The other day I was working up an article at a local cafe when I overheard a couple discussing whether or not they should buy a new car to “save on gas.” The wife made the comment, “I know we spend a lot on gas, but we don’t have a car payment.” I theorized from their conversation that they currently have a paid-for car, but are considering financing a newer car to save on gas expenses. Initially, the idea of spending money to save money sounds ridiculous, but after giving it some thought I wondered where the breaking point is, financially, to make this a wise decision.
The Real Costs of Car Ownership
With gas prices climbing we are consumed by how much it costs to fill the tank, but owning a car includes additional expenses often not considered when accounting for the “auto” budget category:
- Car Insurance
- Loan Interest (if financed)
Excluding depreciation (since it doesn’t directly affect cash flow), let’s compare the costs of continuing to operate our current gas guzzler with the expense of financing a new car. Now, I realize that gas prices fluctuate, MPG ratings change for highway driving vs. city driving, etc, but for this example we will assume everything remains the same – gas prices, costs to operate, etc. for at least one year. Both calculations assume $150 in monthly maintenance/car insurance costs, and the new car includes a $300 car loan payment.
As you can see, from a purely economic standpoint it does not make sense to finance a newer, more efficient car in the short term. Over time, as the cost of gas continues to increase, and the costs of ownership of the newer car come down (and the loan is paid off), the savings realized could be significant. However, it would take a lot of fill-ups at the pump to justify adding a car payment to your monthly budget.
The Costs of Being Green
One aspect I have failed to mention in my analysis is the environmental costs of continuing to operate a car with a lower MPG rating. As you can see from the example above, the “current car” requires about 320 gallons more fuel over the course of a year than the newer, more efficient model. Multiply that amount by several million drivers and you can easily see why demand for gas is so high, and why supply is spread so thin. For purposes of this example I have only used “real” numbers, but environmental costs are certainly something you should consider when making your own car-buying decision. It may cost you more in the short term, but in the long term you are saving money and helping the environment. As Kermit said, “It’s not easy being green,” or was that Al Gore?