Smoking Away Our Budget
We’ve been quite social this summer, maybe too social with both of us working full time and sharing the Debt Free Guys workload. Anyway, the combination of our social life and travels has introduced and reacquainted us with a lot of people. What has surprised us this summer is the high number of cigarette smokers and smokers battling an illness or terminal disease. This made us wonder about the financial impact on smokers because of this habit.
The average cost of a pack of cigarettes in Colorado is about $5.59, up 8 percent from July 2013. The most expensive state in which to buy a pack of cigarettes is New York, where it costs about $14.50. That’s 16 percent higher than last July. The average cost of a pack of cigarettes nationwide is about $6.72.
Studies suggest that the average, long-term smoker smokes about a pack a day give or take a pack. That may seem low, but we don’t want to inflate our numbers. The average smoker in Colorado spends about $2,040 annually on cigarettes. The average New York smoker spends $5,278 annually and the average American spends $2,453 on cigarettes.
The Center for Disease Control (CDC) reports that as of April 2014, 2,100 young adults each day switch from being an occasional smoker to being a daily smoker. That means that whether good or bad, right or wrong, 2,100 young adults daily adopt a habit that directly affects their finances for years to come. That is, they make a choice to forgo one opportunity to adopt another. This is called opportunity cost.
Wikipedia’s definition of opportunity cost is pretty awesome, so we’ll own that we’re quoting Wikipedia. According to them, “the opportunity cost of a choice is the value of the best alternative forgone; in a situation in which a choice must be made between several mutually exclusive alternatives given limited resources.”
Each of us makes daily trade-offs. We choose one product over others. We choose one route to work over others and one activity over others. We do this assuming that we’re making the best decision for us. Opportunity cost affects us all each and every day, some of us better and worse than others.
Direct Cost of Smoking
For this discussion, these 2,100 young adults daily make the choice, whether on their own, because of friends, marketing or entertainment, to spend their money on cigarettes over other things, such as savings and investing. For the sake of our example, we’ll assume that cigarette prices remain constant and these young adults smoke for the next thirty years. Below is their opportunity cost of not saving and investing their money at below average annual stock market returns of 5 percent:
• Annual Expense = $2,040
• Opportunity Cost Over 30 Years = $151,129
• Annual Expense = $2,453
• Opportunity Cost Over 30 Years = $181,725
• Annual Expense = $5,278
• Opportunity Cost Over 30 Years = $391,009
That’s a lot of money to give up; especially when you consider that Vanguard and Fidelity recently shared that the average American worker age 55 and older has only $150,300 in their 401(k). 401(k)s are the primary retirement vehicle for most Americans today.
Medical Costs of Smoking
What inspired this post, though, was our concern about the medical costs of smoking. The CDC estimates that the medical expense of smoking between 2009 and 2012 cost $133 billion, that’s $44.3 million annually. As of 2012, 42.1 million adults were considered daily smokers. That’s an average annual medical cost from smoking of $1,053 in addition to the direct expense previously mentioned. If we add medical costs to our equations from above, the opportunity cost becomes more egregious.
• Annual Expense = $3,093
• Opportunity Cost Over 30 Years = $229,138
• Annual Expense = $3,506
• Opportunity Cost Over 30 Years = $259,734
• Annual Expense = $6,331
• Opportunity Cost Over 30 Years = $469,018
Productivity Loss of Smoking
Now we must factor in lost productivity from smoking. You know how that person in the cube next to you goes outside four to six times, five to ten minutes daily for a smoke break while you stick with your two 15 minute breaks a day? That’s lost productivity. Additionally, studies suggest that smokers take, on average, eight more sick days annually than non-smokers. This is adjusted for non-smoking related health issues and smoker’s tendencies to take riskier jobs.
The CDC estimates that smokers gave up about $156 billion between 2009 and 2012 due to lost productivity. That’s an average of $52 million annually. Divide that by 42.1 million smokers and the average smoker gives up of about $1,235 annually. If we continue to add to our above equations, the opportunity cost is even more surprising.
• Annual Expense = $4,328
• Opportunity Cost Over 30 Years = $320,630
• Annual Expense = $4,741
• Opportunity Cost Over 30 Years = $351,226
• Annual Expense = $7,566
• Opportunity Cost Over 30 Years = $560,510
That’s a range of over a quarter of a million to a half million dollars over 30 years at below average annual stock market returns. The numbers range between a half million to a million dollars over 30 years with average annual stock market returns.
With the median household income at about $51,000, the average Colorado smoker would give themselves an 8.4 percent raise if they quit smoking. The average American smoker would give themselves a 9.3 percent raise and the average New York smoker would give themselves a 14.8 percent raise. If their employers gave them comparable raises, these people would skip out of work. According to the American Heart Association, kipping is good for the heart.
We have no moral object to smoking. America is still mostly a free country and smoking is legal. Heck, the U.S. government subsidizes Big Tobacco. As dollars and cents guys, though, we look at everything through Ben Franklin’s bifocals.
To us, a quarter of a million to a half million dollars is financial independence.