If The Price of Gas Matters to Your Family Budget, You Are Doing It Wrong

The Lesson: It is not the cost of a gallon of gasoline that counts.  It is the inflation-adjusted cost of a mile driven that matters.

As I read the Chicago Tribune, I came across an Associated Press article called Gas Takes Its Biggest Bite Out of Family Budget In 30 Years.  That piece states:

When holiday travel is over, the typical American household will have spent $4,155 filling up this year, a record. That is 8.4 percent of what the median family takes in, the highest share since 1981.

There was a comment left by someone named Albi8gensian that brought me so much joy because it exactly identifies what is really happening (I’ve corrected some of the typos):

A better headline would be, “Average American CHOOSES to spend $4,155 per year for motor fuel.”

Because, for most it is a choice. Most Americans could get by with a smaller, less powerful vehicle, and/or they could drive less.

They don’t, because they are willing to pay extra so they can drive more, in larger, more powerful vehicles.

$4,155 at $3.50/gal is 1187 gallons. At 35mpg, that’s 41,550 miles per year.  At 35mpg, that’s about ten cents per mile for fuel- which surely is less than other per-mile costs of using a car.

The article implies that other purchases are being cut back to pay for motor fuel. Perhaps they are, but if so, it’s because Americans value mobility and power and size more than they value other ways in which they could have spent this moeny.

For what it’s worth, I think one could make a case that the inflation-adjusted, per-mile cost of driving is lower now than it was in 1955- because although gasoline costs about twice as much (adjusted for inflation), most cars get twice as high mpg. And they last longer, and have lower maintenance costs.

Yes!  A thousand times yes!  Whoever wrote this comment is evaluating not only opportunity cost, but the inflation-adjusted per-mile utility in real economic terms.  This is how you should be thinking.  If you want to see the world for what it is so you can adjust for it and get your family the things you want and need, this is the most efficient framework for achieving that end goal.

Some Historical Perspective on the Price of Gas

Fuel efficiency means that on a per mile travelled basis, gasoline is cheaper than it has been for much of the past century.  It is only a problem because certain demographics, such as males with only a high school degree, have seen inflation-adjusted decreases in real wage income and have no sense of history.

Let’s look at raw gasoline costs from 1950 and compare them with today.  Take a moment to glance at this historical chart, which shows the average fuel efficiency in 1950 was 13.9 miles per gallon. That same year, the average price of a gallon of gasoline was 27¢, or $2.42 today.  That means to travel 1 mile cost 1.94¢ in 1950′s terms.  Adjusted for inflation, that is roughly 17.41¢ per mile today.

The current national average for a gallon of gasoline is $3.23 and the average fuel economy is at an all-time best at around 22.4 miles per gallon according to the EPA.  That means it costs roughly 14.42¢ per mile in gasoline today.

In other words, every mile you travel today costs 2.99¢ less in raw gasoline terms than it did in 1950.  If you drive 15,000 miles a year, your real fuel expenses are $448.50 less than they were for your grandparents or great-grandparents.  Plus, you likely have heating, air conditioning, satellite radio, navigation, iPod hookups, and better safety standards.

We’ve Already Discussed the Fact that Gasoline Prices Shouldn’t Matter to You

Early this year, we looked at the year-end historical data estimates from AAA regarding what it would cost to own a car in 2011 in the United States.  Even then, I told you that if the price of gas cuts into your family budget, you are doing it wrong.  Even when my income and net worth were much lower, I always kept automobile expenditures to such a tiny percentage of my operating costs that it didn’t matter if gasoline was $1 a gallon or $5 a gallon.  It shouldn’t matter to you, either.  If it does, you are living dangerously on the financial edge.  

If you live 50+ miles away from work, drive a fuel inefficient vehicle, and allow transportation costs to eat into more than 5% of your after-tax household budget, it is your own fault.  It is wasted money.  Even worse, when you factor in the additional commute time to value your per hour compensation, it is likely you are earning far less per unit of time than you think.

This begs the question: If gasoline is far cheaper on a per mile traveled basis than it was in the 1950′s, why weren’t our grandparents complaining the same way society does today?  First, the sense of entitlement wasn’t nearly as prevalent in the generations coming off the farm because they knew how to work.  If you wanted to eat, you had to rise before dawn to milk the cow, collect the eggs, and feed the goat.  Many of my older family members grew up on farms and this was an integral part of their lives.  

Even more than that, most of them weren’t living paycheck-to-paycheck because leverage ratios were far lower in the past.  They bought a home to pay off completely.  They saved cash to buy a single family car.  They didn’t put furniture on credit cards.  It’s amazing how much extra cash you have when you aren’t sending the bank double-digit interest charges and fees.

Having a nice car is a wonderful luxury, but it is precisely that – a luxury.  There is something fundamentally perverse when the biggest asset owned by most households other than their primary residence is an automobile that is virtually guaranteed to lose all of its value.  Worse yet, it is often financed and costs thousands of dollars in interest expense on top of the purchase price.