Dumb Money: The Lottery

by Kevin on March 6, 2008

This is a continuation of my Dumb Money series. The last post in the series, Dumb Money: The Movie Theater, was used as a guest post at Get Rich Slowly.

My next target? The lottery.

The lottery would be fantastic, if only I could win it. Alas, Alabama doesn’t have a lottery. Of course, even if we did I would not partake. Let’s look at some simple odds courtesy of WebMath.com (it was the first result in my Google search).

To my understanding, most of the major lotteries require you to pick six numbers (usually 5 and the “super” number at the end). Using the calculator, we’ll tell it to pick 6 numbers ranging from 1 to 99 and to not replace each number when it is picked.

Result? The odds of picking six correct numbers is 1 in 1,120,529,256. Picking five numbers? 1 in 71,523,144. Are you really going to be able to pull off those odds? I doubt it. Sure, someone has to win. Someone does usually win. Just look at those odds before plunking your $1, $5, or $10 down.

To put this in perspective, let’s look at some other ‘common’ odds. You have a…

  • 1 in 2,000,000 chance of being struck by lightning.
  • 1 in 12,000 chance of finding a pearl in your oyster.
  • 1 in 705,000 chance of having quadruplets (if you are a pregnant woman).

“But lotteries help fund our schools and education programs!”

Really? Thanks to the New York Times, we know that at most (in New York, no less) 5.3% of the money provided to schools comes from lotteries. Sure the numbers can look great because there are billions of dollars involved. So a few million here and there for education sounds great. The net revenues that end up going to schools aren’t terrible — 30 to 40%. The rest goes to run the lottery — marketing, prizes, and vendor (gas station) payments.

The end result is there are a group of core players that play lotteries. I couldn’t find the data, but you would imagine these are not folks with millions in retirement money. The lottery is occasionally described as just another tax. The only difference is you volunteer to pay this tax. The worst part is that 60 or 70% of the “tax” you pay doesn’t even go to help education. You would be better off having an actual tax that everyone paid because then every dollar could go towards education.

It’s Cheap and Harmless Fun

Lotteries want you to come back and play. They want to entice that core group of players. As noted in the NYT article above, states are coming out with more instant gratification games that are more addicting. I wouldn’t call that harmless.

It isn’t cheap, either. Assuming you play the lottery once per week for only $1, you’re giving up a lot of money in the long run. If you saved your $52 and put it into a savings account or other investment only once per year, and earned a 5% return, you would have $1,805 in 20 years. I would guess most core players do not play for just $1 per week so it just gets worse from there. (Add a 0 to the above number if you played $10 per week.) Imagine if you applied that money to your debt instead of throwing it away!

Then there is the little fact about most lottery winners being broke within five years of winning the lottery. It’s just a bad system all around.

So what do you think? Are you for or against the lottery? Do you play the lottery consistently? If so, are you in positive territory with your winnings?

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Fiscal Musings March 6, 2008 at 4:15 pm

I don’t really care if there’s a lottery or not since either way I choose not to participate. If someone else wants to pay the dummy tax, that’s their business.

bostonian March 10, 2008 at 3:54 pm

Actually, buying the first lottery ticket is a good investment. Its the second one that is stupid. To take your example, say you spend 52 dollars/year on the lottery. If you saved that at 5%, at the end of 20 years you would have $137 (or after 20 years of saving in your example 1,805 for an investment of 1,040). However, with the effect of inflation (I assumed 3%), you would only be able to buy about 76 dollars worth of goods (or about 1000 with a 1040 investment over 20 years), and that is assuming that you had it in a tax advantaged mutual account. If you had in in regular savings you would be paying taxes on your growth every year, and you would have in fact have lost buying power.
If you instead spend that 1 dollar per week on a lottery ticket, you have gone from a zero percent chance of winning millions of dollars to an extraordinarily tiny chance. So while your chances of winning the lottery are indeed low, this kind of high risk high reward investment may be the best thing you can do with a dollar. What else are you going to invest it in? A soda?
Of course the next dollar you spend has you going from a very tiny chance to double a very tiny chance – which is still very small and unlikely. Therefore, you haven’t materially increased your chances at all with the extra dollar. Waste of money 🙂

Jazzy October 22, 2009 at 5:02 pm

well people in america spend that much on fast food alone if we had something other than buying food and eating to kill ourselfs. we wouldnt be a fat america now would there? People are going to spend money period why not support the state and the game if u have a chance to get rich off of it? i would play the lottery everyday.

xpac December 23, 2009 at 2:21 pm

I have never played the lottery here is why, I want to make a fairly comfortable living, and beyond that I don’t find satisfaction. I know a lot of people who find little satisfaction with every day thinds, and they think money will solve it. How about love, learning, and faith in yourself and god!

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