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Bill Freehling is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Bill Freehling.
Trading in gas guzzler for sipper may not be best move
THE BEST TIME to buy stock in a quality company with a solid future is when everyone else is fleeing for the exit rows. And the worst time to buy is when everyone else is also clamoring for shares.
The same argument could be made for vehicles. In both cases, blindly following the crowd could be hazardous to your financial health.
These days, everyone seems to want a Toyota Prius or some type of fuel-efficient car, while car dealers have to come up with clever deals to sell SUVs.
Obviously there are good reasons for this trend. As fuel has crept up to the $4 mark, SUVs getting 20 miles to a gallon look a lot less attractive than gas sippers getting two or three times that amount. That doesn’t even consider the environmental issues attached to SUV ownership.
Setting aside environmental and other non-financial considerations, does the conventional wisdom about SUVs make sense these days? That is, are people doing the right thing for their net worth when they trade in an SUV for a sharp discount to buy a gas sipper selling for a premium?
In stock market terms, that’s buying high and selling low (unless you think gas will keep getting even more expensive, in which case you could be getting in and out at the right time).
Fortunately, a new tool on Edmunds.com makes the decision a lot easier. The Web site has a feature called the "Gas Guzzler for Gas Sipper" trade-in calculator. I read about it in an article on this topic in last Sunday’s New York Times. It allows you to type in the cars you want to buy and sell, the mileage you drive each month, your ZIP and more.
As the driver of a 1996 Jeep Cherokee that gets about 20 miles to a gallon, I have thought about trading in my car for a more fuel-efficient model. But that would be a pretty dumb move assuming gas costs $4 a gallon, according to the Edmunds.com calculator.
Let’s say I were to buy a used four-cylinder 2005 Honda Civic LX sedan. That gets about 31 miles per gallon and is worth about $12,600, according to Edmunds.com. Of course there are more fuel-efficient cars out there, but many of those carry an additional premium.
Sadly, my Jeep is worth just $1,200, Edmunds.com tells me. But it’s paid off and has been pretty reliable. I estimate that I drive it about 800 miles a month.
It would therefore cost me about $11,400 to buy the Civic, and I’d save about $60 a month on gas. At that rate, it would be about 16 years before my investment broke even and I started saving money on gas. Even for a car hoarder like me, 16 years is a long time to drive one car.
Other people are in a different position. Some drive SUVs that could fetch a lot more in trade-in value, meaning less of an initial investment. Others drive far more miles per month, which would make having a gas-sipper more important. Some need a certain size car for lifestyle reasons.
But for me the trade-in really doesn’t make sense on a financial level. Thus my best move is to ignore all the constant stories about rising gas prices and keep driving my cheap gas-guzzler. And on the same note, potential buyers might get a better deal on an SUV than a fuel-efficient car.
Careful investors buy stocks based on rational analysis rather than emotion. They don’t follow the crowd but make their own decisions. Car buyers should do the same.