No, I'm not talking about investing in cars that rise in value. We all know that virtually never happens. Cars are a wasting asset. They lose value faster than money. Buy one in the morning; it will lose value before we get it into the garage.
So your car isn't a true investment vehicle.
But its fuel efficiency can be. Exchange your fuel-inefficient vehicle for one that gets better gas mileage and you'll consume less gasoline. Every gallon not consumed is money not spent.
The basic math isn't difficult. As many readers know, the Burns family started driving the Toyota Prius Hybrid last year. By my calculations, trading in my 18 miles per gallon turbo New Beetle for the 45 miles per gallon Prius saves about 500 gallons a year. At $2.00 a gallon, that's $1,000 a year.
To have $1,000 a year to spend on gasoline, I would need to have $1,176 in dividends before the 15 percent tax rate on a stock investment. And to earn $1,176 in dividends from the S&P 500 I'd have to invest $78,431--- since the S&P 500 yield is only about 1.5 percent.
That's a lot of money. It is more than most people have in their 401(k) accounts.
It isn't so bad if you start comparing the gas savings to the amount you'd need to invest in bonds or CDs, either. To have $1,000 to spend on gasoline a person in the 25 percent tax bracket would have to earn $1,333 in pre-tax interest. With five-year Treasury obligations yielding about 3.73 percent, you'd need to invest $35,746 to come up with $1,000 for the gas pump.
That's still a lot of money. Indeed, it's the price of a rather nicely equipped luxury car. Is there a message here?
I think so. The market is telling us there's more opportunity in how we select the car we drive than in how we invest our savings.
Note that I said "car." I didn't say "Prius."
This idea can work on any two cars. All you have to do is exchange a low-mileage car for a better-mileage car. The improvement doesn't have to be heroic: you don't need to exchange a 10-mpg Hummer for a 60-mpg Honda Insight.
To explore the benefits of trading cars I built a little calculator. It allows me to enter the mileage of the cars to be exchanged; the estimated miles to be driven each year; and the current cost of gasoline. From this information it automatically calculates the gallons consumed by each car, the annual gallons saved, and the dollar value of the fuel savings.
Then it goes a step further. It calculates how much you would have to invest in stocks or bonds to provide the money from the fuel savings. The results are surprising. Here are two samples:
Replace an Older Jeep Cherokee 4WD with a 4WD Toyota RAV4. Suppose you replace your 15,000 miles a year 18-mpg car with a moderately more efficient 24-mpg car? You'll save 208.3 gallons a year or $416.67. To generate the necessary money in stocks you'd need to buy a portfolio worth $32,680--- or bonds worth about $13,889.
Change your life style: replace your aging Land Rover with a new Mini Cooper. This is a major change but you can blame it on a movie, "The Italian Job." You are getting rid of a 13-mpg guzzler and trading it for one of the sexiest little cars out there, even at 30 mpg. And you're sure to drive at least 15,000 miles a year. This will save you 653.8 gallons a year or $1,307.69. Earning the money on investments would require an equity portfolio of $102,564 or a bond portfolio of $43,590.
I could go on, but you get the idea. If you'd like to experiment, try the calculator on my website, www.scottburns.com. Remember, this will work on any two cars. Fuel efficiency doesn't have to be extreme to pay off.
On the web:
Fuel Economy Guide
Earlier columns on fuel efficiency and the Prius:
Liberty from Gas Pumps, Tuesday, April 27, 2004
Toyota's newest hybrid is a "lite" driver's dream, Saturday, March 27, 2004
My own energy policy could be the answer, Tuesday, March 15, 2003
Steering toward hybrids, Sunday, March 13, 2003
This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.
AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.