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Buy high-mpg car instead of CD?

By Claes Bell · Bankrate.com
Monday, March 19, 2012
Posted: 3 pm ET

If you're a habitual CD investor, you've probably read a lot of suggestions on what to do with your money now that CD rates are at record lows. You may not have heard this one, though: Veteran finance writer Scott Burns published a column last week suggesting that with one-year CD rates at 0.34 percent and headline inflation running near 3 percent, it might make sense to just put that money into buying a more fuel-efficient car.

Suppose you have a car that gets 22 miles to the gallon. Suppose you replace it with one that gets 44 mpg.

If you drive 15,000 miles a year, this means you'll be buying 340 gallons of gasoline instead of 680 gallons, a savings of $1,269 at the current national average gasoline price of $3.73 a gallon.

The gasoline is paid for with after-tax income, so if you are in the 15 percent tax bracket you'd have to earn $1,493 in interest to be able to pay for all those gallons you might be saving.

So which will it be? A change of vehicle, or $439,118 in one-year CDs? Yes, you would need to have $439,118 in a one-year CD to get $1,493 in interest.

I think Burns has at least part of his tongue resting firmly in his cheek here. Part of this modest proposal is to point about the absurdity of the situation of lifelong savers, who are seeing virtually no return on their nest eggs.

But as serious personal finance advice, I think this approach is lacking. Sure, you may save $1,269 worth of gas per year. But the average small sedan, which you'd probably buy if you're looking for that 44 mpg, will cost you an average of $2,560 per year in depreciation alone for the first five years of ownership, according to AAA' s 2011 "Your Driving Costs" study.

Plus, should you need money to cover living expenses, you can't liquidate your car instantly the way you can a CD. To me, you're better off just stashing that money in the highest-earning savings account you can find until things get better. Alternatively, it might make sense to consult with a fee-only Certified Financial Planner to get some ideas for higher-yielding investments that won't increase your risk profile beyond what you can bear.

What do you think? Is using liquid savings to cut costs a better use of funds than buying CDs?

Follow me on Twitter: @ClaesBell.

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