A Million Dollars Up in Smoke

 Read more Oily Rag articles by Frank and Muriel Newman 

It seems life’s vices have been in the news a lot lately. Parliament decided not to increase the price of booze but then went into urgency to rush through an increase in cigarette prices. Most oily raggers are not likely to be smokers or heavy drinkers so they will already be benefiting from the savings to be had from moderation, but it’s worth mentioning the tremendous opportunity smokers now have to achieve financial success. .

The figures show how large the opportunity really is. The price of a standard pack of 20 cigarettes has increased by ten percent to around $11. It will increase it by another 10% on January 1 and another 10% again on 1 January 2012, taking the price to about $13.30 (or 67 cents a cigarette).

The one-packet a day smoker would spend about $4,750 a year and the two-pack a day person $9,500. Now let’s assume they kick the habit and instead put that money into repaying their mortgage, or into a Kiwisaver account instead.

Let’s assume the money they invest returns 5.75% (which happens to be the variable mortgage rate). After one year the (former) one-packet a day smoker would be about $5,000 better off – $4,855 by not buying cigarettes and they would have earned (or saved) $145 in interest.

Now let’s extend those savings out. After five years they would be $28,000 better off, $65,000 after 10 years, $115,000 after 15 years, and so on. After 35 years they would be a massive $550,000 better off! Most of that comes from the compounding effect of investing the savings (in other words, income on income, on income, year after year).

So a 30 year old smoking one packet a day could retire at the age of 65 $550,000 better off if they did something as simple as giving up smoking. The two-pack a day smoker would be over one million dollars better off! That’s a huge benefit to be achieved by those who choose to stop smoking.

Given the increase in tobacco costs, the very best thing a smoker could do is stop smoking and start saving – increase the repayments on your mortgage by the amount you were spending on cigarettes, or if you don’t have debt put the savings into a Kiwisaver fund.

In fact, those living off the smell of an oily rag do more than not smoking. They do some or many of the other things mentioned in these columns: grow their own vegetables, buy unbranded products, shop for specials, drive a modest car (paid for in cash), use electricity efficiently, and so on. All of these things add up to substantial savings which means debt is repaid quicker, a family has more money for the things that really matter to them, they have lots of fun – and when they become financially independent they retire early!

One final thing: last year we produced the Milk Report on the best places to buy a 2L bottle of milk. Because oily raggers tend to do a lot of baking we thought we should find out the best way to buy flour. Please let us know how much do you pay for flour – you can go to www.oilyrag.co.nz to take part in the survey or write to us at Living off the Smell of an Oily Rag, PO Box 984, Whangarei. Your participation would be greatly appreciated.

* Frank and Muriel Newman are the authors of Living off the Smell of an Oily Rag in NZ. Readers can submit their oily rag tips on-line at www.oilyrag.co.nz. The book is available from bookstores and online at www.oilyrag.co.nz.