Does trading in an SUV for a gas-efficient car make economic sense?

By Roccy Defrancesco

The Wealth Preservation Institute


Whatever your politics are, it seems clear that the president has no short-term energy policy when it comes to dealing with the prices of oil.

I decided to write this short and simple article when I heard part of a speech by President Obama recently about gas prices. Amazingly, the president was making light of higher gas prices. His speech was fairly typical. He looked down his nose at Americans who like gas-guzzling cars; and, as usual, he had little sympathy for those who drive them.

His idea for those who drive SUVs was simple ─ get rid of them and buy fuel-efficient cars like the Chevy Volt. This shows how truly out of touch the president is and that he lives in some sort of green energy fantasy land.

I imagine some financial planners have been asked and surely will be asked the magic question: Does it make financial sense to get rid of a less efficient SUV and buy a new, more gas-efficient car?

Let’s look at the math using a $42,000 Chevy Volt. I’ll assume no financing costs and that the car payments are amortized over five years. The annual payment would be $8,400.

The average driver puts 15,000 miles on a car. For this article, I’ll give numbers assuming gas is $4, $5 and $6 a gallon.

The Volt averages 35 miles per gallon in the city and 40 mpg on the highway (from Kelly Blue Book), and so I’ll assume it will average 37.5 mpg for this artcile.

I’ll compare the Volt to the most popular SUV, which is the Ford Explorer. I’ll assume the example driver has a 2005 vehicle (with no payments) that averages 15 mpg.

The following are the average cost of gas each year and the annual savings using the Volt.

Ford Explorer
Gallons
Annual Gas Cost Chevy Volt GallonsAnnual Gas Cost Annual Savings
1,000$4,000400$1,600$2,400
1,000$5,000400$2,000$3,000
1,000$6,000400$2,400$3,600


Hmmm. That doesn’t sound like a lot of savings, does it? Not to mention that the SUV is a much larger and more useful car (and safer).

The KBB trade-in value for a 2005 Explorer in “good” condition with average miles is $6,500. Therefore, after the trade-in amount of $6,500 is applied, the out-of-pocket cost to pay for the Volt is $7,100 each year for five years.

The math

Let’s consider the math following the five years after buying the Volt. Because the comparison is to keeping the used Explorer, I’ll assume an additional $1,500 a year in fix-it-up costs to keep it in good working condition.

Without factoring in savings on fuel, if it takes five years to pay off the debt on the Volt, the additional costs this buyer would have to pay each year because of the decision to buy the Volt would be $7,100-$1,500 = $5,600 a year.
If we now factor in the fuel savings by buying a more fuel-efficient car, the net loss when buying the Volt is:

at $4 a gallon = $3,200 a year or $16,000 total over five years.
at $5 a gallon = $2,600 a year or $13,000 total over five years.
at $6 a gallon = $2,000 a year or $10,000 total over five years.

There is a one-time tax credit of $7,500 which needs to be factored into the savings. There is also a need to factor in the cost to install a charging station at home ($2,000, with cords), and the annual electric bill to recharge the car ($450). When you factor in the credit and the additional expenses, you need to subtract $3,250 from the above totals.

If you have clients who are interested in the here and now and having the maximum amount of money in their pockets over the next five years, it certainly won’t be as the president advocates, which is by buying a new gas-efficient car.

Also, to be fair, in five years the 2005 Explorer is probably going to need to be replaced (even though I’ve budgeted enough money to keep it in good working condition). The fuel-efficient car will also be older, but assume you could keep the gas-efficient car for another five years and that you’d have to buy another SUV to replace the 2005.

Even if gas goes to $6 a gallon, you’d have saved enough from 2011–2016 to buy a 2011 used Explorer with the savings (meaning you can keep your big gas hog, drive a safer car, and still save money).

Conclusion

Our job as advisers is not to look out for the good of the country or for the good of the world. We do that when we vote and elect officials. Our job as advisers is to give the best advice possible to our clients.

When your clients ask you if they should get rid of the SUV they love so much (spacious, luxurious and safe) to buy a president-recommended Volt or other fuel-efficient vehicle, give them my article and tell them what they want to hear, e.g., that they should keep the gas hog, enjoy life, and still save more money than if they had bought the car the president and other green crusaders are trying to guilt them into buying.