One of the challenges with personal finance is separating valuable information that can save you money from overblown marketing claims and questionable advice that can steer you in the wrong direction.
That may sound obvious, but in practice it can be a challenge. Decisions people make to save money, such as improving a home’s energy efficiency, or giving up a car in favor of using mass transit, are guided by factors including the expected saving.
A recent claim that was repeated by CARTA, the Charleston area’s bus system, got me thinking about this. On Twitter, the agency said: “According to @APTA_Transit, a two person household that downsizes to 1 car can save roughly $9,000/yr.” (APTA is the American Public Transportation Association).
America Saves, a campaign managed by the nonprofit Consumer Federation of America, has also repeated that claim.
Let me say, before I destroy that claim, that I’m generally a fan of efficient mass transit systems. When I lived in New York City, and in London, I did not own a vehicle, because I didn’t need one.
But when it comes to saving money, the amount a person can save by using less of something, such as electricity or gasoline, or by getting rid of something, such as a car, is obviously capped by the amount the person is spending on that thing.
To save $9,000 a year by getting rid of a car, you would have to be spending more than $9,000 a year to own and use a car — the cost of the car, plus the additional amount of money you would need for transit fares. A key part of APTA’s assumption, which wouldn’t apply to many people in Charleston, is that drivers spend thousands of dollars each year paying for parking. The assumptions also rely on AAA’s cost-of-driving formula, which assumes people buy new cars every five years and trade in the older ones, and includes nearly $3,000 in depreciation and financing costs as a yearly expense.
There is an underlying truth, that people can save money by not having a car. Car payments, insurance, taxes, fuel and maintenance do add up. But average savings of $9,000 — ridiculous.
With claims of savings, it’s important to delve into the assumptions that are being used and see if they apply to you. For example, a person considering buying a home might hear about the financial benefits of the federal mortgage interest deduction, but roughly half the people with mortgages get no financial benefit, because they don’t itemize federal deductions.
On the flipside, claims about the cost of things also deserve scrutiny.
For example, if you’re considering having a child, you might be freaked out by the estimate that it would cost a middle-income, two-parent household about a quarter-million dollars to raise child to age 18. That statistic, reported last month in The Wall Street Journal, comes from the U.S. Department of Agriculture.
As the middle-income father of an 18-year-old, I can agree that raising a child involves substantial expense. But a quarter-million dollars? Delving into the assumptions, we find that nearly 30 percent of the cost estimate, more than $73,000, is for housing. Another $44,400 is for education, and day care.
Some of the costs are real. Kids have to eat, and have clothes and health care. But, having a child doesn’t necessarily raise a person’s housing costs, and the need for education and day care costs won’t apply to everyone.
That’s the trouble with averages, whether it’s APTA’s measure of average savings from getting rid of a car, or the Department of Agriculture’s estimate of the average cost of raising a child. There are underlying assumptions that may not apply to you.