Buying a New Car to Save on Gas Mileage

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
  • Depreciation
  • Maintenance
  • Repairs
  • 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.

costs to operate

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?

Comments

  1. This is a great comprehensive look at the cost of buying a new car. One thing that I didn’t see mentioned is the cost of the license tag and excise tax. I don’t know if all states charge excise tax on new car purchases, but mine does. It can be pretty steep too.

    Thanks for the link!

  2. Not many cars available these days for $300 monthly payment. Even leases for decent cars are more, thus making the gap even wider.

  3. You are so right about this! My husband got new car fever last July and nothing I could say or do would get him out of it…after finalizing this year’s first quarter’s household budget income/expenses I showed him how much he is working each month just to pay for HIS new vehicle (payment, insurance and gas) and it hit him like a ton of bricks. It is a sickening feeling. Hopefully we can get this monster paid off much much quicker!

  4. I know a lot of people fall for the old trap of wanting a new car for a variety of reasons (status, new car smell, save on gas), often none of them very good. Wanting one for green reasons is slightly better, but as you’ve shown, it may not make economic sense in the short term.

    I’ll stick with my 7 year old car with a 110k on it until it dies because I have no more car payment, and the insurance is super low. For me, that is the best decision.

  5. Yes, it does cost more to be green. Where it does make sense though is if someone has to buy a new car. Then you don’t have as big of a difference in terms of the car payment.

    My neighbour just had his car totalled and has to purchase a new (or used) vehicle. Here to payment costs would only need to be compared between the vehicles he would be choosing between, not what he was paying on his old vehicle.

    The Frugal Canuck
    http://thefrugalcanuck.blogspot.com

  6. I think that maintaining/repairing an older car may be more per year than a new car (in some cases). And also, most insurance companies give a new car discount the first year.
    Other than those things, I agree.

  7. “Frugal Canuck” is right. There’s a saying — the cheapest car is always the one in your driveway. But when the decision to buy a new car has already been made, and you’re picking between models, the more efficient ones work out to be cheaper.

    Also your calculation assumes switching from a 20 mpg vehicle (e.g. midsize SUV) to 35 mpg vehicle (e.g. subcompact). Anecdotally, people I’ve encountered who want more efficient vehicles haven’t been willing to make that big a change. They want to keep the same kind of vehicle but wave the “hybrid” wand at it, or maybe downshift one category, like large SUV to midsize SUV. The gas savings are much less here, so it’s an even worse deal to make this kind of change.

  8. Dang, I heard a similar conversation this morning on the train between a group of business people and was going to write something up. However, it was a woman with a GMC Yukon Denali (maybe 15mpg?) thinking about a Scion (maybe 35-40?). Maybe I’ll write something anyway and link to this.

  9. Lordy– WE DID THIS! We moved 25 miles out of town last spring, and decided we needed a smaller car for me to drive to work so I wouldn’t be driving my Durango. Our dumb move was keeping te Durango AND buying a new Kia. Instead of 11-12 mpg, I now get 26-30 BUT…. the savings on gas don’t near make up for the new monthly payment we have. It’s now our last debt to pay off, and WHAT A STUPID PURCHASE WE MADE!

  10. What about the resources and energy required to produce a new car? A whole lot of steel, plastics and oil goes into it. Even if I could afford a newer, more efficient car (which I can’t), perhaps it makes more sense to work to improve the fuel efficiency of my current vehicle.

    I drive a 12-year-old Ford Ranger with 200K on it and am getting ever closer to 30 mpg by constantly refining my driving habits.

  11. This must be a frequent conversation, because I overheard this too last week. I kept thinking the same thing and how it just didn’t make sense. What does make sense is not buying the SUV gas-guzzler in the first place and picking a car that is economical from the start, regardless of what the current gas prices were. We picked our cars because they would give us the best gas mileage. They aren’t the most attractive and aren’t my dream cars, but they do what we need them to.

  12. ==> AMY:

    Our reasoning for buying the SUV in the first place (5 years ago) was two-fold: I have 4 kids, and needed a vehicle that could hold a family of 6. Also, we live in Iowa. If you’ve ever been in an Iowa winter blizzard and live in the country, 4-wheel drive can be a necessity.

    Sometimes those of us with larger families can’t justify “economical” and still find something we can fit our family into. People shouldn’t automatically assume that all of us with SUV’s are doing it for the wrong reasons.

  13. Great analysis! Based on your numbers, it looks like the breakeven would be at around 28,000 miles driven per year. Most people don’t drive that much. My family currently averages about 20,000 miles on each of two cars. This should decrease as our commutes are shorter due to recent job changes.

    Greg
    http:\www.HomeEnergyLiving.com

  14. I’m glad you addressed being green here. Many people see being green as costing more, being less convenient, and less comfortable.

    It would be interesting to see the numbers worked out to account for an increase in gas prices over the life of the car loan vs. a steady $3.50/gal.

    @mickey – you’re so right!!! A lot of petroleum products go into making a new car, plus the gas used by the factory workers to get to work, the electricity consumed by the factory, etc.

  15. I have argued to people for 10 years that the variation in gas prices is insignificant compared to all the other costs of car ownership — especially for people who move from one car payment to the next. Your analysis proves this out again. Car payments, upkeep, and insurance are far more expensive than fuel for most people, but those aren’t the costs about which most people complain. Go figure…

  16. In the short term buying a car will cost more, but over time it can save money. When the car payments end the fictitious family will save a $1125 a year. If the plan is to keep the car for a long time and factors like the amount of miles driven change a new car might be a good option- as long as the family realizes that it will take up to 5 years to start seeing any differences.

  17. For the current car, you forgot to include repair costs, and lost time from work to handle said repairs. Granted, you didn’t mention how old this proposed car is , so those concerns may be minimal.
    But if we’re talking about an 8-9 year old Dodge, then they could be substantial! They might even be enough to push things over into the new car’s favor.

  18. We commute 45 miles each way to work everyday so we need reliable transportation and we live in an area that offers no reliable public transportation. So we traded our Diesel Jetta for a Honda hybrid when diesel prices went through the roof and had no signs of going down. We are getting the same gas mileage (50 mpg) but our car payments went down (the Honda was cheaper). Plus the oil changes on the hybrid are cheaper on the Honda than they were for the VW. Also we scored a great tax break for the hybrid in NM. No sales tax, and we also got the federal tax credit for 2007. So for us the choice was a no brainer.

  19. 20 years ago I did this exact calculation when gas went to $1.20 a gallon. Moving from a 1973 2 door Plymouth with a v8 to an almost new 2 seater Honda CRX-HF was break even on the cost of gas versus payments but that Plymouth had 120k on the clock and was probably going to start costing more in repairs. The smaller engine kept insurance costs almost the same so there were no hidden extras. That CRX-HF was trouble free for the first 100k miles and at 55MPG versus 16MPG it was far greener to boot. I’ll never regret that car and love the Honda Insight that it inspired me to drive now. At 81MPG for the lifetime (so far) at 150k miles, the Insight has also been a great car and this one I did pay cash for.

  20. Also it should be mentioned that buying a new car, especially a US model keeps money in the economy to keep things moving along. There is also that piece of mind that we you have with the additional safety features, such a side airbags and stabily control that may keep its occupants safe in an accident, therefore avoiding high medical costs.

  21. Our SUV has needed some expensive repairs (and the transmission seems to be going) and we still owe 1.5 more years on car payments. We drive it very little on a daily basis but use it to drive from GA to PA and back at least 3 times a year so we need something reliable. Does it still make financial sense to keep it???

  22. ok… what if i’m looking at buying a cheap, older car (for a 2nd car) that would get 10-15 mpg more than my SUV. there would be no car payment on either, just registration and insurance costs… i know it would depend on how much i drive, but at what point would it make sense to “spend money to save money”???

  23. Great focused analysis. I have seen and heard things like this before. Here are two observations and a comment on my personal situation to consider.

    First, sometimes folks just want to have an excuse for a new car. The one that most often is cited is no repair bills (but mpg could be used as well). The problem is that the monthly payments aren’t compared with the monthly repair costs. If they were, they would see that on an annual basis, people pay $5,000 for a new car to avoid $800 a year in repair and maintenance for an older car.

    Second, we don’t tend to look at our total cost of transportation. This is where we should have our focus. The issue isn’t 15mpg versus 35mpg, as if driving our car is the only option available. The issue is the amount of money we spend getting ourselves from one place to another. If we move nearer to where we go often, then perhaps the need for a vehicle diminishes considerably or disappears altogether.

    Personal Comment:

    The best approach to saving money on gas is to use less of it to begin with, and use it more wisely when we do.

    I live in the country, and work from home. Some folks go to town as part of their entertainment, whereas I stay at the house for two weeks or more without using my vehicle. I drive to town when I need to, not for discretionary things. How much gas (and cost) do you think I save by not operating my car for two weeks or more? Plenty, regardless of my mpg.

    I have cut my local consumption of fuel by about 75% from what it was three years ago. That is a huge dent in my overall transportation cost.

    If we think hard, there are dozens of ways to save money on gas, save gas, and reduce our cost of transportation. We are only limited by our imagination and our ability and interest to sit down and carefully analyze the situation.

    Thanks again for a clear analysis on this topic.

    Clair

  24. Do the calculation again at $4.60 gas (many parts of the country) and with a $360/mo payment ($19-20K car) and the gap shrinks to $1K per year.

    In my case, it made sense to buy new even if I take a couple grand hit down the road on re-sale and/or a grand a year in overage. Of course, one major repair on your used car and there goes the savings.

    Also, no one has brought up safety differences in old vs. new. Everyone says “just get a used Honda”. Well, I have a used 1994 Honda and I’d not be too excited to get in a crash with it. My new 2008 Honda Fit has tons of cargo space AND industry leading crash test ratings…plus I push the upper 30′s on MPG and think an efficient car from a reputable manufacture should hold its value better than most over the next few years. What value do YOU put on safety?

    Try running that calc at $8,$9,$10?

    $8 gas the new car edges ahead, $9 gas the new car wins by $350 a year, $10 gas the new car goes out to $700 a year better…of course, if/when we hit $10 a gallon, there will be so many fundamental changes it’s hard to really run an estimation as public transit costs, repair costs, everything gets more expensive.

    I am also constantly amazed that people who complain about gas prices still drive 80mph on the freeway…

  25. I’d say for 90% of vehicle owners, buying a different vehicle for gas savings will NEVER add up in the long run. Especially the motorcycle excuse. Do the math and for every $100 spent on a motorcycle it requires about 900 legit replacement vehicle miles to make that $100 up. It would take 1,800 miles a year just to make up average insurance cost for the motorcycle and more depending on cc’s and rider age. Most gas excuse buyers quickly learn that riding a motorcycle on a daily basis isn’t exactly simple to accomplish. Rain days, steaming hot days, transporting family days. Gear adds up, repairs, tires, general maintenance. Add in all the extra “fun” miles and you are looking at 8 years to recoup the base cost of a $6,000 motorcycle and that’s if you paid cash and rode it as much as possible instead of the taking the vehicle. Your average rider will most likely take 12 years to even begin seeing a positive effect and that’s still pushing it.

    The formula is simple… Say for $100 at $4gal you get 25 gallons of gas. At 20mpg in the vehicle you get 500 miles out of that 25 gallons.

    Average motorcycle gets around 50mpg, so you still have to buy 10 gallons in order to make up that 500 miles that could have went toward the vehicle. 10 gallons is $40. You only made up $60 of the $100 spent. Now you have to make up that $40 which would have been another 200 miles on your vehicle. 200 miles is another $16 worth of gas for the bike. You only saved $24 of the $40. Now you have to make up another 120 miles for that $24 which costs you another $9.60 for motorcycle gas. It just keeps going until the last dollar is made up which means it will take around 900 miles to make that $100 up. So, $3,000 motorcycle will require 27,000 miles to simply make up the base cost of it. Add gear, insurance, tires, repairs, maintenance, oil.. etc.. just keeps adding up.

    Same formula applies to new vehicle price differences yet the mileage is far far greater as the difference between old mpg and new mpg decreases.. say 20mpg going to 35mpg vs 20mpg going to 50mpg.

    Bottom line…changing vehicles and buying motorcyles just for gas reasons will never make economic sense.

  26. Not long ago I had to “talk down” a relative who was about to spend $20k on a used Prius. Once we crunched the numbers I pointed out that he would be spending $450/month to save $150/month in gas.

    Shortly afterward, the price of a gallon of gas tumbled from $4 to $1.35. Problem solved.

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