As I’ve said, I’m a finance guy and therefore I look at things mostly from a financial perspective. Although I’ve never been a smoker, I’ve always had friends and colleagues who did. I enjoyed highlighting to them what they are missing out on. Health issues are a concern as well, but people generally know and ignore those. So I’ve highlighted the financial impact and the opportunity cost.
How much does it cost to smoke?
The cost of a pack of Marlboro, which has a good reference price globally, varies from 1 to 30 USD, depending on the country and city you live in. For the sake of this exercise let’s take an average of 15 USD, which is actually the price in New York, United States of America. In this country an average smoker smokes 14 cigarettes per day, based on 2018 statistics. The cost of one cigarette is 0.75 USD (15 USD for a pack of 20), which is then multiplied by 14 cigarettes per day is 11.25 USD per day spent on smoking. This does not include lost productive time and the cost of medicine purchases, which is higher for a smoker than an average person, etc. This 11.25 USD multiplied by 365 days is roughly 4100 USD in a year. That is how much an adult in the US who smokes spends on cigarettes every single year when he/she smokes. I could go on and calculate lifetime cost, but I guess I’ve made my point. It is to be noted that the more developed a country is, the higher the cost of a pack is. Australia, New Zealand, and Ireland have cost up to 26, 23, and 16 USD. Also, there are people who smoke more than a pack a day, but for the sake of this exercise, I will stick to averages.
What else can you buy for 4100 USD?
This will be just one example, you can have similar ones based on your consumer preferences. If you depart from New York JFK and head towards Ubud, Indonesia, you will have a total door-to-door spending at about 764 USD based on Rome2Rio current prices for March, 2022. But you also need a place to stay, right? Prices for a one-month vacation start at 79 USD. Let me repeat this, 79 USD for the entire month in Indonesia. But that’s a hostel, you want something fancier, and you have the budget as you saved a lot of money not smoking for a year. You can pick something like this:
The cost is 790 USD per month, breakfast included, with a private pool, air conditioning, terrace, garden view, and 90 square meters of the house. The entire villa is yours. You can also invite your friends, the villa can host up to 4 guests.
The food costs close to nothing, in a restaurant you would spend between 1 and 5 USD per meal, a weighted average of 2 USD. So you would spend 2x2x30 for two daily meals for 30 days. That is 120 USD for the month. So far you’ve spent 1674 USD. If you rent a motorbike, go out to drink twice a week, and buy clothes once in a while, you can end up spending another 200 USD in a month.
From the 4100 USD saved on non-smoking, you still have roughly 2000 USD. You can spend that on investing in yourself, studying, signing up for a course, or buy stocks and start trading on the stock exchange. I hope the above example has made it clear how you can think of something in financial terms. It was quite easy to “convert” one action into money and then another action.
How does it apply
In personal finance the most valuable asset you have is time. Your time is definitely limited to about 100 years (let’s be optimistic here). But in reality, it is limited to about 53 million minutes, where every minute counts. If you spend it on social media, you lose about 1 hour 22 minutes a day on average if you live in the US. Do that for a year and you have spent 30.000 minutes, most of it on non-productive scrolling. In this time you could read many books, do an MBA or prepare for a Marathon.
Another frequently occurring example is food. When you order lunch and dinner every day, you spend at least twice as much as cooking yourself. Not even mentioning the quality of food. When you buy coke from a vending machine, you spend 2-3 times more than buying it in the supermarket. There are things you can buy used, and save a chunk compared to buying it new. A car for example. If you sum up all the financial consequences of your actions, you will come up with a shocking sum for sure.
In business and finance you make different valuations. For example, a company that has 10 million USD earnings in a year and distributes all of it as dividends, clearly focuses on shareholder satisfaction at the expense of growth. Which is still shareholder satisfaction, but in the long term. That money can be spent on growth. You can purchase new machinery to reduce production costs and/or increase quality. You can diversify your income portfolio by investing in a company. You can upgrade your software environment to be more efficient, etc. In other words, you can reinvest in yourself for higher potential future gain. I didn’t know this until today, but when I researched, I’ve found this in Berkshire Hathaway’s 2020 financial statements: “Berkshire has not declared a cash dividend since 1967”. And that’s one of the most successful companies in the world.
A similar example could be a medium sized company that keeps spending on maintaining and keeping alive a set of software systems, rather than implementing an ERP system. Here the issue might be that it is difficult to quantify the financial impact as most of it would be lost opportunity, delays, lots of issue management and firefighting. Even more importantly, if your software systems do not allow management to have a clear view of what is going on, the consequences are difficult to even evaluate. This is the case of a smoker who has no idea how much he spends on cigarettes and what else he could be spending it on.
Conclusion
When I have to decide something, I often turn to finance first. I also like to invite others on this journey, for example, my smoking friends. When you are not sure what is the right choice, or when you have to convince yourself to make a decision, do the math. Most things are easy to quantify and through numbers, it is easy to convert to other opportunities. And better understand what you are doing now and how could you do better.