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Couple with $172K in debt uses credit cards to buy groceries — here’s the 1 mistake Dave Ramsey says is the root of their woes

After combining her finances with her husband’s, Michelle from Indiana discovered just how deep they are in debt.

Michelle called in to The Ramsey Show (1) seeking help on how to deal with this debt, which includes US$50,000 (C$70,000) in credit card balances and US$12,000 (C$17,000) for a personal loan. Most of the credit card debt belongs to her husband, who’s been using the cards to pay for groceries, utilities and other household items.

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But their car debt — US$45,000 (C$63,000) on one car and US$65,000 (C$92,000) on the other — is “upside down,” as Michelle explained to hosts Dave Ramsey and Rachel Cruze. In total, that’s US$110,000 (C$155,000) in car debt alone, not to mention the US$62,000 (C$87,000) in credit card debt and personal loans that Michelle and her husband have to deal with as well.

Ramsey was rather blunt when assessing Michelle’s problem.

“Your cars stole your food money,” said Ramsey. “And your food was put on a credit card.”

‘Electric cars suck at holding their value’

“This credit card debt is not due to irresponsible spending,” said Ramsey. “It is due to the irresponsible purchase of vehicles that you can’t afford.”

Michelle, who used to work as a nurse, receives US$21,000 (C$30,000) a year from long-term disability insurance. Meanwhile, her husband makes US$101,000 (C$132,000) a year and, aside from their other debts, the couple owes US$315,000 (C$444,000) on their mortgage.

This is an example of how one mistake — in this case, taking out auto loans they couldn’t afford — can snowball into more debt and make daily essentials unaffordable.

However, getting rid of their cars — either through a trade-in or private sale — is still going to leave them with plenty of debt to settle.

Michelle and her husband currently owe US$65,000 (C$92,000) on a Honda Prologue, an electric SUV, but the market value on Kelley Blue Book is only US$30,000 (C$42,000) for a trade-in, according to Michelle. On their other car — which still has US$45,000 (C$63,000) left to pay off — the market value is just US$27,000 (C$38,000).

That’s because “electric cars suck at holding their value,” said Ramsey.

And it’s not just the Honda Prologue. While all cars lose value the moment they’re driven off the lot, EVs lose their value faster than gas-powered cars. In fact, some EVs lose half their value within the first year, according to a new report from Wired (2).

Read more: Here are 5 expenses that Canadians (almost) always overpay for — and very quickly regret. How many are hurting you?

Why do EVs depreciate faster than gas cars?

“Depreciation remains the most expensive aspect of buying a new vehicle, and the variation between vehicle types and specific models is something consumers should consider when researching their next purchase,” Karl Brauer, executive analyst at iSeeCars, said in an article on the company’s website (3).

Thinkinsure.ca reports that the average electric car depreciates in value by 44.2% over five years (4), though some sources put this figure as high as 70% for luxury EVs. While the Jaguar I-PACE had the worst average depreciation rate for an EV (72.2%), the Tesla Model S had an average depreciation rate of 65.2%, the Nissan LEAF came in at 64.1% and the Hyundai Kona Electric came in at 58% (5).

As for the Honda Prologue, according to CarEdge, it will depreciate 49% after three years, with a resale value of US$29,701(C$41,880) (6).

So, why do EVs lose their value so quickly? Even with over-the-air software updates, technology is changing rapidly, particularly with batteries — offering faster charging or longer driving ranges — which means older models can become outdated more quickly.

Some buyers also have concerns about battery life. In Canada, a basic warranty of 3 years or 60,000 kilometres applies to electric cars (7), though EVs in the U.S. are required by federal law to offer an eight-year or 100,000-mile warranty. In California, this warranty extends to 10 years or 150,000 miles. Many EV manufacturers in Canada offer extended coverage that meets the U.S. standard, however.

If you’re looking for an EV that does a better job of retaining its value, you may be better off (at least at this point in time) with a hybrid. According to Driversnote, hybrids lose just 37% of their value, on average, after five years (8).

“The difference between buying a hybrid versus an electric vehicle could be tens of thousands of dollars in lost value,” said Brauer. In the hybrid category, Toyota dominates the rankings for retained value.

What EV car shoppers should keep in mind

These days, there’s a wide variety of EVs on the market, from luxury brands to cheap-and-cheerful models. Whichever you choose, many financial advisors recommend that your monthly car expenses should be no more than 10% of your monthly income.

A common rule of thumb is the 20/4/10 method (9), which means you make a 20% down payment, finance the car for four years (or less, if you can) and ensure total monthly car expenses don’t exceed 10% of your gross monthly income. Total expenses include not just the loan, but the cost of insurance, gas (or electricity) and maintenance.

After that, you risk becoming “car poor,” like Michelle and her husband.

While the federal government’s Incentives for Zero-Emission Vehicles program has been paused, there may be rebates, discounts or incentives from automakers available to you. If you’re buying an EV, be sure to look into whether or not you qualify for those incentives, as many come with income or vehicle requirements.

You should also consider whether you’ll have to pay to install a home charger (some automakers offer to install one for free with a vehicle purchase), as well as how many EV charging stations are available in your area.

In the case of Michelle and her husband, Ramsey and Cruze suggest they get a loan from a credit union to pay off the two cars and then sell them — even at a loss — and then each buy a used $5,000 car. Then they’d be about US$55,000 (C$78,000) in debt, as opposed to US$110,000 (C$155,000) in debt.

In other words, the cost of holding onto these cars is greater than the loss from selling them.

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Article sources

We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.

YouTube (1); Wired (2); Road and Track (3); ThinkInsure (4); iSeeCars (5); CarEdge (6); obvi (7); Driversnote (8); J.D. Power (9)

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.