By Wendy Mihm | Thursday August 4, 2011
If you’re out shopping for a car, one of your top considerations is probably gas mileage. If it’s not, lean in a bit closer so I can whap you upside the head.
Related to this, another question that may come to mind is “Should I buy a hybrid?”
When deciding whether to buy a hybrid, there are several things you may consider, but when you’re assessing the gas mileage, it all comes down to basic math.
Turns out, fuel efficiency is no small matter. In August of 2011, as this post goes up on FinancialRx, the average price of a gallon of non-premium gas in the U.S. is $3.71. But remember, that’s the U.S. average, and it varies depending on where you live. For example, in traditionally less expensive areas like the Gulf Coast, the current average is $3.60, while New York City residents are paying $3.86, just slightly more than their urban counterparts out in San Francisco, who pay $3.84 a gallon. Regardless, by the time you fill your tank, it ain’t cheap.
Let’s look at some real numbers, using the Chevy Malibu, which is a mid-sized sedan as an example. It’s tank holds about 16.5 gallons, so if gas costs an average of $3.71 per gallon, you’re talking $3.71 x 16.5 = $61.22 every time you fill your tank.
And how about those SUVs we see all over the place? An Expedition’s tank capacity is anywhere from 28 to 33.5 gallons. You can do that frightening math yourself!
So, should you rush out and join all those people buying hybrids?
Maybe. Or maybe not.
If your primary reason for considering a hybrid is gas mileage, then buying a hybrid car really can come down to some basic math.
Buying Hybrids: Do the Math on the “Break Even” Point
Good news: figuring out when you will “break even” on your investment in a hybrid is not that hard. As my business school stats professor used to say “Let’s give it a go!”
1. Take your best guess as to how many miles you drive in a typical year. In our example, we will use 15,000. That also happens to be the number the EPA uses when they calculate the Estimated Annual Fuel costs. Car dealerships also print that number on the stickers they put in the windows of cars for sale.
2. Look up the average price of a gallon of gas – if possible, try to get it for your city. In our example, we’ll use the U.S. average of $3.71.
3. Shop online as if you really were buying a hybrid. Find out and write down its price and EPA estimated MPG. In our example, we’ll use the new, base model 2011 Toyota Prius, which retails for about $24,566 and gets a combined EPA rated city/highway 50 MPG.
4. Using our simple formula outlined below, calculate the annual fuel cost for your hybrid.
Annual Fuel Cost = Miles Per Year x (Price Per Gallon / Miles Per Gallon)
Here’s how the formula looks using the Prius:
Annual Fuel Cost = 15,000 x ($3.71 / 50) = $1,113
Now, for comparison’s sake, go through the exact same calculation with a non-hybrid that you might also consider buying. For our example, we’ll use the 2011 base Toyota Camry (because I think they’re cute). They currently retail for about $20,195. The Camry’s EPA estimated combined city / highway MPG is 26. Using the same equation, we calculate the Toyota Camry’s annual fuel cost as follows:
Annual Fuel Cost = 15,000 x ($3.68 / 26) = $2,140
Notice the trade-off happening here. Sure, when you buy hybrid cars, you spend more up front on the overall cost of the car. But then you save money at the gas pump each and every year, for as long as you drive your hybrid car. The dollar amount the hybrid saves you each year in fuel costs versus the conventional car is important in the final analysis, so we’ll calculate it here:
Annual Fuel Cost Toyota Camry $2,140 – Annual Fuel Cost Prius Hybrid $1,113 = $1,027
Now, we arrive at the most important part: the Breakeven Analysis. Here, we calculate how many years it should take to make back in fuel savings, all that extra money that was spent up front when you purchased the hybrid.
Breakeven Analysis on the Hybrid Purchase
Here’s how we go about the analysis:
First, start with the price of the higher-priced hybrid car and subtract from it the price of the lower-priced traditional engine car.
Here’s how it looks for our example:
Price differencial = $24,566 – $20,195 = $4,371
Second, calculate the break-even time in years. Here’s how: divide the price differential we found in the first step directly above, by the annual dollar amount the hybrid saves you.
Here’s how it turns out for our example:
Price differential of $4,371 / Annual fuel savings hybrid of $1,027 = 4.3 years
So what does that mean, exactly?
This means that after driving the hybrid for 4.3 years, you will have saved enough money at the pump to make for all that extra dough you blew on the Prius. Then after that, the savings are yours to keep. Year after year. Hmm.
In addition to this basic math, things to consider when buying a hybrid are:
- How long do you expect to be driving your car?
- Whichever car you drive, if your plan is to reap fuel savings after the breakeven point, make sure you’re buying from a manufacturer that makes cars that last that long!
- Now, on the other hand, if your primary concern is gas mileage as opposed to the environment or geo-politics (a whole separate set of topics!) there are some sub-compacts out there with big mileage estimates and small price tags.
Ok, sister, I’ve given you the basic math and some things to think about. Now go figure!
Notice how I didn’t say “Start your engines?” or “Fire up your spreadsheets!” or something cutesy like that?
That’s love, baby.
Like what you've read? We pack some of our best insider know-how and savviest strategies into our free weekly emails.
Subscribe today and let us help you live a healthy, happy financial life.