Would you spend $20,000 to save $100 per month?

by Kevin on June 30, 2008

BMW X5 Limo

(Photo by Piutus)

As we all know the price of gas has gone through the roof. The larger and less efficient your vehicle, the more pain you are feeling. The further you drive, the more pain you are feeling.

Some people are thinking of trading in their older, inefficient vehicles for something new and efficient like a smaller car or a hybrid vehicle.

There’s a major flaw to this plan.

It all boils down to this question: Would you spend $20,000 to save $100 or $200 per month? If you have to sell your SUV at a loss (highly likely), buying a new more efficient is going to cost you a ton of money. If you have to finance the purchase, you’re hurting yourself even further.

Let’s say spending $20,000 saves you $200 per month. Not taking into account interest, your payback period (the time it would take to earn your money back) is 100 months… or 8 years and 4 months. By that time, your new car is pretty close to needing replacing.

Financing just makes the situation worse. For example, if you must finance your new Toyota Prius at $400 per month you may only save $150 per month in gas. That’s a losing proposition. If you have to trade in your SUV (and take a loss on the trade in), that’s an even worse financial position.

But gas is killing me, what can I do?

You’ve got a couple of other options other than purchasing a new car. Obviously try driving less and consolidating trips. Don’t go to the grocery store, come home, and go back out to the home improvement store. Car pool with other people in your neighborhood or office. If you go to lunch with your co-workers, ride together. If your city has quality public transportation, consider yourself lucky and use it. SquawkFox also gives us 10 tips to save money on gas.

Just because gas is going up and pinching your budget, you don’t have to look just at your car costs to save money. Go back to your budget and see where you can cut — less weekend movies, less high end groceries, turn up the A/C during the summer, etc.

Gas prices aren’t going down any time soon, so you need to make some major changes in your life. If you need to replace a car, then go ahead. But you may be better served by buying a used car that is a few years old (and thus costs much less than the new hybrid). If the used car is $10,000 and the hybrid is $25,000… that’s a $15,000 difference. Again, if the hybrid only saves you $100 or $200 per month in gas it is going to be quite a while before that purchase pays off.

Or maybe you can get a scooter. I’ll talk about that tomorrow. In the meantime, tell me what you’ve done to adapt to higher gas prices.

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klein June 30, 2008 at 9:18 am

Ever here of a little something called a Trade-in? Chances are good that you car payment wouldn’t change that much and you’d only tack on a little more to the loan. That would definitely be worth it.

Kevin June 30, 2008 at 9:25 am

@klein: I completely disagree for a few reasons.

1. Everyone should be striving to -not- have a car payment.

2. Trading in your car is typically one of the easiest ways to get ripped off. The reason dealerships make so much money is not just new car sales. They make a profit on every used car they sell, too. Money that could be in your pocket rather than theirs.

However, if you could trade in for the actual cash value, keep the payment the same, and keep the loan length the same… AND get better gas mileage, that is a good situation to be. Anything else is still throwing good money after bad because you’re either losing money on the trade or losing money on extending the financing.

I neglected to mention this, but you also need to look at insurance costs for new hybrids as well. Any new car, typically, is going to have higher insurance than older cars.

Ricky June 30, 2008 at 11:40 am

Another point to consider is right now most dealers wont even take large vehicles as trades. I completely agree with you Kevin. Trading your vehicle in the interest of fuel economy is almost never a good idea. Unless you are making a 100% lateral trade and you will be netting higher gas mileage in the end.

Kym June 30, 2008 at 5:36 pm

I own my car outright (no car payments), and although it’s 5 years old, I’ve only got 25k miles on it. The gas price increasing so much so quickly has forced me to redo my budget many times, but I’d rather spend $x amount more per month on gas rather than get into having a car loan and payment to deal with. When this car’s life is nearing its end, then I’ll get a new (or newly used) fuel-efficient car. The trade-in value on my car wouldn’t be much towards the cost of a new hybrid (my car new only costs around $13k).

This is a great post though – I know many people considering taking on new car loans just to save money on gas, without thinking about the overall cost.

Cindy July 2, 2008 at 4:58 pm

Understanding the factors that affect your gas mileage is key to optimizing your mpg. If you have decided to keep your gas-guzzling vehicle, this is particularly important. I found some great gas saving tips on http://www.creditinfocenter.com in the “budgeting” section of the site recently that I have followed, and have improved my gas mileage in my older vehicle significantly. Every dime helps!

Justin July 4, 2008 at 3:13 am

One thing you seemed to have forgot to mention is that you can get your car converted to run on cooking oil, bio diesel or gas/propane. This should cost a couple of grand but could save you a bit of cash in the long run especially if you’re driving one of those giant SUV type vehicles. These links should give you an idea

Michael July 29, 2008 at 11:10 am

Thinking only in terms of dollars saved isn’t the entire point. Conserving fossil fuels is also important. It’s irritating to hear commentators talking about oil “production” when no one is “producing” it– we are extracting it and depleting supply. We’re burning through our capital, in other words.

I happen to have an inefficient car, but I drive it very little, relying on trip consolidation, biking, and public transportation. I know I’m fortunate to be able to restrict my driving, but I think a lot of people could drive a lot less and still be living fine lives. Part of the problem people have is that they want the image of having something new– I would like to promote an new aesthetic, of preserving and conserving. New cars are very wasteful in terms of the resources entailed in their manufacture.

Drive less, folks.

Kevin July 30, 2008 at 10:58 pm

@Michael – I’m responding back to this tomorrow with a post at 7am. Hope you’ll come back to read it!

Rudent Cuffler March 24, 2009 at 1:08 pm

I think Hybrids are worth the money. Even though it will take a long time to regain the money you spend on an hybrid, you will still be helping the economy.

BY A HYBRID!!!!!!!!!!!!!!!!!!!!!!!!!!!

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