consists of 60 of the largest and most liquid stocks listed on the TSX.
• iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC): Similar to the first one listed, this ETF also tracks the performance of the S&P/TSX Capped Composite Index, providing exposure to a broad range of Canadian stocks.

Whether you opt for stocks, ETFs or alternative investments, such as artwork or real estate (say, using real estate investment trusts, known as REITs), the key is to open and become familiar with an online trading platform. Good options include:

• Qtrade: Customers get free trades on hundreds of ETFs, while stock trade fees can be as low as $6.95 for elite account holders. The best part is that opening a new account can earn you up to $150 cashback. Open a Qtrade account today.
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Savings (hint: separate from your long-term savings)

Sethi suggest allocating between 5% to 10% towards savings. This second savings account includes funds dedicated to emergencies as well as near-term ambitions such as a down payment on a home, going to school or buying a car.

Since you'll access these funds in a shorter time-frame, it's best to keep in the funds in an accessible account where the funds are safe. Good options include guaranteed investment certificates (GICs), as well as Tax-Free Savings Accounts (TFSA) and high-interest savings accounts (HISA).

Guilt-free spending

With 80% of your family’s after-tax income deployed in these three segments, the last segment is for guilt-free spending. Depending on your budget, this could be between 20% to 35% of your monthly take-home pay.

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But is it possible to save?

Let's get real: Higher costs have suppressed the amount ordinary people can save and invest. A recent Money.ca report, Greedflation, highlights how inflation and corporate greed is taking a larger bite of our paycheque. As a result, Statistics Canada reports that in March 2024, the average personal savings rate was 6.20%, significantly lower than Sethi’s target of 10%.

It appears the odds are stacked against the average family. Nevertheless, households that can beat the odds and manage to save at least 10% of their after-tax income can achieve millionaire status.

Assuming your household can save 10% of the median income of $70,500, that means your household can invest $7,050 in low-fee, diversified basket of equities, such as a low-cost index fund. If that fund were to track the S&P 500, your investment would've delivered around 10.3% annual growth rate over the past seven decades. Do this and your household could achieve $1 million in assets within 28 years.

Summing up Sethi's 4 number strategy

Sethis’s strategy can be summed up as simple budgeting and disciplined investing. On paper, this looks like a robust roadmap to riches, but the economic struggles faced by ordinary families in 2024 could put some of these simple targets beyond reach. While Sethi’s strategy is simple, the application of this strategy would require most households to commit to above-average savings. It's hard, but not impossible, meaning Sethi's four number strategy could actually help you become a millionnaire.

— with files from David Saric and Romana King