carmax | Online Savings Blog

A Cheaper Car Will Protect Against Increasing Gas Prices
05.01.08 | Consumerism | 0 Comments | by Fred Siegmund

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I recently saw an article in the Washington Post titled "Price of Gas Hits 23-Year High."

Not surprising, right?

Except the article was from May 15, 2004, or almost exactly four years ago.

The 23-year high price was cited at $1.95 a gallon. The article had a breathy tone and warned Americans that summer driving was sure to see $2.00/gallon gas.

Since I just paid $3.51 a gallon for my last gallons, the former 23-year high sounds like the kind of bargain I will never see again.

The price increase of $1.56 in 4 years works out to an average increase of $.39 a gallon per year.

Let's take a look at what that means, using the Bureau of Transportation Statistics' reports on annual average miles traveled per passenger car and average miles traveled per gallon of fuel consumed.

Convert to months and divide the miles by miles per gallon and the result equals 46 gallons: the average gallons for the average car for the average month. Use the $.39 a gallon increase on 46 gallons and the average monthly fuel bill went up $17.94.

The depressing part though is that the increase is cumulative; in the second year, it's $35.88 a month and so on. If these extra payments for gas went into the bank each month starting in May 2004 and earned 4% interest, the amount after 4 years comes to $2,283.88. Ouch!

You can think of it as a loss, or if you are a real saver, you will think of it as a challenge. Probably you have thought of driving a more fuel efficient car, or living closer to work, or just driving less. You could also buy a cheaper car.

Suppose you were buying a car in 2004 and you bought a car a year older, or two years older, than you originally planned and saved $1,946.71 on the deal. Let those savings earn 4% interest compounded over the 4 years and you would have the exact money you lost buying that expensive gas: $2,283.88.

There you have it. Save your gas money, buy a cheaper car.

If you want to know how easy that is go to a website like Carmax.com and look at model prices for 2005 and then back up to 2004, 2003 and 2002.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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