Better futures going up in smoke
Whenever I hear stories about people being unable to pay their bills, I think about the amount of money that is wasted on cigarettes.
If I drive past a building site early in the morning, two things stand out - the hotted-up utes that every tradie seems to be driving, and the fact that many of them have a cigarette hanging out of their mouth.
I always wonder how much money they would have been able to invest if they had gone for a normal vehicle, and had never fallen for the nicotine kick.
Think about John, aged 35, who has a home loan of $400,000 over 30 years that he is repaying at $2271 a month.
He spends $25 a day on cigarettes. If he quit smoking and used the $761 a month saved to increase his repayments to $3032 a month he would pay off the loan in 16 years. He would be debt free at 51 instead of 65 and save $203,000 in interest.
Home loan interest is not tax deductible so saving $203,000 is equivalent to $341,000 in pre-tax dollars for a person in the middle tax bracket. Just giving up smoking has given him the equivalent of $341,000 in bonuses.
Being debt free at 51 also means that he would have the $3032 a month no longer needed for his house repayments to invest. If he placed this every month into a good share trust, and it returned 9% per annum he would have $947,000 at age 65.
Now think about two people aged 20 and assume that one chooses to smoke, while the other chooses to invest the price of a packet of cigarettes a day into a quality share trust.
If the non-smoker increases their investment by 3% per annum, the expected inflation rate, the amount invested or spent on cigarettes, by age 65 will be $677,000. If the fund returns 9% per annum, (a realistic return if inflation is 3%), the sum accumulated by the investor will be $5.4 million at age 65.
Put it another way. If a young person wants to retire wealthy at age 65, all they have to do is invest the equivalent of a packet of cigarettes a day from the day they start work.
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.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org