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Fuel Efficiency: Going Green Can Earn You More Green

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woman_driving_carOne of the most prominent statistics you'll come across when shopping for a car is miles-per-gallon (MPG). Recent years have seen more people insisting on better fuel efficiency for ecological reasons, but there is also a very dollars-and-cents reason for looking at a vehicle that gets a higher average. Going green can put some extra green in your savings account.

How much of a difference can this make?

The answer depends on the specifics of your situation, but working through an example can demonstrate that even a few miles per gallon difference in fuel efficiency could make a significant difference to your finances in the long run.

Gas up your retirement nest egg

According to the AAA, the average American drives 11,505.38 miles per year. Automotive sales site ISeeCars.com reports that Americans own their cars for an average of 7.3 years. Multiplying the average miles per year by the average ownership period yields a total of 83,989.24 miles that the typical American car owner can expect to put on each vehicle they own.

The cost of fueling all those miles depends on the vehicle's fuel efficiency, so consider two examples:

  1. One car gets 20 miles per gallon (MPG). Dividing the total mileage over the life of the car by its MPG figure, this carshould require 4,199.5 gallons of gas during its ownership period.
  2. Another car gets 23 MPG. This more fuel-efficient car may require only 3,651.7 gallons during the same period.

As of this writing, the average retail price of gasoline in the United States is $2.625, according to the U.S. Energy Information Administration (EIA). At that price, the owner of the first vehicle could expect to spend a total of $11,023.59 on gas, while the owner of the second vehicle would spend a total of $9,585.73. That's a total savings of $1,437.86 in fuel costs.

Clearly, even a few miles per gallon difference in fuel efficiency can be enough to offset a modest difference in the price of the two vehicles. Note that a similar difference in miles-per-gallon would make more of a difference in a comparison between two less fuel efficient vehicles, since 3 MPG would represent a bigger percentage difference in their fuel consumption.

Adding fuel efficiency savings to your retirement plan

Instead of thinking of fuel efficiency just as a potential way of offsetting price differences between vehicles, imagine what you could do with the fuel efficiency savings if the cars were essentially equal in price. If you chose the more fuel-efficient option, you could magnify the savings by adding it to your retirement plan contributions.

In the previous comparison between two cars, the total savings of $1,437.86 over the vehicle's ownership period could translate to savings of $196.97 per year. Suppose for every car you owned between the ages of 25 and 65 you looked for 3 MPG in extra fuel efficiency, and funneled the resulting dollar savings into your retirement plan contributions, invested at an average annual return of 6 percent.

The result would be an addition of more than $32 thousand to your retirement nest egg. This additional retirement savings could be further enhanced if your higher contributions helped you qualify for an additional employer match from a 401(k) plan.

Customizing fuel savings for your retirement plan

Car enthusiasts like to customize their cars, adding little individual touches to better suit their needs and tastes. Often personal finance tips can benefit from some customization as well -- take a general principle, and then decide how to adapt it to your situation.

Using the example described above for figuring what extra fuel efficiency is worth to the average driver, you can customize this calculation to more precisely fit your situation in the following ways:

  1. Gas type. Vehicles are increasingly being designed to run on premium gas, though some are still content with regular. This is important, because according to the EIA there is currently a 58.7 cents-per-gallon difference between the average US price of premium and regular gasoline. So, if you are comparing two vehicles that both get 20 miles to the gallon but one takes premium and the other regular, the average price difference would work out to about $2,465 over the vehicle's ownership period.
  2. Type of driving. You know those city/highway comparisons often shown for MPG figures? Be sure to use the one most relevant to the type of driving you typically do when doing fuel efficiency calculations.
  3. Amount of driving. For the purposes of these examples we used the figure of 11,505.38 miles per year, which is based on a AAA survey that finds Americans drive an average of 31.5 miles per day. If you drive significantly more or less than this, you should adjust this figure to your usage when calculating the potential impact of fuel efficiency on your budget. The more you drive, the greater the impact of differences in MPG.

Looking for fuel efficiency is not just a question of going green. Along with positively impacting the environment's future, insisting on greater fuel efficiency is an opportunity to positively impact your financial future.

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