If you’re talking about a new hybrid vehicle, the answer is not yet. You might want to get one out of a sense of responsibility to the planet, or for the general benefit of reduced emissions. But at current prices, hybrid cars are barely earning their keep – especially when you factor in the near inevitability of replacing a battery pack in a few years.
If you live in a larger city like Dallas, Texas, with long daily commutes, hybrid cars may be worth considering – and speaking of the Lone Star State, during my research I ran across an interesting site Toyota of Dallas that explains the evolution of the Toyota Prius from the early days of hybrid technology.
Depending on the model, hybrid cars are still selling for anywhere from $2,000 to $10,000 more than comparable conventional models from the same manufacturer. You have to save a lot of gas to pay for the difference! So how do you figure out whether it makes sense for you?
Let’s take a specific and popular example: The Lexus RX. The hybrid variety will cost you $6,400 more than the gasoline version – and net you 26 miles per gallon, according to a study by Consumer Reports, compared to 21 miles per gallon for the cheaper gas version. That’s extra $6,400 buys you a difference of five miles per gallon.
Doing the Math
So how do you figure the savings? Ignoring any differences in what it costs to insure these vehicles, divide the $6,400 difference in purchase price by the average price of gas in your area.
Continuing our example, assuming gas prices average $3.40 per gallon, you will have to save 1,882 gallons in gasoline before you reach the break-even point. Somewhat more if you financed the purchase and have to pay interest on the price difference. You can disregard this cost if you qualified for zero percent financing. Also keep in mind that other costs may change as a result of your new vehicle purchase, in this case shopping for car insurance can be time well spent. Make sure you get quotes from as many insurance companies as possible.
How Long Will it Take to Break Even?
So how long will it take for the car to pay for itself? If you just take fuel economy and price into account, the calculation is fairly straightforward: How many miles do you drive each year? Divide the answer by the number of gallons you have to save to pay for the price difference, and that’s how long it will take for the hybrid to pay for itself.
In this example, if you drive 12,000 miles per year, it will take 6.37 years to make up the difference in price. The more you drive, the more it makes sense to go for the hybrid.
Rate of Return
One of the most important financial concepts for lay people to understand is opportunity cost. Any money you commit for project A is not available for project B. The opportunity cost is equal to project B – the best possible alternative.
For an investment of $6,400 in a hybrid vehicle to make sense, it would have to generate a better return on your investment – adjusted for risk and taxes – than anything else you can do.
That includes paying down debt, contributing to a retirement fund, putting a down payment on a home or investment property, saving for your childrens’ college education, or even just simply banking the money somewhere safe as an emergency fund.
A word of warning: Eventually you’ll have to replace those hybrid batteries! That will cost as much as $3,000, at some point in the future, though it’s still a little soon to make a really accurate projection on how long these battery packs last and how much they will cost to replace in four to eight years. However, assuming a replacement cost of around $3,000, that will add another few years to your break even analysis. Be sure to look at all the factors involved in owning a hybrid.
So does it make sense?
Emotionally, it may mean a lot. If you’re a committed environmentalist, it may be worth a few grand to make a statement, and brag to your friends. But mathematically? The hurdle is high. Buying the hybrid may make some sense under these conditions:
- You drive a lot of miles. And I mean, a lot.
- You’re a safe driver – and unlikely to wreck the car. This goes for the kids, too.
- You have 6 months cash in an emergency fund.
- You can easily afford the up-front difference in price for the hybrid. If you have to think about it, I’d go with the gas model.
- You are debt free, except for your mortgage and perhaps some business debts with low, deductible interest payments.
- You have maximized your tax-advantaged retirement savings.
- You’re easily on track with tax-advantaged college savings plans.
- You have adequate life, health and disability insurance taken care of.
- You really want to drive the hybrid.
If you’re not there yet, but you still really want the hybrid, don’t lose heart. I’m confident that the price premium between the hybrids and comparable gas models will narrow. There’s nothing wrong with saving some money, and reassessing next year. Meanwhile, more and more of these cars will become available used.
Meanwhile, if you’re concerned about an increase in oil prices, talk to us! There are ways to prep for that!