Wednesday, September 27, 2006
Wow, that gas mileage s*(&ks! or economics of puchasing a new car.
I really like my 2002 Yukon XL. Unfortunately it averages a whopping 14.5 miles per gallon. This, with my interest in automobiles, gets me thinking about purchasing a new vehicle every once in awhile. Lately I have been brain-teasing the economics of buying a new car (more likely to replace my Ford Explorer, but that is a different story). Unfortunately, in searching the net, I have not really found the logical information that I want to determine the economics of purchasing a replacement car (based on gas mileage).
Background. I drive my Yukon around 14,500 miles a year. Recently, gas here has gone down to $2.00/gallon from $3.00/gallon where it has been all summer. This is excellent news for me as it will save me $1000 a year in fuel cost! So, after suffering through many $75+ fill-ups, i tried (in my mind) to justify a new car with better gas mileage. Just for full disclosure, I ride my Ducati motorcycle a lot, otherwise I would have much, much more mileage on my trucks. My Explorer gets around the same mileage as the Yukon and I do not drive them both at the same time, so the yearly mileage stays the same.
Fuel Costs
I spend $2000-$3000 in gas a year depending on the price. What would I save if I got better gas mileage?
14.5 mpg 21 mpg 30 mpg
fuel cost ($2) $2000 $1380 $966
fuel cost ($3) $3000 $2071 $1450
Wow, in the worst case gas price ($3/gallon) and change to great economy (30 mpg) I would save $1550 a year! But to be realistic, most of the cars I would want to drive are more likely to get 21 mpg than 30 mpg.
Depreciation
So, excited about the possible fuel savings, I started studying the most important offsetting cost, which is new car depreciation. The best information I could find indicates that the very best value holding cars depreciate to about 60% of their new car value in 3 years. Note that this depreciation is not linear and the highest depreciation is in the earliest years. Thus
New car value 3 year depreciation
$30,000 $12,000 or $4000 per year
$40,000 $16,000 or $5333 per year
So, the depreciation on a new car would far offset the savings in gas if the new car got better mileage then my Yukon. Darn. Now I acknowledge that I am simplifying a lot. Especially as my current vehicle is also depreciating (but at a much lesser rate as it is three years old).
This, depreciation, is the number that is not advertised or talked about very much. I got my figure by looking at estimates of the very highest resale value cars. There are very few cars at the top that reportedly hold their value at 60%. So I feel I am safe using this number in my calculation as most cars would be worse. May be eye opening next time you are shopping cars to figure that the car is losing at least 13% of it's value a year. It would be great if someone more industrious than me calculated the first, second, and third year depreciation. My gut feel is that the first year depreciation is more likely at least 20%.
Other cost
There are many more costs to a vehicle including: maintenance, taxes, registration. Unfortunately, Kansas also has significant property tax on cars as well as sales tax. All of these cost favor my current vehicle rather than a new car. The one exception is maintenance. But the GMC Yukon XL has proven very reliable and my maintenance costs are very low.
Another very significant cost is if you borrow money to purchase the new vehicle. For example to borrow $10,000 for a year at 5% would cost approximate $270. I preach the mantra of not borrowing money to purchase a car at all.
Conclusion
So my justification (better gas mileage) will just not pan out. In fact purchase of a new vehicle at all (even for desire) just does not make economic sense for me since I do like my Yukon.
Savings -$1550
Depr $4000 ($30,000 car)
Tax $1800
cost $4250 for the first year.
In addition to suggesting not borrowing to purchase a new car, I find that people think differently when they look at the monthly cost of a car. Thus, my potential new car would cost $354 additional per month.
Note for parents of students
This whole exercise illustrates the practical use of some basic math. I know for some students using practical examples of using math illustrates its value well. For younger student try this:
Your friends is excited that he will be saving $1000 per year when gas price dropped from $3 per gallon to $2 per gallon. His gas guzzling GMC Yukon gets 14.5 miles per gallon. How many gallons of gas does he use per year? How many miles does he drive per year?
Background. I drive my Yukon around 14,500 miles a year. Recently, gas here has gone down to $2.00/gallon from $3.00/gallon where it has been all summer. This is excellent news for me as it will save me $1000 a year in fuel cost! So, after suffering through many $75+ fill-ups, i tried (in my mind) to justify a new car with better gas mileage. Just for full disclosure, I ride my Ducati motorcycle a lot, otherwise I would have much, much more mileage on my trucks. My Explorer gets around the same mileage as the Yukon and I do not drive them both at the same time, so the yearly mileage stays the same.
Fuel Costs
I spend $2000-$3000 in gas a year depending on the price. What would I save if I got better gas mileage?
14.5 mpg 21 mpg 30 mpg
fuel cost ($2) $2000 $1380 $966
fuel cost ($3) $3000 $2071 $1450
Wow, in the worst case gas price ($3/gallon) and change to great economy (30 mpg) I would save $1550 a year! But to be realistic, most of the cars I would want to drive are more likely to get 21 mpg than 30 mpg.
Depreciation
So, excited about the possible fuel savings, I started studying the most important offsetting cost, which is new car depreciation. The best information I could find indicates that the very best value holding cars depreciate to about 60% of their new car value in 3 years. Note that this depreciation is not linear and the highest depreciation is in the earliest years. Thus
New car value 3 year depreciation
$30,000 $12,000 or $4000 per year
$40,000 $16,000 or $5333 per year
So, the depreciation on a new car would far offset the savings in gas if the new car got better mileage then my Yukon. Darn. Now I acknowledge that I am simplifying a lot. Especially as my current vehicle is also depreciating (but at a much lesser rate as it is three years old).
This, depreciation, is the number that is not advertised or talked about very much. I got my figure by looking at estimates of the very highest resale value cars. There are very few cars at the top that reportedly hold their value at 60%. So I feel I am safe using this number in my calculation as most cars would be worse. May be eye opening next time you are shopping cars to figure that the car is losing at least 13% of it's value a year. It would be great if someone more industrious than me calculated the first, second, and third year depreciation. My gut feel is that the first year depreciation is more likely at least 20%.
Other cost
There are many more costs to a vehicle including: maintenance, taxes, registration. Unfortunately, Kansas also has significant property tax on cars as well as sales tax. All of these cost favor my current vehicle rather than a new car. The one exception is maintenance. But the GMC Yukon XL has proven very reliable and my maintenance costs are very low.
Another very significant cost is if you borrow money to purchase the new vehicle. For example to borrow $10,000 for a year at 5% would cost approximate $270. I preach the mantra of not borrowing money to purchase a car at all.
Conclusion
So my justification (better gas mileage) will just not pan out. In fact purchase of a new vehicle at all (even for desire) just does not make economic sense for me since I do like my Yukon.
Savings -$1550
Depr $4000 ($30,000 car)
Tax $1800
cost $4250 for the first year.
In addition to suggesting not borrowing to purchase a new car, I find that people think differently when they look at the monthly cost of a car. Thus, my potential new car would cost $354 additional per month.
Note for parents of students
This whole exercise illustrates the practical use of some basic math. I know for some students using practical examples of using math illustrates its value well. For younger student try this:
Your friends is excited that he will be saving $1000 per year when gas price dropped from $3 per gallon to $2 per gallon. His gas guzzling GMC Yukon gets 14.5 miles per gallon. How many gallons of gas does he use per year? How many miles does he drive per year?
Saturday, September 02, 2006
Motorcyclist are idiots!
Now, my friends know that I am an avid motorcyclist. But after reading my umpteenth rant on a a motorcycle bulletin board from a motorcyclist complaining about someone else in a car, I just have to admit that many of my motorcycling compatriots are selfish, f**(ing, idiots.
The typical rant from the motorcyclist goes like this. I (motorcyclist) was doing something in their own opinion is not wrong (speeding, cutting to the front of the line in traffic, passing emergency vehicles, etc.) when another motorist or traffic cop took offense. How dare they?
I do agree that your average motorcycle has some amazing capabilities in terms of acceleration, stopping, and turning. But does this give the motorcyclist the right to ignore all traffic laws and courtesy at the expense of other. My GMC Yukon (4wd) also has some great capabilities too. Does this give me the right to run right over anyone in my way or bulldoze my way to the front when driving it?
It is interesting that the motorcyclist (and many of his buddies) feel that the people driving "cages" are always wrong and should always bow to the motorcyclist. Maybe the motorcyclist should learn from bicyclist and try to "share the road". There are plenty of opportunities to exercise your wonderful motorcycle while not pissing off other motorist.
The typical rant from the motorcyclist goes like this. I (motorcyclist) was doing something in their own opinion is not wrong (speeding, cutting to the front of the line in traffic, passing emergency vehicles, etc.) when another motorist or traffic cop took offense. How dare they?
I do agree that your average motorcycle has some amazing capabilities in terms of acceleration, stopping, and turning. But does this give the motorcyclist the right to ignore all traffic laws and courtesy at the expense of other. My GMC Yukon (4wd) also has some great capabilities too. Does this give me the right to run right over anyone in my way or bulldoze my way to the front when driving it?
It is interesting that the motorcyclist (and many of his buddies) feel that the people driving "cages" are always wrong and should always bow to the motorcyclist. Maybe the motorcyclist should learn from bicyclist and try to "share the road". There are plenty of opportunities to exercise your wonderful motorcycle while not pissing off other motorist.
