How One Financial Decision Changed Everything For This 35-Year Old Single Mom

June 06, 2018

As a financial wellness coach, I have the unique opportunity to dive deep into the finances of many different types of people with many different situations. Most financial advisors don’t have this perspective because they only work with “qualified prospects,” people with enough investable assets for them to manage. Because of our business model, we are able to deliver guidance to employees on every aspect of their finances from crisis situations to wealth building.

I want to share a recent client story about re-thinking your assumptions about the best way to handle what may appear to be a “little thing” that turns out to be a really big thing.

Borrowing from retirement to buy a car – good idea or bad?

A recent coaching relationship, Susan, originally contacted me because she was looking to take a loan from her 401(k) account to purchase a new car. Susan (35) works for a large corporation and earns around $80,000 annually plus bonuses. She is a divorced single mom with an 11 year-old daughter.

She was planning to buy a new brand Buick Enclave, which is a very nice SUV that would provide reliable, safe transportation for her and her daughter. It can carry up to 7 people, ideal for soccer carpool duty. Sticker price after trade-in: $40,000.

Susan’s plan was to take the $40,000 as a loan from her 401(k) because she would get a low interest rate, pay herself back the interest instead of to a bank, and have cash to buy the car, which would enable her to negotiate with the dealer for a better price. She had calculated the loan payment of $375 per paycheck (Susan is paid bi-weekly) for 5 years. On the surface, that sounds like a good plan. But I wanted her to dig a little deeper.

What’s your 5 year plan?

I asked Susan if we could take a step back for a minute to discuss her other financial goals and she agreed. Here’s how our conversation went:

Me: “What does your ideal financial situation look like in 5 years?”

Susan: “I haven’t really thought about it.”

Me: “Let’s break it down to make it more tangible and talk about some other common goals:

  • How much would you like to have in an account in case an emergency comes up?
  • Would you like to be debt-free besides your mortgage?
  • Do you want to put some money away for your daughter’s education?
  • You should have a plan to be on track for retirement some day.
  • How about travel or vacations?”

Setting 5 year goals

After discussing further, Susan decided to put her 5 year goals down on paper:

Me – “How does the car fit into this plan? Can you afford to be your ideal 40 year-old Susan if you buy this car?”

That got her thinking.

Financial psychology side note

As humans, we are constantly making intertemporal choices (inter – between, temporal – time periods), basically deciding to act on impulses (instant pleasure) or for the future (delayed gratification). The brain is an amazing organ. It has the ability to learn and remember, but that can work both ways. The more we make impulse decisions, the more inclined we might be to act on impulses in the future. The more we stop and think about how decisions impact our future, the stronger this part of brain gets.

The more we make impulse decisions, the more inclined we might be to act on impulses in the future. The more we stop and think about how decisions impact our future, the stronger this part of brain gets.

Why visualizing your future makes a difference in today’s choices

If we can’t visualize what we want the future to look like, we don’t have the context for what we could be giving up in the future. Susan’s car decision was impulsive — she was thinking about how it would make her feel good in the present but she wasn’t considering how it would impact her future. After understanding what she would have to give up (retirement preparedness, her daughter’s college plans, the trips she loves), her impulse turned into a thoughtful decision.

What she decided to do

So, what did Susan decide to do? After researching Consumer Reports and other publications, she purchased a 3 year-old Honda CRV for a little under $18,000. She gave up the dream car with room for the entire soccer team, but her new car rated better in safety ratings with less than half the payment.

She weighed the financing options with facts. The dealer offered her a better rate than her local bank with the option to make extra payments. Because her 401(k) loan did not allow this pre-payment option, she decided to use the dealer financing.

Now, she is able to fund her other goals. With the remaining $380 she would have paid every month, she did the following:

  • Opened an emergency fund and set up a $150 auto-deposit per month
  • Opened a separate vacation fund at the same online bank with another $150 going in each month
  • Opened up a College Savings account for her daughter with a monthly contribution of $50
  • Signed up to increase her 401(k) contributions every year by 1% to get her on track for retirement

It’s amazing how one seemingly small choice to drive a different car can make such a huge difference, but it did. What are you giving up in your future with the choices you’re making today?