Mellody Hobson talks about the lottery and why it’s best to avoid this game.
Last week we talked about how fear of losing money keeps people from making good long-term investments in the stock market, but this week I want to talk about the other side of the coin: Instead of being overly fearful about losing money, millions of people are unreasonably hopeful that an unexpected windfall is going to make them rich. What I’m talking about is the lottery.
People love the lottery!
They sure do. Worldwide lottery sales were almost $262 billion in 2011. And listen, I get it. The lottery sells hope. A dollar seems like a small price to pay to dream big. But that’s what makes playing the lottery so insidious. It’s like smoking. There’s damage happening, but you can’t see it in the day to day. Just like one cigarette doesn’t give you lung cancer, one scratch off ticket doesn’t make you go broke. But if you add up ticket after ticket after ticket, you’re looking at real money going the drain. And for what? So people can fantasize about lying on a beach somewhere?
What I encourage people to do is to skip the lotto and instead try saving just $1 a day for 4 months. Then up the ante and go for $2 dollars a day for another 4 months. Then really push and shoot for $5 a day for another 4 months. That’s almost $1,000 in savings in a year! My experience is that saving is addictive. I know it’s not as sexy as the idea of becoming an overnight millionaire, but it’s REAL.
So who’s buying all the lotto tickets?
Well that’s the saddest part. It’s frequently the lowest income Americans who are buying the most tickets. In fact, a PBS report earlier this year showed that households that earn at most $13,000 a year spend 9 percent of their money on lottery tickets. Tom, that’s huge. That $25 a week could make a big impact over the long term if it were saved rather than donated to the government, because that’s in essence what you’re doing when you play the lottery. It ends up being a tax on the people who can least afford it.
Where exactly does the money go?
It’s different for every state, but for the most part, it first goes into prizes and administrative costs, then the profits go the state’s general fund and to education. It’s a great cause to donate to, Tom, but scratch off tickets aren’t deductable!
Someone will win. It most likely will not be you. Or me. Or anyone we know. To be fair, I have to disclose that you’re not completely throwing your money away when you play the lottery. You’re throwing half of it away. The average return is just over 50 cents for every dollar. But forget about winning the Powerball. At 175 million to one, the odds are if you played every hour, around the clock, you would win once in 20,000 years. And if you live that long, you’re bound to get hit by lightning a few times.