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The question has been nagging at me all week after seeing stories on tv about drivers switching over their SUV's for smaller cars to save on money. I've had a friend recently trade in their paid-for 2005 Ford Expedition for a 2007 Toyota Camry to save money but economically this doesn't make sense to me. I have a need to work this equation out and figure for myself if this choice will actually save any money in the long run.
They bought their Ford Expedition new in 2005 for appx. $45,000 and it gets an average mpg of 16 mpg in mixed driving conditions. They sold it for $17,000.
They bought their 2007 Toyota Camry for $22,000 (with all fees, etc) and it gets an average 28 mpg in mixed driving conditions.
Figure gas prices are $4/ gallon and they drive 15,000 miles/ year.
12,000 mi\ 16 mpg= 750
750*$4= $3000/ year in gas costs for the Expedition
12,000 mi\30= 400
400*$4= $1600/ year in gas costs for the Camry
$3000-$1600= $1400 more/ year to drive the Expedition
$5000/$1400= 3.5
It'll take 3 1/2 YEARS before trading in that Expedition will be economically adventageous. Doesn't the average American consumer trade up vehicles every 3 years? So basically if you don't wait 3 1/2 years before trading in that Camry for something else, it would've been a better idea financially to keep the Expedition. Of course this is all assuming that gas stays at a steady $4/ gallon over the coming years and we all know that this won't be the case but my point is so many people are trading in their SUV's for smaller cars, taking a huge hit on the SUV, paying a premium on the small car, and actually not saving as much money as they thought they would. Makes you think, don't it?
I would think paying the gas vs having a car payment is the way to go. My mom keeps talking about getting a scooter and we tell her they cost $4000 which she will have to finance and take years to pay off vs keeping the car she has that's paid for and just pay the high price of gas. She doesn't get it though. she just thinks of the better MPG she would get not considering the monthly payment she would also have to take on.
The advice I've heard the financial gurus giving is the following... "the most economical car for you to drive is the one you are driving right now." Unless you have a vehicle guzzling gas at 14 mpg or lower and it's unreliable... getting a new car for the fuel cost savings is going to cost you, probably quite a bit. People need to do their math much like the OP of this thread before rushing out to buy a new car. Although no one knows for sure how much the cost of gas will be this time next year, it is darned assurable that all the costs associated with getting a new car right now (or at any time) will add up to quite a bit of money.
Part of why the economics don't work is they are trading to a newer as well as smaller car. Anyone with decent wrench-bending skills can pick up a car from the 80's that gets good mileage in the mid to high 30's for way less than $5000.
When this guy bought the Expedition for $45,000.00......2/3 what I paid for my house....in 2005 when gas was, what, $1.50 or $2.00....this reminds me of the opening move in chess that results in the "fool's mate"...having opened the game so poorly, they were almost doomed to lose from the get-go. IMHO of course.
At the same time getting $17K for the guzzler now is better than just parking it if/when gas gets even higher. To chuck the Expedition and get the Camry, a newer and much more reliable car (and IMHO more fun to drive, although neither of these really get my heart racing...) for $5K difference is an OK move.
Part of why the economics don't work is they are trading to a newer as well as smaller car.
What exactly does this have to do with the economics? I took economics in both High School and College and the basic aspect of Microeconomics is how individuals allocate limited resources (i.e. money) in a market where goods and services are bought and sold. Buying a newer and smaller car has nothing to do with the economics of losing money. Granted newer goods are
a) More reliable
b) Safer
but 2 years is hardly considered a large enough timeframe in which to be able to improve a good.
When this guy bought the Expedition for $45,000.00......2/3 what I paid for my house....in 2005 when gas was, what, $1.50 or $2.00....this reminds me of the opening move in chess that results in the "fool's mate"...having opened the game so poorly, they were almost doomed to lose from the get-go. IMHO of course.
Do not get caught up in one of the cardinal sins of cost analysis - trying to take into consideration the sunk cost of the original purchase. The analysis is only between the alternatives now available, not about the original decision.
The "pure" analysis of the alternatives that started the thread is a bit more complicated than was shown, but is close to how it should be done.
We're looking to get rid of a '97 tahoe which gets around 14 combined. It has 140k on it and will need a new transmission soon as well as the usual intake gasket for a total of about 3k, plus it's starting to rust in places. While it's been paid for for years and has been a good truck and my wife is heartsick about retiring her "baby" I figure it's better to put the repair money into a newer more efficient vehicle than keep life support going on the tahoe.
I figure over 3-4k equals almost a years worth of payments and who knows what'll happen to the tahoe next year or if we'll even be able to sell it next year with things going like they are but I really hate to spend 15-20k again.
Descisions, descisions....
You really need to gather all the info you can and do some serious number crunching. Consider that you won't get alot of $ for your SUV and you'll probably have little room in price negotiations for your small car. I think alot of people are just reacting right now.
Financial common sense should be used in both good and bad economic times.
I bought my SUV a couple of years ago knowing that gas prices would continue to rise (even at an alarming rate) and with the anticipation of keeping it atleast 8 to 10 years.
My mother actually went through the number crunching for her SUV vs. a car for trade-in back in December. She calculated how many miles she drove, fuel economy, etc. In the final crunch she compared costs for a car vice an SUV with the following variables:
Monthly Payments
Insurance differential
Approximation of gas costs
Approximation of standard maintenance
In the end, she did the trade and saved herself a lot of money. For some people, it's not worth it.
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?
IMHO of course. 
