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As gas prices rise, will buying an electric car save money?

By Gary Foreman
Published: April 28, 2011

The New Frugal You
New Frugal You columnist Gary Foreman
Gary Foreman is a former financial planner who currently edits The Dollar Stretcher website and newsletters. He writes "New Frugal You," a weekly Q&A column about frugal living, for CreditCards.com

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Question for the CreditCards.com expert

Dear New Frugal You,
With gas pushing $4 a gallon, I'm considering trading my 3-year-old SUV for something more fuel efficient. I'm tired of paying $60 for a fill-up. Something a little smaller that gets better MPG looks like it would be a good way to cut my expenses. I'm even considering an electric car, like the Chevy Volt or Nissan Leaf. What do you think? Is that a frugal move? -- Tired of Being a Gas Hog 

Answer for the CreditCards.com expert

Dear Tired,
You're right. Gas prices are hurting a lot of family budgets. Just a year ago, gas cost about $1 a gallon less than it does now. For a family driving 10,000 miles per year and getting 20 miles per gallon, that works out to an extra $500 per year -- clearly, that's a sum that could affect your family finances.

Buying a more fuel efficient car is tempting. After all, if you could double your gas mileage, you'd cut your gas bill in half! So let's take a look at how buying a new car would affect your budget.

We'll need to make some assumptions to illustrate. Don't worry if the estimates are rough. Once you see how the math works (it's easy), you'll be able to plug in your own numbers and do the calculation.

Let's assume that your SUV is getting 10 mpg in town, it's paid for and you drive about 10,000 miles per year.

In our first illustration let's assume that you'll be replacing it with a car that gets 30 mpg in town. The car will cost $20,000. A 48 month, 5 percent car loan would cost you $460 per month. You can use the Bankrate auto loan calculator to see how much the monthly payments will be).

Now for the fun part -- the savings. If you drive 10,000 miles per year that's 833 miles per month. So if you get an extra 20 mpg you'll need to buy 42 fewer gallons each month (833 miles / 20 mpg). At $4 per gallon that's a gas savings of $168. Which is good, but not nearly enough to cover your $460 car payment.

What happens if gas goes to $6 per gallon? Multiply the gas saved (42 gallons) by the price per gallon. At $6 gas that works out to $252 per month saved. The truth is that gas would need to go to roughly $11 per gallon before the savings would pay for your car!

OK, so buying a new gas-powered car isn't the answer. What about the elctrics that everyone is reading about? You wouldn't need to buy any gas. Could that help your family budget?

Let's use the Nissan Leaf for our example. The suggested retail price is $32,000, but you would qualify for a federal tax credit of $7,500. So you'll be out-of-pocket by $24,500.

How much does it cost to drive? The batteries are advertised to get 100 miles per charge. At an average cost of 8 1/2 cents per KWH, it'll cost $2.04 to recharge. That works out to about 2 cents per mile. Wow!

How does that compare to our current 20 mpg car? If gas costs $4 per gallon you're paying 20 cents per mile ($4 gas / 20 mpg). That's a huge savings for the electric car!

But before you head down to the dealership there's something that you need to consider: battery life. Nissan estimates that the batteries will last five to 10 years. If we assume five years (considering that most manufacturer's estimates are pretty generous), that means that we'll need to replace the batteries every 50,000 miles.

New batteries will cost $10,000 according to Nissan. So the cost of replacing the battery works out to 20 cents per mile ($10,000 / 50,000 miles). Added to the 2 cents for recharging, it'll cost you 22 cents per mile to drive the Leaf. Just about what you're paying for gasoline at $4 per gallon.

And, we haven't factored in the cost of your monthly car payment. On a 48-month loan, that would be $620 per month.

So until the price of gas goes up or the cost of replacement batteries comes down, buying a new electric car won't help your budget. For now, the best thing you can do is to keep your car well maintained, check your tire pressure and reduce the amount of miles you drive.

See related: The cost of commuting, Buying a car? Know the 3 main costs of auto ownership, Using credit, debit card to buy gas now a major financial decision

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