opportunity-cost-of-smoking - Zacchaeus Financial Counseling, Inc.

opportunity-cost-of-smoking

Opportunity Cost of Smoking

Article by R. Joseph Ritter, Jr. CFP® EA

When we have an opportunity to do something, there is a certain cost involved. How ever we choose to spend the time, effort and/or money that goes into developing an opportunity means that same time, effort and money cannot be spent somewhere else.

In this article, we will look at the opportunity cost of smoking and some of the financial and non-financial costs it has.

First, let’s set a few parameters. The average cost of one pack of cigarettes is approximately $5.50 (source: http://www.businessinsider.com/cigarette-prices-around-the-world-2014-2). The local cost of cigarettes may fluctuate because of taxes imposed, however, $5.50 will be used in the illustrations in this article. Here’s how much smoking costs in one year:

½ pack per day $1,003.75
1 pack per day $2,007.50
2 pack per day $4,015.00

This means each year $1,000, $2,000 or $4,000 (or some other number based on the amount of cigarettes smoked per day and the number of people in the household who smoke) cannot be allocated to other household needs because this money is being used to purchase cigarettes.

But what happens if we invested this money? You say, well, I don’t have money to save or if I didn’t spend it on cigarettes it would be spent on something else. That’s not entirely true. The fact is when money is spent on cigarettes that money is permanently and forever gone. You are doing without this money now, so saving it instead of spending it is entirely plausible. If you really needed this money for other household needs, you wouldn’t be spending it on cigarettes.

Each time you bought cigarettes, if this money was deposited into an investment portfolio earning total return of 6%, the value of this investment account would grow as follows:

Opportunity Cost of Smoking 1/2 Pack of Cigarettes Per Day

Years of Smoking
1 Year
5 Years
10 Years
15 Years
25 Years
35 Years
50 Years

Actual Cost
$1,003.75
$5,018.75
$10,037.50
$15,056.25
$25,093.75
$35,131.25
$50,187.50

Investment Value

$5,852.29
$11,251.52
$19,975.83
$47,648.06
$98,067.66
$261,165.51

Opportunity Cost of Smoking 1 Pack of Cigarettes Per Day

Years of Smoking
1 Year
5 Years
10 Years
15 Years
25 Years
35 Years
50 Years

Actual Cost
$ 2,007.50
$10,037.50
$20,075.00
$30,112.50
$50,187.50
$70,262.50
$100,375.00

Investment Value

$11,704.58
$27,503.72
$48,829.80
$116,473.03
$239,720.95
$638,404.59

Opportunity Cost of Smoking 2 Packs of Cigarettes Per Day

Years of Smoking
1 Year
5 Years
10 Years
15 Years
25 Years
35 Years
50 Years

Actual Cost
$4,015.00
$20,075.00
$40,150.00
$60,225.00
$100,375.00
$140,525.00
$200,750.00

Investment Value

$23,409.18
$55,007.44
$97,659.60
$232,946.06
$479,441.90
$1,276,809.18

Through the use of compound interest (interest earned on interest), which you can achieve by investing the cigarette money, you can see how quickly a few thousand dollars can add up to real money. But, let’s set aside the money talk for a moment. There are several non-financial opportunity costs associated with smoking.

You have to decide what is more important: Smoking or the lost opportunity for something else?

Opportunities Gained

  • Social status
  • Acceptance by peers (giving in to peer pressure)
  • “Stress relief”
  • You get to look “cool”
  • Rush of nicotine

Opportunities Lost

  • Money
  • Health
  • Relationships (marriage, children)
  • Peace of mind on your financial future
  • Time
  • Work

One opportunity cost that may often be overlooked is the impact smoking has on relationships. When the cost of cigarettes takes money away from the clothing or food budget, your children suffer first. How do they know you love them if you put cigarettes ahead of their basic needs? Their development and education will be impaired when they do not feel loved, and the quality of your interaction with them, especially as they age, will be less.

Peace of mind as a lost opportunity is a curious entry. Many people who smoke say they enjoy cigarettes as a stress reliever. Some people smoke on a very difficult day but normally would not smoke otherwise. Relieving stress is entirely different from removing stress. Money issues tend to create some of the worse stress in our lives, and it is no wonder many people smoke if for nothing else than to relieve some of the stress and tension associated with money. It is bizarre, then, that spending money on cigarettes actually increases the stress. You see, we can only have peace of mind with our money when our basic priorities are met – food, shelter, clothing, utilities and transportation – and when essential necessities can be obtained – medical care, education, etc. Until we have put these items at the top of our priorities and buy cigarettes only when there is money left over, rather than buying cigarettes first and only buying food and clothing if there is money left over, we cannot have peace of mind. So, smoking doesn’t really help stress at all.

Go back to Article Library