Very interesting topic for today isn’t it? We are happy at the gas station. Until recently, as late as last July/August – we were paying $50 – $55 to fill up my car and SMB (My wife) was spending $40 – $48 on her car which has smaller fuel tank. I looked at credit card statements from 2014 to arrive at the range. Last weekend I spent just $35 to fill my tank.
On average, a govt. agency estimates a $550 that an American household will save on gas this year. This was based on a December estimate. Oil plunged a lot more since then. We can expect to save more than $550 now. Now, what are you going to do with the money?
A very pleasant question to ask, no doubt. But it can be more pleasant if you find a better use of the money you save.
(See Also – Various ways to save money on gas)
There can be various ways to use this money, as this article says. You can save towards emergency fund (Save), you can buy things you aspired for (Spend), you can donate (Donate) or, you can invest the money (Invest) for future needs.
Let’s break it from a consumer point of view (not reporter’s) for our decision-making and see if which one is the best way, if any.
But, before you do that, first thing first;
As a first step, I’d suggest you re-allocate your budget, if you haven’t done so yet. You can readjust (reduce gas budget) by looking at your gas expenses for first 15 days of the year.
Unless you re adjust you won’t see the real difference in your personal finance this money brings in, at least I felt it that way.
Now let’s talk about the surplus amount. I am against reallocating the excess money to some other budget categories. If you were doing fine with the current allocation for entertainment, food or education, etc. I think you shouldn’t start spending more on them. (unless there’s a very pressing and logical reason to do so).
On the other hand, if you were postponing receiving a treatment or taking a certification test for the lack of money, you can certainly do so now. Although the gas saving may not be more than $50 a month, keep in mind.
As a personal finance blogger and an advocate for slow and steady wealth growth model, I’d certainly put investing my first priority. But based on your personal situation you should take decision.
Start by asking yourself what did you do with the pay hike you received last time? (here’s one of my favorite posts with tips to increase your salary).
If you remember what you did with your budget, find out whether it worked as well as you anticipated or was the raise got lost somewhere in your increased spending.
In case you don’t remember, check your monthly spending before and after your raise. Mostly we don’t have plans with the extra money we start getting. I don’t remember adjusting our budget after the raises I received in last few years.
Doing nothing worked for us actually. That is because we save budget surplus automatically. So not increasing budget with increased income meant saving more money with each raise.
But,saving money on gas is a different situation, here doing nothing with your budget can make it irrelevant. You also may run in to a situation where spending on other items may increase, as most of us try to stick to the total spend limit as opposed to limits on each items. So the savings will evaporate before you even realize it.
If you invest the saving
Now a simple compound interest calculation – $550 every year at long term stock market gain rate of 6% (conservative estimate – lower than actual historical return) will become $7684 in 10 years.
A good enough amount to let you drive a bigger and better car on your next purchase. Or even, with some more money, it will let you replace your current car with a used car.
That means a replacement car with nominal cost!
The same compound interest formula will turn your gas saving into $21,446 in 20 years. Can it reduce some student loan burden on your child?
In 30 years this will become $46,000 and that will be extra money in your nest egg!
If you just save it
A $550 yearly in your checking/saving account, and with a few years this can become a full-fledged emergency fund that can sustain your unemployment for 5-6 months. A couple of years of saving will pay for your auto insurance premium as well. Opportunities are a lot.
A novel way to use this money for your vehicle would be to increase your deductible each year the gas price stays low.
If you have a $1,000 deductible in your insurance policy now. Next year it can be increased to $1,500 as you’ll have $550 from gas saves.
The year after you can increase deductible to $2,000. The more your deductible is, the less premium you pay to the insurance company.
your gas fund combined with the money saved from auto insurance premium can together go in to your car fund towards buying your next car!
Also read – How to save money on gas
If you spend it
In case you do, spend on experience rather than things. You may out it in to your travel fund and stay a couple of nights extra during your next vacation, just an idea. You can also undertake a road trip with the money.
If you donate it
May this be the charity you were always interested in but, couldn’t contribute because of your budget constraints.
There is no best way to use the money you see. Take the decision that best serves you. In our case we’ll just try to pay off our mortgage faster with the additional contribution towards principal. That’s my plan as of now.
This article assumes the gas prices to stay low for some time in future, which may or may not happen actually.
Whatever you do with the extra money you save, make it visible and apprehensible. The joy of purposing the save in a tangible and useful way could give you more pleasure than what you get just by spending less at a gas station.
Make living a fun! make saving a fun!