talks about financial topics from the perspective of a physicist turned financial advisor (aka insurance agent)
Wednesday, April 6, 2016
Fuel Economy and Investment
A cousin of mine rides a scooter that’s heavily modified; in the parlance of the modding community, he got a bore-up, which means the engine was modified to a larger displacement compared to the stock setup. For many motorcyclists, getting a motorcycle with a larger engine (and with greater acceleration to weight ratios) is an eternal itch, since many guys (and they’re mostly guys) itch to be able to outrun every other vehicle on our highways. Thus, the bore-up, especially if the motorcyclist cannot afford specially built motorcycles that are intended for the race track.
One of the results of such tinkering with their vehicles, alas, is higher fuel consumption rates. One measurement of fuel efficiency is the kilometer per litre ratio. It’s a number that gives how many kilometers your vehicle can travel on one litre of fuel. For example, my own vehicle, a scooter, has an average rate of 40 km/l. My cousin’s vehicle, on the other hand (after the bore-up), runs at 25 km/l. (Fuel efficient petrol powered cars, on the other hand, perform at around 12 km/l.)
I asked him how many kilometers he travels in a year, and he gave a figure of 6000 km. So let’s now do some calculations. Modification costs money, so let’s estimate that he spent PhP 10K for the modification. Next, without the modification, his motorcycle would have consumed fuel at the rate of 40 km/l. So in one year, the amount of fuel he consumed would be 6000 (km)/ (25 km/l) or 240 liters. The cost of 240 liters at today’s fuel prices of 40 pesos per litre is PhP 9600.
On the other hand, if the engine was left unmodified, the total gas consumed would have been 6000km/(40 km/l) or 150 liters. At PhP 40 per liter, the cost of fuel would have been PhP 6000. This means, during this year (his motorcycle is approximately a year old), he spent an additional PhP 13600 (PhP 10,000 +PhP 9600 -PhP 6000), compared to what he would have spent if he chose to keep it all-stock.
My cousin is 27 years old. Suppose he had chosen to spend that money on shares in an index fund (a conservative estimate of real return is at 8 percent per year), this money (PhP 13600) would have grown to about PhP 508K by the time he reached retirement age. Such is the power (pun intended) of compounding.