Don't Make a $5,000 Mistake

Earlier this year, in a single month, I got two phone calls from separate people that were in the process of spending thousands of dollars, as an emotional reaction. I don’t blame them for jumping to that conclusion. When something unexpected happens and we are overwhelmed financially, our first idea is to take out a debt. We start to justify all the reasons why we should head to the bank and sign our name on the dotted line. It is hard to get real clarity. Why is this? Well, money issues are personal and deeply emotional.

If you ever had to figure out what to do when you didn’t have the money to handle a situation, you can relate to these two people. I can relate too. Being in this situation can make you feel helpless, but it doesn’t have to. Most of us tend to have credit to lean on. When you start to change your money situation, all of sudden debt doesn’t seem like the best solution. You can not solve your debt problem while creating more debt. That becomes crystal clear, once you commit to digging yourself out of your current circumstances.

In situations like this, the hardest thing to do is sit and wait. Believe it or not, your emergency might not be as urgent as you think it is. Waiting until you are not anxious, uncertain and enraged can save you thousands of dollars. Time will tell if your emergency needs your financial attention now or months from now.

Often times, when we sign for a loan to solve a financial problem too quickly after a situation, we regret it a couple of months down the line. I have seen this several times with car loans. When a car is wrecked, we often head straight to the dealership, without waiting for the emotions to pass. I hate to say it, but many dealers love an emotional buyer. If we wait and weigh the numbers, we might make a different purchase.

Let’s look at the stories of Lisa, Kris, and Toni. (These are not real names. It is all in fun.) Poor Lisa, Kris, and Toni each were in car wrecks that left their cars unusable. They had nothing to drive. Needless to say, they were used to having easy access to a vehicle whenever they wanted. All three drove back and forth to work and to run errands. All worked in the city and lived in the suburbs or on the border of the city.

Lisa couldn’t imagine not being in a car. The insurance company told her that her car wasn’t salvageable. The insurance company gave her a rental. The clock was ticking on when she needed to return the rental. The pressure was on. All day and night she looked online to see what car she should buy. Two days after her accident she went to the dealership. Her last car had $15,000 left on the note and she had bought it brand new. She went with her first instinct and returned to the dealership where she bought her last car. After seeing a few cars, she decided to get the newest model of her last car. She signed a loan and left with a new car and a debt of $28,000. Now Lisa is $13,000 more in debt than she was a week ago.

Kris, on the other hand, decided to wait before going to a car dealer. She had been paying off debt and didn’t want to make any rash decisions. It was hard for Kris at first. She had to learn how to use public transportation and Ubers to get around. Kris, too, had a $15,000 loan balance on her last car that was totaled. After a month, Kris had done a lot of research and ran the numbers. She didn’t want to create more debt for herself, but she also was nervous about another month without a car. She went to the dealership and negotiated. She took her time and shopped around. In the end, waiting paid off. She could look at the numbers and not only the emotions. By the end of the month, Kris drove off the lot with a used car and a debt of $15,000. Now Kris is no more in debt than she was a month ago.

Finally, let’s look at Toni. Like Kris, she waited. She waited longer than a month. She was committed to not being in debt. She was currently paying off her debt and had come so far that she refused to go backwards. Since her car was totaled, the insurance paid off the balance on her loan. She no longer had a car note. It felt really good. Toni decided that she didn’t want another car note. So, she saved every month for eight months and committed to taking public transportation and Ubers. She made it through the winter and rainy days. In the end, she saved $6,000. She took the cash and bought a used car. Now Toni is $15,000 less in debt than she was 8 months ago, because she was patient.

Quick Recap:

Lisa is now $13,000 more in debt.

Kris is now $0 more in debt.

Toni has paid down $15,000 in debt, by not getting another note and paying cash for her next car.

These three stories are not far reached. I have seen all three happen to clients and non-clients of mine in the last 12 months. This kind of situation could happen in a lot of scenarios, for example home appliances, travel, and home repair. Many times, getting new debt to solve a problem seems practical, but the longer we sit and wait, our justifications don’t work. The key is giving yourself time to breathe and think before making those decisions. One signature can stay with you for years.