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1. Get rid of the car as soon as you can
2. Rent a car when you need it OR buy a cheap one (like Robert Paterson's Echo/Yaris or maybe the new Smart car) and own it outright (no leasing!)
3. Buy a Segway to get to work. It'll cut your 40-minute walk down to a 10-minute roll (or less).
I've actually looked into the Segway lately because I'm in the same situation, where I live close to work and necessary shopping, but still need a car occasionally and only buy one tank of gas per month.
The Segways are pricey, but use no gas. Others have suggested biking to me, but my beef there is that I don't want to show up at work sweaty, nor do I want to deal with basically a second set of clothes for riding (that adds commute time because of the changing of clothes and such).
Just a thought!
On a bright note - I consider living within walking distance of everything a huge luxury, and I'm sure you do as well. Ann Arbor was supposedly soooo convenient, and yet I still found myself in the car for 30-40 minutes at a time, and often on the freeway. Maybe I was doing something wrong... :)
I also was in your situation, and although I was petrified, I took the big bite, and got rid of my car. I was so fearful at first, wondering how I would get to the hospital at 3:00am if something happened, and how I would survive without the 1:00am drives I used to take when I couldn't sleep....
Well, after one month's time without, I had a complete epiphany. I realized that I was alot less stressed out, since I didn't have to worry about people breaking into my car, and I didn't have to waste a couple hours per weekend washing the car, nor worry about taking it into get maintenance done. Not only that, I saved an extra $300/month because I wasn't buying as many frivolous things at the store (since it wouldn't be so easy taking them home).
Now, one and a half years later, I worry about the day I might have to go back to owning a car (i.e. if my work moves to a remote location). I'm very content and much less stressed without. I dont need to worry about my 1:00am drives, since I'm sleeping much better than ever! All I can say is not only better for the environment, but it's better for you too. I hope you find the courage to take the plunge and go car-free!
Best regards,