I’ve done some really stupid things in my life. Hitchhiking from my home in Georgia to California at age 17. My first marriage. Opening a restaurant. I could go on.
But the single worst mistake I’ve ever made? No contest: smoking.
While I’m trying to quit, I still smoke. (Please, don’t bother reaming me in the comments below. There’s nothing you can tell me that I haven’t told myself a million times.) The obvious problem with smoking is health. But something less discussed, but nearly as important when it comes to lighting up, the money you’re burning.
And that brings us to this week’s question.
My wife and I recently quit smoking, and we would like to invest the amount that we would have paid for cigarettes: $150 a week. What would you suggest?
Congratulations, Allan and wife!
While the $150/week figure Allan is quoting is what he says he and his wife were paying for cigarettes, odds are he’s saving a lot more than that. So before answering his question, let’s ponder other ways he’s likely to keep more money in his pocket by taking the smokes out.
The cost of smoking
WalletHub recently published an article about the lifetime costs of smoking, by state. They assumed a pack a day beginning at age 18 and continuing for 51 years. (The average smoker has a lifespan of 69 years.) The formula they used:
Financial cost of smoking = tobacco costs (cost resulting from smoking and interest income loss) + related health care costs + income loss because of smoking-related issues + other costs (increase in homeowner’s insurance premium and secondhand-smoke exposure costs)
What they came up with: the cost of smoking over a lifetime ranges from a low of $1,097,690 in South Carolina to a high of $2,032,916 for Alaska residents.
While you may dispute some of the methodology used by WalletHub, one thing is beyond dispute: Smoking is not only bad for your physical health, it’s also catastrophic for your fiscal health as well.
The rewards of quitting
Allan and his wife now have $150 per week to do something else with, as well as more time on the planet to do it. What’s their first move?
One thing they should do is put even more money in the bank by contacting their home, car, health and life insurance companies and informing them they’re no longer smokers. The amount of time that has to pass to earn nonsmoking discounts will vary by company and type of policy, but typically ranges from six months to a year.
On HealthCare.gov, for example, insurers in some states are allowed to charge smokers 50 percent more for health insurance. You must be tobacco-free for at least six months to qualify for nonsmoking rates.
As for what they can do with the extra money they’re already saving, let’s look at a few possibilities.
How $150 can change your life
Albert Einstein is often credited with the expression, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Whether Einstein actually said this is questionable, but the fact remains compound interest rocks. Let’s assume Allan and his wife use it to invest their $150 per week, or $600 per month, in the stock market. Should they earn 10 percent (the average annualized return of the S&P 500 stock index over the last 50 years), here’s what they’ll end up with in round numbers, not considering taxes:
After five years: $50,000
After 10 years: $130,000
After 20 years: $500,000
After 30 years: $1,500,000
Granted, we don’t know how old Allan and his wife are. We also don’t know their risk tolerance or a host of other factors that should be considered before investing in risk-based assets like stocks. But if the question is “what should we do with new-found money?” my answer is nearly always going to be “invest it in stocks,” simply because the stock market returns more than most other common asset classes over time.
But there’s another reason I often suggest regular investments in stocks. It allows you to convert the ups and downs of the stock market from something scary into something awesome.
A simple system to make a fortune in stocks
The best way to approach stocks is also the simplest: dollar cost averaging, also known as systematic investing. All you have to do is invest fixed amounts at regular intervals. This method works for a simple reason: It automatically buys more shares when they’re cheap, and fewer when they’re not.
Let’s use Allan’s potential $600 monthly investment as an example and assume he’s investing in the shares of XYZ company, a notoriously volatile stock.
When he started, the price of XYZ was $10, so Allan’s $600 buys 10 shares. The next month the price drops to $8, so that same 600 bucks buys 75 shares. In the third month, the price zooms to $15, so Allan’s money buys only 40 shares. Yada, yada, yada … six months go by. At the end, XYZ is back where it started: 10 bucks. But Allan has accumulated 396 shares, now worth $3,960.
Allan has made $360, or 10 percent, even though XYZ is unchanged.
How did this happen? Because his investment was fixed, Allan automatically bought extra shares when prices were low and fewer when prices were high.
This system will work with anything. All it requires is for prices to periodically change, and for the final price to be at least as high as the beginning price. Since stocks meet both requirements — their prices are volatile and have most definitely increased over time — they’re perfect.
How to invest small amounts
An easy way for Allan and his wife to systematically invest their monthly windfall is simply to increase their contributions to their 401(k) or other work-related retirement plans. That will also give them income tax advantages.
If they’re already maxing out their retirement plans, they can invest directly into shares of a low-cost mutual fund. My favorites are the Vanguard 500 Index Fund or 500 Index ETF. (I typically suggest Vanguard because they’re low cost. I have no affiliation with them.)
You don’t have to smoke to light up your savings
Allan and his wife have the best of both worlds. They stopped paying big bucks to kill themselves, while discovering a new and significant source of wealth. But just because you don’t smoke doesn’t mean you can’t find an extra buck or two to invest. Track your expenses, find some extra cash and join them.
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get way more questions than I have time to answer.
I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.
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