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Al Jacobs has been a professional investor for nearly four decades with expertise in areas that include real estate, mortgage, securities investment and the operation of a private trust company.

The Economics of a HabitThe Economics of a Habit
A few days ago, while waiting in line at a Rite Aid drug store, I witnessed the person directly ahead of me, a young man about eighteen, purchase a package of Marlboro cigarettes. The price caught my attention: $3.84. Though I once smoked two packs a day, it was a long time ago. To give you an idea how long ago, my brand, Raleigh’s, then sold for $1.39 a carton. After quitting, I sort of lost track of it, never imagining how expensive the habit might become. This revelation came as a real surprise.

For some reason, when I left the store I didn’t dismiss the matter from my mind. I visualized this fellow making his daily purchase over the years, passing through young adulthood, middle age, and finally into the domain of senior citizenship, while continuing to emit a never-ending stream of smoke. Actually, the vision came easily, as several of my friends and acquaintances are still users after more than forty years. Perhaps my fellow oldsters deserved scrutiny before I focused on this hapless teenager, but it didn’t register the same way. You see, my generation can be excused for its nicotine use. Note that at an earlier time smoking enjoyed popular support, thanks to regular promotion by such celebrities as Humphrey Bogart and Ronald Reagan—and no Surgeon General reports declared it a health hazard. But times have changed. With the popularity of smoke-free areas, the public’s contempt for the smoker, and an industry deluged with lawsuits and restrictive legislation, smoking today is more the province of the outcast than the idol.

At this point I could launch into a dissertation on the evils of tobacco, but that’s not my intent. Instead, I want to share some financial hallucinations: the revelation of what cigarette indulgence represents in hard dollars. The numbers are fascinating, so stick with me as I craft the scenario.

To begin with, the true cost of a $3.84 tobacco product is not $3.84. A sales tax will be added—7-3/4 percent in my state of California—so that a customer must actually hand over $4.14. However, that doesn’t tell the whole story. The real question becomes: What earnings are required to generate the purchase price? Unfortunately few of us get to keep our whole salary. Big brother, Uncle Sam, and sometimes his sidekick, the state tax collector, first take their cut. We only pocket what’s left over. How much, then, did our young friend earn so to fork over the purchase price? We’ll make a presumption here; let’s say he pulls down the not unreasonable wage of $15 an hour. This puts him in the 25 percent federal income tax bracket and the 6 percent California bracket. Thus, he keeps 69 percent of his pay. A bit of math tells us that it takes $6.00 of his earnings to buy that pack of smokes.

If the story ended here, we might simply philosophize as to whether the pleasure of smoking offsets the financial cost, irrespective of any health considerations. In other words: How might $6.00 daily be used to give greater personal satisfaction? Well, I’m sorry, but the story doesn’t end here. We’re about to take a financial excursion to see what six bucks a day really means. And since I’m the tour director, I get to steer.

The analysis starts on an 18th birthday, contemplates $6.00 per day, deposited monthly into the money market portion of a regular self-directed Individual Retirement Account (IRA) with a stockbrokerage firm (an income tax deduction for the IRA contribution reflects the $4.14 counter price), with no tax rate changes, all continuing until the 65th year. During this time, the money will be gainfully employed—and I’ll tell you how. At the end of each year, any cash in the account is invested in corporate bonds. If done properly, a 7-1/2 percent return, compounded semiannually, can be generated. Details on exactly how to go about selecting bonds are described in Chapter 6 of my book Nobody’s Fool: A Skeptic’s Guide to Prosperity.

Perhaps the prospect of an annual 7-1/2 percent return fails to impress you. If so, it’s because you can’t visualize the compounding effect, possibly as close to magic as you will ever get. What occurs, simply, is that when paid, the interest earns interest, which in turn earns interest, which in turn . . . I think you get the picture. The reality is that in 47 years, $6.00 per day grows to $870,000. That’s not a bad way to begin retirement.

At this point I’ll fess up and admit to having written this as much to discourage smoking as to counsel investment. It’s hard to know what’s required for someone to set tobacco aside, as different people react to different stimuli. The threat of imminent death by cancer is sufficient for some, while others continue to puff through a plastic tube inserted in their trachea after the malignant larynx is surgically removed. Perhaps this economic inducement might inspire some of you to call it quits, so to offset the age-old adage: Ve ist too soon old und too late schmart.

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Al Jacobs has been a professional investor for nearly four decades. His business experience ranges from real estate, mortgage, and securities investment to appraisal, civil engineering, and the operation of a private trust company. In addition to managing his investments on a day-to-day basis, he is a featured financial columnist for both online and print publications. He is the author of Nobody’s Fool: A Skeptic’s Guide to Prosperity. You’re invited to subscribe to his financial Newsletter, "On the Money Trail," at no cost or obligation, by visiting On the Money Trail

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