Buying A Car To Save Money

Cars that get over 40 miles per gallon in fuel efficiency are, reportedly, becoming all the rage, with more models from American and foreign car makers being introduced at the latest Detroit Auto Show.

So I got curious, having just started a 18-mile-each-way commute, what exactly are the savings one can achieve by buying a more fuel efficient car? I assumed a situation faily like mine: My car is paid for and costs me only minimal maintenance to keep up (a 14-year-old Toyota Camry) and a 20 mile each way commute.

Say you’re considering buying a new car which gets 40mpg for $20,000. That seems moderately standard for these cars. Assume a 40 mile daily round trip commute, and an additional 40 miles of weekend or additional driving. Assuming a current care actual efficiency of 20mpg. Assume the price of gas goes up to $4/gal. How long would it take for you to make up the cost of that new car in fuel savings?

I calculated savings as follows:

(([Daily Commute]/[Old MPG])-([Daily Commute]/[New MPG])) x [Price of Gas]) = Daily Gas Savings

[Cost of New Car]/([Daily Savings] x 6 x 52) = Years to make up cost of car

How long would it take? 16 years.

Then I decided to go at it the other way. What changes would allow me to pay off the expense of a new car in gas savings over a normal financial window of five years?

- If the cost of a new car gets below $6,500
- If the cost of gas goes over $12/gal
- I tried coming up with an increased MPG efficiency answer, but it’s impossible. Even if you could get 100,000 MPG, it would still take eight years (assuming gas prices of $4/gal) to pay off the expense of a new $20k car via gas savings. If you assume a 100MPG car and seek for the gas price which get you to break even in five years, you need a gas price of $8 per gallon.
-If you vary the length of commute, a 130 mile daily commute (assuming 780 miles per week of driving total) would allow a $20k car to pay for itself in gas savings in five years with gas prices of only $4/gal.

11 Responses to Buying A Car To Save Money

  • Rick says:

    I also performed this calculation before I purchased my new car 5 years ago. I found that is was the same way. I didn’t really have a choice with my car at the time expiring at a quickening pace. Needless to say this calculation did figure into my purchase but was low on the priority list.

  • Jacob Morgan says:

    This applies to the environmental impact as well. Getting rid of an older, less efficient, car by replacing it with a newer one ignores the mountain of ore and coke, thousands of gallons of water, bauxite, thousands of Kwh of electricity, crude oil, etc., required to make the iron, smelt the aluminum, refine the plastics, etc., that go into that more efficient car.

    If anyone wants to conserve nature they’d do well to focus on durability and longevity as well as, or even more than, energy efficiency. Would be interested in this sort of an analysis regarding energy efficient light bulbs.

  • MarylandBill says:

    I agree that in general, it makes little sense to buy a new car just to improve your gas mileage… except maybe perhaps if you currently drive an original Hummer or other similar vehicle that barely gets double digit gas mileage.

    That being said, I would point out that the analysis is flawed in a couple of ways. The most basic flaw is that it assumes you would keep the Camry for another 16 years. Now, assuming you have owned the Camry since it was new, and that your driving habits have remained constant (probably a big if), your Camry should already have about 175,000 miles on it. By the end of 16 years it will have about 375,000 miles on it. Now toyota makes a decent car and engine, but after a car already hase 175,000 miles on it, you can be sure that some of the maintence over the next 200,000 is going to be more than minimal. If the alternator and fuel pump haven’t been replaced already, they will be soon, likewise you can expect at least one new or rebuilt transmission and maybe even need a rebuilt engine after say 250,000 miles. So, in order to keep the Camry running for another 16 years, I would expect that you will need to put at least $5,000 to $6,000 into it above and beyond basic maintenance (i.e., oil, tires, brakes). Of course on the bright side, a 14 year old Camry is going to loose a lot less value over the next 16 years than a new car will loose in its first two :) .

    In any case, unless you are the sort to run a car completely into the ground (and you might be), the better analysis will be to look at how much longer you are likely to keep the car and balance those costs against buying X years early. In practice this means it probably never makes sense to trade in early just to get better gas mileage. In fact, it might well make sense to wait say two years when many of these 40 mpg cars will be hitting used car lots costing 40% less than the new cars of today :) .

  • Aaron B. says:

    Bruce Williams, the talk radio finance advice guy (sort of an early Dave Ramsey, if I recall correctly), once said that you’ll never again own a car as cheap as the one you have right now, or words to that effect. In other words, buying a different car will almost always cost more in the long run, even if your current car needs a fair amount of work. There are cases where a car is really shot, of course, but they’re rarer than people think. The person who says a newer car will save in the long run on gas mileage or repairs is usually just kidding himself.

    That becomes even more true as licensing fees climb. I bought my current car for $150, and then immediately more than doubled the cost when I went to pay the state of Illinois for the privilege of owning it.

  • Mike Petrik says:

    Aaron (and Bruce Williams) is right. There is nothing wrong with replacing a current car with a new one, but it usually cannot be justified on purely financial grounds. The notion that one should “trade in” a car after three or four years in order to save money on repair and maintenance expenses is really a myth, yet one believed and practiced by many Americans including many Americans who are otherwise financially savvy.

  • Elaine Krewer says:

    “you’ll never again own a car as cheap as the one you have right now”

    That is even more true since “Cash for Clunkers” took a lot of still-serviceable older cars off the market, thereby driving up the price of used cars and making them less viable as an alternative to buying a new car.

  • All true as to milage. However, an older car with mechanical “issues” can rapidly become a money pit. My first car out of law school was a cherry red Thunder Bird with 37,000 miles on it, sold to me by a sweet little old lady who I suspect now probably rolled back the odometer. It was a superb vehicle until it hit “77,000″ miles in early 1985 and then I had unending trouble with it, and easily pumped $3,000 into it in nine months, after having several different mechanics work on it. After it collapsed for a fourth time, and I was told it would cost another $1800.00 to get it back on the road, I sold it to a secretary’s husband for parts for $250.00. Since then I have never purchased a used vehicle, and I rarely keep a car much beyond 100k. With two vehicles for the family, I can normally get 8 years out of each car.

  • It seems that this shows that it’s silly to change a perfectly good car for a new car just for the fuel savings, and perhaps even for the additional repairs. What I’m not clear on is whether or not if you’re buying a new car anyway (old one too expensive to keep up, etc.) if it is worth it to invest the money into purchasing a car with better fuel efficiency.

  • Michael,

    I think the trick would probably to be compare the cost of the two cars you’re considering and figure out how long it would take up to make up the difference between the two (assuming the more efficient one is more expensive) via gas saving.

    For example, you might be deciding between buying a 2005 Civic which gets around 28mpg and a 2010 Civic which gets 40mpg. The cost difference might be about 10,000. You could plug those figures, and the respective fuel efficiencies, into the equation and come up with the break even point it.

    I was showing that given my commute and my current car, I’d save about $25/wk if I bought one of the new, highly fuel efficient cars that’s coming out. (Obviously, with a hybrid the savings might edge up to $30+.)

    That would be worth getting if you’re buying a new car anyway, but it’s not necessarily worth paying more than about $8k more for unless you have a much longer commute, are betting gas will get very expensive, or have a strong moral feeling that you need to conserve fuel regardless of cost.

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