How Important is Fuel Efficiency When Buying a Car?

Julia wrote in a few days ago with the following questions.

My question is about cars, inspired in part by your post this morning. We have a gas guzzling 2004 Ford Expedition in very good condition. There is about $3,000 left on the note, leaving us with about $10,000 in equity, should we sell it for Bluebook value. We could have it paid off in about 4-5 months. Our note payment is $408, rounded.

For fuel we spend no less than $300/month, often closer to $400 and beyond. We live in southern California, so we do drive quite a bit. Luckily, my husband has a company car, and for the most part we use that on the weekends. About $100/month is taken from his paycheck by the company to account for personal miles. It’s a predetermined amount by the company and does not reflect our use of the vehicle.

We are a family of four (two boys, aged 3 and 1 year) and can’t decide whether to sell the truck (now or when it’s paid off) and get something more fuel efficient or, keep the the truck free and clear. I don’t suspect a Prius will be able to accommodate our young family (strollers, etc.) but we would like a hybrid if it makes sense financially. My concern is that by selling the truck for a more fuel efficient vehicle the money we save in gas would simply go towards a new car payment, registration, and insurance.

Guess what, folks? It’s time to run the numbers!

Calculating Fuel Efficiency

A 2004 Ford Expedition gets 13-15 mpg in cities and 17-19 mpg on the highway. I’ll estimate that yours gets right in the middle – 16 mpg overall. If you live in an area with gas at $3.50 a gallon and are spending $400 a month on gas, that means you’re putting about 1,800 miles a month on your vehicle – $400 divided by $3.50 gets you 114.3 gallons of gas a month, and at 16 miles per gallon, that’s just about 1,800 miles.

So let’s go with that. Let’s say you replaced your Expedition with a 2008 Ford Escape Hybrid, which gets 30 mpg on the highway and 34 in the city, so for you we’ll average it at 32. I chose the Escape Hybrid because it’s comparable to the original in size and storage which you probably still need, but much more fuel efficient. If you drive 1,800 miles a month, that means you’ll only burn about 56 gallons of gas with this model versus the 114 gallons you were burning with your old one. That’s a savings of about $200 a month – you’ll basically halve your monthly gas bill.

Questions to Consider

Is $200 a month worth it over the long haul?

Over the course of five years of ownership, that $200 a month difference adds up to $12,000. The Ford Escape Hybrid has a base invoice price of $24,734. So, if you get $10K in trade-in on your current vehicle, you’ll likely be paying somewhere in the range of $15K for the new vehicle. Your break even point from the gas savings is then at about the six year mark. Of course, there are advantages in having a new vehicle – it’s going to be more reliable at first, for starters, and you’ll likely save on the maintenance over the next six years versus the older vehicle simply because you’ll be starting your maintenance schedule fresh and new.

If I were in your shoes, I’d probably be willing to make that switch. You’ll be returning to car payments for a while, but your monthly gas bill will be halved. After the new vehicle is paid off, though, you’ll be doing very well. There are compelling arguments both ways, though.

What about just adding another new car to the mix?

Another compelling option is to simply add a highly fuel efficient car to the mix and using that as often as possible. Let’s say, for example, that you could get a 2004 Honda Insight, which gets an incredible 60 miles per gallon city and 66 miles per gallon highway, and you’re able to use it for 70% of your driving. That means that 30% of your driving would be at 16 miles per gallon in your expedition and 70% would be in your Honda Insight at 63 miles per gallon, giving you an overall effective gas mileage of 49 miles per gallon. Over 1,800 miles in a month, adding the Insight and driving it 70% of the time would save you 75.8 gallons of gas each month, and at a cost of $3.50 for a gallon of gas, that’s a savings of $265.17 per month on gas.

I played around on Kelley’s Blue Book and found that you can likely find one of these Honda Insights for about $16,000. If you walk into a lot with no down payment and get a 36 month loan at current rates, you’ll leave with a payment of $525.38 for the next 36 months, meaning that each month for the next three years will cost you $260.20 each month. After that, though, you’re in very good shape. Plus, you now have the redundancy of another vehicle that will likely be able to seat your whole family, so if one breaks down, you’re not hoping for a loaner or renting a car.

Note that I’m not figuring insurance or licenses into either case. I don’t know what this family would be paying for insurance or for licenses, but in especially the case with the extra car, this is an additional cost. Julia and her family should figure in these costs before making a choice for themselves.

What’s my conclusion?

Fuel efficiency is becoming very, very important, especially with a high-mileage driving situation. It makes sense to look for a more fuel efficient car that could also be cheaper to insure.

I think this family, given that they’re putting 1,800 miles a month on their car, should strongly consider making a change. Even if gas prices stick to their current levels, it ends up being a good deal for them over five or six years. If gas prices continue to go up, they’ll be in tremendously good shape in the future, especially if they couple it with some changes in habits.

My advice for them is to go for it. Once they get past the three or four year mark (depending on their payments), they’ll be in much better shape in terms of fuel efficiency. If they choose to drive the car for many years past that, then fuel efficiency will have saved them a lot of money.

Trent Hamm

Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.