Monday 21 July 2008
The SUV Problem: attitude in personal finance
the psychology of breath-taking denial in the context of economic efficiency
(Note: I have my opinions about unneccessary use of SUVs for image purposes, but the following is completely free of any personal pointed judgements about car manufacturers, people who drive SUVs in general, or any comments about environmental impact or anything else. The topic is specifically about the personal finance situations some SUV owners are finding themselves in these days & the problem I see in some commentaries urging people that they'll lose money by trading in their gas guzzling mammoth vehicles.)
I've been reading these articles recently about the SUV falling out of favour because of higher fuel prices. Naturally more of the new cars being purchased now for basic work commute needs are more fuel efficient cars. It makes sense, for people already in the market for a new car, in light of recent oil prices, to pass on a big vehicle if they don't really need it.
But I've also been reading a lot of commentaries that suggest that it's NOT a wise move to trade in your gas guzzler just to get a fuel-efficient car. In essense, advising people who already have inefficient vehicles, to keep on driving them.
The Burns family debates whether to ditch the SUV
Should You Trade in Your SUV for a Fuel-Efficient Car?
But one thing missing from each & every commentary I've found on this subject - where people are urged not to trade-in their inefficient vehicles - is the possibility of getting a, -- god forbid -- used, older, fuel-efficient car. All of these commentaries assume anyone interested in trading in their economic liability is going to run out & buy a brand spanking new car - and lose big in the process.
That's just not the case.
Or at least it shouldn't be for any rational person who is really considering taking a hit on the value of their car in order to economize.
I'm pretty sure the gazillionaires who drive Hummers for fun aren't the ones looking to downsize for fuel efficiency. Even if they want to save on road trips, they could afford to buy a Honda Civic, and keep their prized 5-ton vehicle for being seen tooling around town.
I regularly hear of people saying that they love their SUVs, and they wouldn't get rid of them "even if gasoline hits $10 per gallon"... Because, I assume, apparently they can afford it. (Or they feel/believe that they can.)
No, most of the people who are looking to downsize for economic reasons are people who are already hurting from gasoline prices. (Or at least they worry about hurting in the near future.)
And I think it's sad if people aren't looking further into the math, because they're told it wouldn't be worth it to trade in their money pisser, and continue to let the vehicle bleed them into bankrupcy court. Just because they really want to believe that keeping their SUV as a commuter vehicle is the sensible choice. So they look no further than, 'See, it wouldn't be worth it to switch anyway.'
I used the calculator to do a little experiment...
Gas Mileage Savings Calculator: Car Cost vs. Fuel Savings
I'm no economist nor financial advisor, I don't have a degree in accounting... But I'm frugal and I know how to budget. Maybe there's some flaws in my calculations, but I'm really thinking people are missing the obvious.
Let's take a hypothetical example like this that I just came up with in my head, based on everything I've been reading & hearing about in the news:
Mister Smith is in the home building industry, and his wife is a mortgage broker. They live in a big house in an affluent suburb, which, when they bought it 8-10 years ago, in the housing heyday, when gasoline was $1.50 a gallon, they could well afford it. But now that the housing bubble has burst, and the subprime mortgage crisis is in full swing, and their son had an illness requiring a lot of medical expenses, and oil prices have jumped the sharks circling the land yaghts... Well now they're now in trouble, or at least heading that way fast.
The Smiths have taken a good hard look at their projected finances, and they figured out that they need to sell the big house and downsize to a smaller house in a more reasonable neighborhood, or, at their current expense level, they'll be facing foreclosure in less than a year. They're having trouble selling their home, especially not at the price of what they still owe on their mortgage, so it may take awhile. They're looking to cut costs wherever they can, so they can keep up with the mortgage payments, and keep their good credit intact, until they find a buyer.
Mrs Smith has been driving a 2004 Ford Explorer, which is paid off now, for her commute to work, and also to school (now that she's looking to switch professions). She drives about 1,000 miles a month.
Now if the Smiths want to trade in their 2004 Explorer for a brand new Prius or a new Honda Civic, for that matter, of course the calculator is going to tell them that it would take 3 years or something crazy to start saving money - way too long for them to wait, and way too much money to throw into the void until then.
BUT, let's say they sold their 16mpg Explorer for $10,000, and then went out & bought an older $10,000 car that gets 21mpg - say a 2002 Subaru Forester or something like that. According to that calculator, they'd break even on the switch, and immediately start saving $60 per month in gasoline. Or say they bought a 2001 Honda Civic for about $8,000. They'd immediately have a surplus of $2,000, and immediately be saving $120 a month in gasoline.
And I'm thinking that could most certainly, at the very least, assist them in trying to avoid financial disaster, and allow them to transition to their new circumstances in the nick of time.
(Note: in the calculator, I input my own figures instead of taking their monetary values based on Make & Model. I actually adjusted the sell price of the SUV to be lower than the calculator estimated, and adjusted the buy price to be higher than the calculator estimated. So actually, the calculator is saying they'd be saving even more than I'm thinking they would.)
Of course, I imagine that some mortgage brokers, for example, who've been livin' large & flyin' high, living in McMansions, driving SUVs, & spending $4 a morning at Starbucks, wouldn't even consider driving a *gasp*, old car, until the repo man came, and then the sheriff forced them out of their foreclosed house & they found themselves living in a rusted out van down by the river.
I imagine that many people in that position have started living on hope & credit cards, and haven't looked far enough ahead to avert disaster.
Denial can be a funny thing.
I could easily see the proverbial Smiths continuing to believe that they're in the same financial position as Mr. Burns, when they're NOT, no matter how much they wish it to be so.
And that unavoidable human psychological factor is why it bothers me that all these financial experts keep pushing this general idea that downsizing is a bad bet for any SUV owners, when that's simply not the case.
Sure, if every SUV owner absolutely insists on driving, if not an SUV, then some other image of wealth that just happens to get better gas mileage, then yeah, those commentaries make sense.
But in the real world, where formerly wealthy people, middle class people, and regular joes who thought themselves wealthy, are heading into credit nightmares & mortgage disasters, with no relief in sight, that kind of generalization just doesn't wash.
And I find it troubling that little old shoe-string budget 17 year old car driving me is seeing logic that so-called financial experts seem completely oblivious to.
Is our culture's group psychology really so irrational that the thought of going older when buying another car is so unthinkable that even financial experts feel compelled to 'enable the denial'?
I guess this is the kind of thing that anthropologists have a field day with years later.
posted by Chloe | Monday 21 July 2008 12:07 AM