Ditch the Gas Guzzler? Well, Maybe Not Yet

By RON LIEBER and TARA SIEGEL BERNARD

Your neighbors may turn up their noses, but keeping your gas-guzzling sport utility vehicle, or buying one coming off a lease, may be a smart move.

The fact is that not many people want your big vehicle right now, if Friday’s new auto sales data are any indication. Total S.U.V. sales were down 43.3 percent this July from a year ago, according to Autodata, an automotive information services company in Woodcliff Lake, N.J.

As for used vehicles, while they almost always fall in value over time, Jack Nerad, executive editorial director and executive market analyst at Kelley Blue Book, says that the rate of depreciation on large S.U.V.’s over the last six to eight months has been about twice what is normal.

Given the plummeting demand for big vehicles and the rise in gas prices that is responsible for the market turmoil, it is probably tempting to ditch your own large vehicle and trade down to something smaller.

But many experts suggest sitting tight, for a variety of reasons.

Here are some questions to consider if you are tempted to get rid of your gas guzzler, and some tips for figuring out whether it may be more financially sensible to hang onto it for a little longer.

WHAT IS THE TRUE COST OF A TRADE-IN? If fuel prices are behind your urge to drive a smaller vehicle, here is what you need to consider if you own a bigger one that you want to get rid of.

First, how much does fuel cost you now, and how much would it cost with a new car? Then, how much could you get for your old vehicle — and how much more money would you need to come up with to acquire a new one?

Philip Reed, senior consumer advice editor at Edmunds.com, was on the tennis court a month ago when a friend asked him what he ought to do about his Ford Escape S.U.V. “I said, ‘You probably don’t want to hear this, but your best thing is to keep driving it,’ ” he said.

Mr. Reed and his colleagues huddled to come up with a way to help consumers do the math, and the result is the new “Gas Guzzler for Gas Sipper” trade-in calculator at edmunds.com/calculators/gas-guzzler.html.

You select the vehicles in question, your location, the local price for gas and the number of miles you drive a month, and the calculator tells you how many months it will take for the fuel savings to equal the money you would need to acquire the new vehicle.

The calculator may actually underestimate how often it makes sense to hang onto a gas guzzler, since it does not account for sales taxes or the immense hassle of having to deal with all of the registration paperwork.

IS A SMALL CAR PRACTICAL? You will be tempted to play with the Edmunds.com calculator by swapping your hulking Chevy Suburban for a tiny Honda Fit or an itty-bitty hybrid of some sort. But let’s get back to reality for a moment. It is nice to fantasize about tripling your fuel economy, but you might have a trailer to tow or perhaps you are larger than average and are not comfortable in small cars.

Say you need to haul three rows of people but still want to save on gas costs. So you trade in your 2005 Ford Expedition for a 2008 Toyota Highlander hybrid with a third row. It will take more than 15 years to break even on that deal, driving 1,500 miles a month, according to the Edmunds.com calculator. The numbers may work better if you get a used car instead.

Tex Pitfield, whose company, the Saraguay Petroleum Corporation, delivers fuel to gas stations, airports and elsewhere, has done the math himself on his 2003 Lincoln Navigator. “I can’t justify trading it in,” he said. “It’s going to cost me more to trade it in than it will to keep driving it.”

WHAT IS YOUR LARGE VEHICLE WORTH? The answer is, probably much less than you think. About 36 million S.U.V.’s were sold in the United States in the last decade, according to Autodata. Plenty of people are blindly putting them up for sale or trading them in right now.

Used S.U.V. prices were down 12 percent for the months of May and June, compared with the same period a year earlier, according to J. D. Power and Associates data. But certain models had even sharper declines. For instance, the price of the Ford Excursion was down 27 percent, Hummers fell 25 percent, while Suburbans dropped 24 percent.

Take a standard 2005 Ford Explorer in good condition with 50,000 miles on it, for instance. According to Kelley Blue Book, a dealer might give you a stunningly low $6,740 when trading it in now. Selling it to a private party might net you $10,000, if you are lucky. In theory, a dealer would spiff it up and try to sell it for $14,315. But a bargain hunter might be able to find a sales lot full of Explorers coming off a lease and pay many thousands less.

By that same token, if your lease is up on that Explorer, you may be able to negotiate a rock-bottom price if you want to buy it.

The only good news on the falling value of your S.U.V.? “It seems to correlate with the rise in fuel prices,” said Mr. Nerad at Kelley Blue Book. “So it’s probably mitigating somewhat even as we speak.”

If you still owe money on the loan on your vehicle, there is also the ugly possibility that you may owe more on the loan than the vehicle is actually worth. You will want to check the residual value of it on sites like Kelley Blue Book to see.

WHO ELSE WANTS A SMALL CAR? Lots of people. Sales of vehicles with four-cylinder engines represented 47.2 percent of all new vehicle sales during June, up from 38.4 percent of all new sales compared with the year-earlier period. “They would be even higher if they were available,” said Charlie Vogelheim, vice president of automotive development at J. D. Power and Associates.

Take the Honda Civic: On average, there was a 16-day supply of these vehicles at the end of June, versus a 32-day supply a year ago (meaning it would take 16 days to sell existing inventory off a dealer’s lot), according to Autodata. There was a nine-day supply for the Toyota Prius, down from a 17-day supply last year. There was a 41-day supply for all new cars in June, down from 49 days last year.

“The consumer can expect to pay a higher price today for a compact or subcompact than they would have a few months ago,” said Ron Pinelli, president of Autodata. “There is more demand. The dealers aren’t discounting as much, if at all."

EMOTIONAL OR RATIONAL DECISION? “If you’re selling an S.U.V. or trading it in, you’re selling an asset at the low ebb in its value and trying to buy an asset that’s been bid up in value,” says Mr. Nerad of Kelley Blue Book. “In stock market terms, this wouldn’t be a propitious time to make that kind of trade.”

As for fuel costs, the way Mr. Nerad sees it, people tend to view the cost of a fill-up as their cost of owning the car. So if filling the tank has gone up to $75 from $50, it seems as if the cost of owning the vehicle is up 50 percent.

Do not fall into this trap. Your insurance bill has probably stayed the same. So has your car payment. Maintenance costs do not change when fuel prices do, either. Take a deep breath and consider staying put, no matter what your neighbors may think.

5 steps to building an emergency fund

By Joe Light, Money Magazine staff reporter

(Money Magazine) -- Lindsay and Patrick Heineke seem to be doing everything right, financially speaking. The Whitinsville, Mass. couple are aggressively paying down mortgage debt and are saving for retirement at a pace that would put most of their twentysomething peers to shame.
There's just one thing Lindsay, 26, and Patrick, 27, are missing. And in today's turbulent economic climate, it might be the most vital investment of all: a sufficient emergency fund.
This cash account is a kind of insurance policy against financial calamity. When you're suddenly faced with a bill you couldn't possibly have budgeted for, the money is there. In a worst-case scenario, like a computer replacing your job, the fund can cover your family's living expenses while you look for work.
The Heinekes - who only have $2,500 in cash - aren't alone in being underprepared: A third of Americans have no emergency savings, according to the National Foundation for Credit Counseling; 57% of those who have a fund don't have enough in it.
Surprisingly, Lindsay and Patrick have made a conscious decision not to have rainy-day savings. "We just feel confident that we won't need it," Patrick said when the couple first spoke to Money. They felt that their $116,000 income - from his job in custom manufacturing and hers in event marketing - was secure. And if they ever did face a disaster, they figured, they had $19,000 available on a home-equity line of credit (HELOC) to carry them over.
Dave Fernandez, a Scottsdale, Ariz. financial planner, says the Heinekes' sense of financial invulnerability is misguided - though it doesn't make them unusual. "Everyone feels secure in their jobs until they get handed a pink slip," he says. "But putting the job aside, what if their furnace or AC unit breaks? Big costs like that are always a possibility."
What's more, the HELOC may not be the guaranteed safety net the Heinekes thought it was. With home prices having dropped 9% in the past 12 months, according to Fiserv Lending Solutions, lenders have been freezing or reducing these lines in the areas that have taken the biggest hit.
Meanwhile, the real estate slump is supposed to get worse before it gets better; Fiserv projects that home values will plummet 10% in the twelve months ahead. And the job market is suffering too. Unemployment has edged up to 5.5%, the highest in almost four years, following some big layoffs. And job seekers are spending an average of 4.5 months handing out résumés, the Bureau of Labor Statistics reports. The message of the markets: Right now you can't afford not to have an emergency fund. Protect yourself by taking these steps.

1. Chart your expenses
To figure out how much you need to save, you first need to calculate how much you spend every month. As tedious as it may seem, it pays off to go over the past three months of bills to get a monthly average of your expenses. At a minimum, include:

• Mortgage payments
• Utilities, including bills for cable, Internet, landline and cell-phone service
  Groceries
• Insurance premiums, including home, auto and life. Add in at least $400 for individual health insurance - $1,000 for a family - in case the partner whose work provides it is the one to get laid off.
• Other car expenses including gas and loan payments
• Property tax (if not included in the mortgage payment)
• Discretionary spending Allow yourself some fun money. And be realistic: While there are certainly things like dinners out that you can cut back on in a pinch, don't delude yourself into thinking you can slash spending drastically.

Lindsay and Patrick calculate that their expenses are $4,750 a month. With only $1,000 in a savings account and a $1,500 buffer in their checking account, "we'd be through our savings before the month was out if one of us lost a job," admits Lindsay.
2. Measure your need
The rule of thumb is that you should have three to six months of living expenses in the bank. But your personal target depends on how stable your income is, says Tim Maurer, a Baltimore financial planner. With two salaries - which Lindsay and Patrick have - a three-month emergency fund may be sufficient in good times.
When finding a new job is tough, as it is now, it's a good idea to push that up to six months. If your family depends on a single income or if one or both of you rely heavily on commissions or bonuses, shoot for a six-month fund in safe times. And daunting as it sounds, aim for a year in uncertain times.
You can reduce the fund if you are guaranteed a severance package, but never dip below three months of cash - a lost job isn't the only potential emergency. Also, keep in mind that your fund may not be just for you. If your parents or grown-up children are likely to call on you in a crisis, you might need to tap your savings to support their emergency in addition to yours.
3. Find a place to put it
Often, the safest accounts offer interest rates that don't even keep up with inflation. "But the emergency fund isn't about yield," says David Greene, a financial planner in Fairfax, Va. Above all, you need an account that won't tumble in value and that's as liquid as cash.
Taxable stock and mutual fund accounts, while relatively easy to get at, fail the first test. When the economy is in trouble, chances are stocks are as well, making it the worst time to cash out.
The past six months have shown that home equity fails the second test. Lindsay and Patrick's HELOC is still intact. (Condo prices in Massachusetts are down only 2.6% year over year.) But since lenders have been changing the rules on HELOC equity, the Heinekes shouldn't view their line as guaranteed.
For the best combination of access, safety and yield, you have three options: a bank money-market account, a high-yield savings account and a money-market mutual fund. The first two have the benefit of being FDIC-insured for up to $100,000. And while money-market mutual funds are not insured, no individual investor has ever lost money in one.
Among these ultrasafe categories, pick the one with the highest yield. Go to bankrate.com to compare rates.
4. Build it up
Starting from scratch? Save fast. You don't want to be one emergency away from debt. Halt retirement savings - except to get your employer's full 401(k) match - and extra payments on low-interest loans until you have the target amount in the bank, says Maurer. Then resume retirement contributions.
Today, Lindsay and Patrick put $2,000 a month toward their 6% HELOC (they used $19,000 of their $38,000 line for home improvements and wedding costs). They could divert most of that to an emergency fund - still making $300 minimum payments on the HELOC. Combined with the $1,000 in their savings account, they'd be able to build a decent three-month cushion of $15,000 in nine months.
5. Look but don't touch
Once you've got the fund built, revisit it once a year and consider upping the amount if life events - like a new baby, new house or new salary - have increased your spending. Resist the temptation to use the fund for anything other than unbudgeted necessary expenses.
Hearing the planners' advice has made Patrick and Lindsay realize that they weren't as secure as they'd thought. They've decided to split their extra cash between their emergency fund and the HELOC, and they plan to move their savings from a bank account yielding a low 0.2% to a high-yield money-market account. Says Lindsay: "We've really had our eyes opened to how much risk we've had all this time."