How Not To Save Money

by Eric Peters
EricPetersAutos.com

Hybrid vehicles are many things, some of them positive. I tested an Infiniti M hybrid recently that had so much right-now torque (an electric motor strong point) that it launched like a dragster, almost getting air under the front wheels. I tried out a Chevy Volt that could operate at 60 MPH on battery power alone. The Toyota Prius is very popular, in part because of its array of LCD displays and fascinating engineering, including near-seamless transition between gas and electric power.

So, hybrids can be quick, they are certainly neat in terms of the technology – and also different. All perfectly fine reasons for buying a car (any car).

But are hybrid cars really money-savers?

Not that I can figure.

Because I’ve done the figuring. The results of which tell me that a hybrid car’s better-than-average gas mileage is economically irrelevant when it takes years of driving to amortize the hybrid’s much higher up-front costs.

Example: One could buy a nicely equipped 2012 Nissan Versa, a car about the same size as a Prius, for around $15,000. That is about $10,000 less than the base price of a 2012 Prius. You can also buy a base model Versa 1.6 for about $10,000 – if you’re willing to live without power windows/locks and AC. This way, you start out about $15,000 ahead of the Prius, in terms of initial cash outlay.

But let’s go with $10,000 as the difference since most people want at least AC, a few power options and a decent stereo.

So, how long will it take to reach break even given this $10k disparity?

Let’s assume a Prius averages 45 MPG and a car like the Versa averages 30 MPG – a generous 15 MPG difference in favor of the Prius. It sounds good on paper.

Now let’s run some numbers

Assume 15 gallons equals one tankful of gas. The Prius can go 675 miles on 15 gallons of fuel at 45 MPG before it needs a refill. The Versa, 450 – a difference of 225 miles in favor of the Prius. To go the same 675 miles, then, the Versa owner would need to buy another 7.5 gallons of fuel (225 miles divided by 30 MPG) which at $3.20 per gallon comes to about $24.

Let’s assume 10,000 miles a year of driving.

The Prius owner will need to fill up about 15 times to go that far (675 miles per tankful at 45 MPG times 15 fill-ups equals 10,125 miles). The Versa owner, about 23 times (450 miles per tankful at 30 MPG times 23 equals 10,350 miles). That’s a difference of seven tankfuls of fuel, or seven times fifteen – which equals about 105 extra gallons of fuel annually to travel the same (roughly) 10,000 miles.

This means that at current prices of about $3.20 per gallon, the Versa owner will spend around $336 more per year on gas than the Prius owner – assuming they both drive about 10,000 miles annually.

Remember, we started out with a $10,000 up-front price difference between the Versa and the Prius. How many years of driving will it take to reach break even at this rate?

About 25 years.

Even if you triple the Prius’ annual fuel savings – make it an even $1,000 a year, say – it will still take you nearly ten years to work off the higher up-front costs of the Prius. Even if you assume $2,000 in annual fuel savings, it’ll be five years down the road before the Prius finally catches up to the Versa.

That’s a long time to wait to “save money,” isn’t it?

I won’t get into the opportunity cost of the hybrid – the $10,000 that could have been used for other things, such as investments – or the cost of the money itself (interest) which is no small thing when you finance a $24,000 car, even at just 2 or 3 percent. Nor the fact that after a decade of use and 100,000 miles, the hybrid will be getting on in years and like any older car, will be entering the problem-prone years of its life. And being a hybrid, it will of course have hybrid-specific (and expensive) problems that standard cars don’t have, such as tiring batteries.

None of this is rocket science. A pocket calculator and five minutes will make the math pretty clear to anyone. And the math does not favor the hybrid. Not unless you compare the MPGs of a hybrid to a real gas pig – something that gets less than 20 MPG. And even then, it’s going to take a while to reach break even. The better comparison – if the object is to save money – is a standard economy sedan like the Versa or (even better) a used economy sedan, which can drop your up-front costs to less than $10,000.

Granted, it won’t be snazzy, quick or a technological tour de force. But it will get you where you need to be in reasonable comfort, for very little money – and isn’t that the whole point?

Well, maybe not.

I don’t think hybrid buyers are dumb. The typical buyer demographic is middle-upper income and college-educated.

They may tell themselves they are being “green” – but deep down, I think they buy hybrids because they want to tell others how “green” they are. It is a political act, not an economic one.

Doubt this?

If so, you have to explain why the best-selling hybrids – like the Prius – are the most visible hybrids. Hybrids that looked like standard cars – like the hybrid version of the Honda Civic – don’t sell as well, arguably because they don’t make a statement as well as models like the Prius.

There’s nothing wrong with any of this, by the way. People buy luxury cars and high-performance cars for similar reasons. It’s perfectly rational from this perspective, too.

Just don’t buy a hybrid because you think it’s going to save you green.

Because it won’t – or at the very least, you’ll be waiting a long time before it does.

Reprinted with permission from EricPetersAutos.com.

January 11, 2012

Copyright © 2012 Eric Peters

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