I don’t usually dive into niche topics like this, but after spending 12 hours car shopping over the weekend, it feels fitting.
That’s a lot of test drives and awkward conversations with overly enthusiastic salespeople. Sorry, Clayton, I’m not ready to picture myself driving this car off the lot today… why do you ask?
Long story short, I’ve been comparing a lot of cars recently. You’ve probably noticed that hybrids are always more expensive than their all-gas counterparts.
But here’s the kicker aren’t hybrids supposed to be cheaper to operate? And if so, could they actually save us money over time? That question set my finance brain into overdrive.
The Value of a Dollar Today vs. Tomorrow
As Aesop wisely said in 600 BC, “A bird in the hand is worth two in the bush.” Or in simpler terms, “I’d rather have a dollar today than two dollars 20 years from now.”
This principle, known as discounting, explains why money today is worth more than money in the future. We’ve used this concept before when analyzing mortgage costs.
When you buy a hybrid car, you pay a higher purchase price upfront. The idea is that you save on operating costs over time. But the future savings are worth less than the extra dollars you spend today.
The big question is: do the savings on operating costs over the years make up for the higher upfront price and depreciation? To figure this out, we need to:
- Understand the differences in costs between hybrids and gas cars (sticker price, depreciation, fuel, insurance, and maintenance).
- Determine an appropriate discount rate and apply it to the analysis.
Choosing the Right Discount Rate
As of 2022, the average age of cars on U.S. roads is 12.5 years. However, the typical car owner keeps their vehicle for about eight years before selling it or retiring it due to breakdowns.
For this analysis, we’ll split the difference and use a 10-year ownership period to compare hybrid and gas cars.Now, how much less is a dollar in 2034 worth compared to today?
Warren Buffett recommends using U.S. Treasury bond rates as a discount rate since it’s considered “risk-free.” I agree. As of February 2024, the 10-year Treasury rate is 4.3%.
For example, if I had $74.47 today and invested it at 4.3% annual interest, it would grow to $100 in seven years. So, saving $100 in 2031 is the same as having $74.47 in your pocket today.
Comparing Hybrid and Gas Cars
Let’s take a real-world example: the Kia Sorento. My wife Kelly and I have been looking into this model as we prepare to be “Baby on Board” parents. (Side note: what’s the deal with those stickers?)
We’ll compare the all-gas Sorento to the hybrid Sorento, with all the details shown in this spreadsheet. Feel free to make a copy and tinker with the numbers.
Sticker Price and Depreciation
The all-gas Kia Sorento starts at $31,990, while the hybrid begins at $36,990. Both vehicles depreciate 53% over five years.
Gas Expenses
To calculate gas costs, we need three pieces of information:
- Annual mileage (we’ll use 14,000 miles, the U.S. average).
- Fuel efficiency (24 mpg for the gas model; 35 mpg for the hybrid, based on AWD versions).
- Gas prices (currently $3.27 per gallon).
From these, we find:
- The hybrid costs $1,308 per year in gas.
- The all-gas model costs $1,907 per year.
Insurance Costs
On average, full-coverage auto insurance costs $2,000 per year. Hybrid insurance tends to be 7% more expensive, so the Sorento hybrid would cost $2,140 annually.
Maintenance
Hybrids generally have lower maintenance costs due to features like regenerative braking, no alternators or starters, and simpler transmissions. However, I couldn’t find solid numbers to quantify this advantage.
For now, I’ll assume an average of $600 per year for maintenance, with more expenses occurring later in the vehicle’s life.
The Total Cost: Hybrid vs. Gas
Over a 10-year period, the all-gas Kia Sorento would cost $56,491, while the hybrid would cost $55,662 in 2024 dollars.
Here’s the breakdown:
- Depreciation: The hybrid costs $3,000 more.
- Fuel: The hybrid saves $4,997.
- Insurance: The hybrid costs $1,167 more.
While the savings are modest, the hybrid edges out the gas model in terms of overall cost.
After all this analysis, do hybrids make financial sense? For some models, like the Sorento, the difference is marginal. However, for others, the gap might be more significant—possibly in the thousands of dollars.
For me, this was about gaining clarity. Even if real life doesn’t match my model perfectly asteroids hitting my garage notwithstanding I now feel more informed. Hopefully, you do too!
