If you own a vehicle, chances are you pay attention to the price of gas. Over the last decade, and particularly the last 4-5 years, we have seen the price of gas fluctuate from $1.70 per gallon, all the way up to $5.50 per gallon in some areas of the country. What causes this large swing in gas prices?
Politics is a great example of an external factor that influences the prices of oil. The paranoia after the BP oil spill is another. Prices fluctuate based on the season, and also based on the weather. As much as we may try to predict these prices, there is really no way to accurately budget for the increase or decrease in your fuel prices.
That is why you should start your own hedge fund using the price of gas at the pump.
How To Start Your Own Hedge Fund
The first step to starting a hedge fund using the price of gas, is to figure out how much money you spend in gas over the course of one month. If you have a monthly budget, this should be very easy. You will however, need to know specific dollar amounts, so you will need to track the exact amount that you spend at the pump over the course of one month.
Each time you fill up at the pump you should write down the price per gallon, and the total amount you spent. Let's use my daily commute as an example:
In March, I filled up my vehicle 4 times for a total of $184.45. The price per gallon stayed a very consistent $3.15 per gallon.
Once you have a baseline, you can begin to take advantage of hedging your money against the future rise in gas prices.
A ‘hedge” is simply a protection or a shelter, and many people hedge their portfolios.
When you “hedge” your money against the future increase in gas prices, you are essentially saving money when the price of gas is low, in anticipation that the price of gas will increase.
In my example above, let's assume that in April the per gallon cost of gas lowers to $3.09. The savings of $0.06 per gallon can be used to begin hedging money away for the eventual increase of gas prices. If I used roughly 58 gallons of gas in April, as I did in March, my $0.06 per gallon savings would amount to $3.48. This may seem like a nominal amount to save in your hedge fund, but the beauty of a hedge fund is that the more the prices fluctuate, the more you are able to save.
If the price of gas was initially $3.50 and reduced to $3.00, then my $0.50 per gallon savings would net me $29 per month in my hedge fund. This amount could easily add up to a significant savings that can then be used to even out the cost of gas, should it rise in the future.
Keeping these savings organized is easy if you use an online savings account or use free online money management software. Each month, once you have totaled up your gas expenses for the previous month, you can simply do a one time transfer of your savings into your online savings account. Then when you end a month where the price of gas increased, you can withdraw these funds to your checking account to cover your increase in gas expenses. Your budget stays flat, and you have successfully “hedged” your money against the increase in gas prices.
Other “Hedgable” Expenses
This same principle will work with virtually any expense that fluctuates over time. For example, many expenses in your home such as natural gas, electric, water, yard maintenance, or even daycare, fluctuate based on the time of year. By budgeting in the maximum monthly amount for that expense, you can essentially save the difference each month when that price decreases, then use those savings to combat any higher future prices.
This concept may not make you rich, but it will help you keep a close eye on your expenses, and provides a fun way to beat the system.
Have you tried this concept before? Has it worked? Can you think of any other expenses this concept may work for?