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19

The Agony of Knowing Better: Giving Financial Advice in the Face of Adversity

For me, today was a huge lesson in reasoning.

The Crisis

I got a call this morning from my mom: my sister’s 1991 Subaru had died beyond repair and now my sister was trying to buy a car. My mom explained that they were at the car dealership now and she’d already given $1000 to my sister toward her new car. This upset me greatly.

What followed were a series of events where I was simultaneously trying to shake some sense into my sister and get my mom on my side.

My sister (Ramana) makes about $26k per year at only 21 years old. She goes to college full-time on her own dime. Mom is an avid Dave Ramsey listener and fan, so she should theoretically be on board with me about this whole situation. As I see it, logically, Ramana is is no shape to buy a car and shouldn’t be looking for any car over $3000 if she must buy one. But no one would hear me out. I was frustrated that they weren’t thinking or listening.

I was angry at my mom for giving my sister the money without conditions, like, “you must buy a car for cash” because my mom clearly knows better. I was angry at my sister for immediately jumping to the conclusion that she needed a new car. I was angry that no one had consulted me first, but I suppose that’s rather arrogant of me. And most of all, I was angry that an opportunity to buy a new car would even be available to my sister at her age and place in life.

They told me that they were looking at a 2007 Toyota Corolla LE with 39 miles on it (it had been a rental car). After some explanation, I learned that they had picked the Toyota because they knew that Toyotas were great cars that devalued slowly compared to most cars. They picked it because it was “only” $14,999 and not technically new, and because Ramana thought they could make a down payment and pay the rest off quickly. My mom also explained that she had already said she wouldn’t co-sign on the loan because she didn’t want it in her name.

I then realized that Ramana was trying to do the right thing, but really didn’t know what she was doing. My heart went out to her.

A surprise turn of events gave me some time to make my case in person, rather than on the phone while the salesman was eagerly drowning them in persuasion. My sister was rejected for a loan because of a bad debt on her credit report. They then proceeded to go to the credit union to investigate this bad debt.

The Reasoning

I live a block away from the credit union, so after resolving nothing at BECU, they came by my apartment. Because Ramana currently needs a car for her spread-out life of work, home, and school, she basically had to get one today. I tried persuading her and my mom to share my mom’s vehicle for a couple of days until she could find a good used car to buy with cash, but Ramana scoffed at this idea. Because of her urgency, she wasn’t thinking clearly.

It really made me sad to watch her stressing and bartering over the phone, looking more and more desperate. She made over a dozen phone calls to my dad, the car dealership, and various insurance companies, trying to concoct a plan to buy this silly new car.

What saddened me the most was how much propaganda she was reiterating to me once she actually settled down and talked with me about this decision. She argued that it was more sensible to buy a new car that had no problems, that she would buy full-coverage insurance for it so that she’d never have a problem should something happen, and that she could definitely afford the monthly payments. Disturbingly, it seemed to me that the decision had already been made, without a moment’s second thought. I tried to convince her against this rash decision in basically every way I could think of, refuting her arguments one by one:

You argue that the car is new and nice, but it will still depreciate rapidly for the next few years like every other car.
You argue that you can make the monthly payments, but you won’t be able to pay off this car as fast as it’s depreciating, and in a couple of years you’ll be upside-down on the car, still paying for it far and beyond what it’s worth.
You argue that you can make the monthly payments, but with a high monthly car payment, you will be FORCED to work. You will have no choice, because you have to make this huge payment every month. You won’t have the occasional choice between an extra shift at work or an extra hour studying. You will be a slave to your car payment.
You argue that it’s a sensible price, but the price of this car is not sensible, nor is it only $15k. It will be more like $18-20k when all is paid off, if you’re lucky.
You argue that you will buy full-coverage auto insurance, but that doesn’t make the price of the car any better! If you get into a wreck, especially a bad one, you’ll not only cut the value of your car significantly, but pay HIGHER insurance and STILL owe thousands on the now-highly-devalued car.

I looked up the Kelly Blue Book value of a 2005 Carolla to prove to her that the ‘07 car would devalue $5000+ in only two years! I felt like she wasn’t listening. And while she was out on the deck, I scolded my mom for not having been the authority here and stopped this frivolity before it led them to a car lot.

I then told Ramana what I would do in her situation: 1) find a reliable semi-old car and buy it with cash, 2) sell the broken car for parts and 3) snowflake those little earnings toward my savings which would be depleted from the car purchase. Then I would sell the car in a couple of years for the same price I bought it for and buy another slightly newer used car for the same price.

(This plan does work. You could potentially buy, for example, a used $7000 Honda and never pay more than that for the same car [only newer] perpetually, essentially always driving sort-of-new cars forever without paying more than your initial investment, save for inflation.)

The Resolution

When they left, I felt deflated. I had tried reasoning from every angle and had been harsh to both of them in my frustration. I’ve been thinking about this all evening. I wish I had been better at clairifying my point to Ramana while she was here.

It’s not that I think she doesn’t deserve a nice car! Or that I think she’s stupid for wanting one. This is a mind-shift we all need to learn. What she REALLY doesn’t deserve is 5-10 years of ridiculous debt on top of the struggles she already deals with such as school payments and regular bills. For someone in a lower income bracket as she is, a $15,000 loan can be the death of her dreams. That is why I was so harsh with her.

I think she deserves only the best, and that’s why I’m so adamant about her buying a used, older car right now. The VERY BEST for her would be to buy something she can use now to safely get from A to B, and to therefore save tons of money to invest in her EDUCATION and WELL BEING now - so that later she can buy whatever she wants. At our age our investments should be in our lifetimes, not in cars.

Triumph

Later this evening, Ramana found two older Toyota Carollas on craigslist, a 1997 and a 1994, both for around $3000. She actually called me to run the details of each car by me before calling the car owners, which just completely warms and tickles me. After some discussion, she decided that she could borrow another $1,500 from mom and pay that back intensely so that she’d own the car outright in a month or two.

I am so proud of her. And I’m glad my words got into her brain and moved her soul to do what’s ultimately best for her now and for her future.
Edit 02/22/08 - Ramana bought the 1994 Camry and completely loves it. She’s also out of debt and has her credit cleared (it was a mistake). Things couldn’t be better for her, and I am SO PROUD.

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Comments

3 Responses to “The Agony of Knowing Better: Giving Financial Advice in the Face of Adversity”

Emily on February 20th, 2008 6:17 am

Hi! Thank you for linking to me and I am so glad to hear that the story turned out well. I am a big believer in buying used just like you described. It really does work and we’ve never lost money on a car that way.

good luck to your sister!
shanti on February 20th, 2008 1:58 pm

Hi! You’re welcome And thank you!

Yeah, it’s a big relief that the story has a good ending. She’s going to go buy the 1994 one today (way less miles) and I’m just so proud
CarFan on March 11th, 2008 11:36 pm

What a great and inspirational story. You had all the right argument and this is definetely the right choice for about anyone. I don’t really see any point in buying a new car only to see it devaluate by a huge amoutn in the first few years when you can perfectly get a 2+ years old car at close to half price. And as you mentioned, all extra cost add on as well, like interest, car insurance ect.

People today give way too much importance to their social status which they think is determined by what they wear, drive ect. And with a society which is deeply indebted, we should definetely go back to the basic of getting things we can afford and will actually have a better life for it.