THE COST OF SMOKING
BY: Noel Whittaker (Australian Doctor Magazine, 3 December 1999) -- prices are in Australian $ ($A 1= $US 0.65c.)
The price of cigarettes has gone up again - this time due to a change in the way excise is calculated. It's bad news for smokers but it does provide a splendid opportunity to think about what the habit costs.
Let's start with two people aged 20. We'll assume that one chooses to smoke, and the other chooses to invest the price of a pack cigarettes a day into a managed trust that invests her/his money into a range of blue chip shares. The price of cigarettes rises at least as fast as inflation, so if we assume inflation runs at 4% per annum, the price of cigarettes will rise by 4% per annum too.
If the non-smoker increases her investment by 4% per annum too, the amount invested, or spent on cigarettes by age 65 will be $331,000. If the share trust returns 9% per annum, (a modest return as the average for the last 16 years is around 14%), the sum accumulated by the investor will be $2.4 million at age 65. The smoker's return on his investment is ongoing health problems, the non-smoker has become a millionaire.
You may argue that $2.4 million won't be a huge sum in 45 years after inflation is taken into account, but it is enough to buy a $25,000 a year indexed pension in 1999 dollars. Put it another way. If a person who is young now wants to retire at 65 on an indexed income of $25 000 a year, all they have to do is invest the equivalent of a pack of cigarettes a day from when they start work.
This sounds simple if you are young, but what if you are older and have a mortgage now -
CASE STUDY: The Jones family have a home loan of $100,000 over 30 years at 7% which they are repaying at $665 a month. The latest price rise means that they will be spending $10 a day on cigarettes, and they decide to quit and add the money they save to their home loan repayments. This increases the payments to $969 a month and enables them to pay off their loan in 13 years instead of 30. The interest saved is a huge $87,000. Home loan interest is not tax deductible, so saving $87,000 is equivalent to the family earning nearly $160,000 from their job. Just giving up smoking gives them the equivalent of $160,000 in extra salary.
The benefits don't stop there. In 13 years they will have $969 a month available to invest, as it is no longer needed for paying off the home mortgage. If they put that into a managed trust that returned 9% per annum they would have over $650,000 dollars in 20 years.
Cigarette smoking illustrates two basic principles - we can always find the money to make small "investments" every day, and tiny sums invested regularly grow to huge sums in the long term.
www.health.usyd.edu.au/tobacco
Editor: Tobacco Control (www.tobaccocontrol.com)
Chair:Australian Consumers' Association, Chair: Action on Smoking and Health (ASH)
Page last updated April 24, 2002