The Pros and Cons of Playing Lotto Versus Savings Options

Recently, I noticed people are still spending a lot of money on playing Lotto hoping that this time it will be their ship coming into the harbor. So, I started wondering how much do people really did spend on Lotto and were they also putting something away in a saving program, just in case the ship never made it?

My dad would spend lots of money every pay-day as a form of recreation and hoping he'd get rich. A few times, he won a prize in the thousands of dollars, however, nothing really significant. When he retired, he did so on Social Security and a pension; alas, no big lottery win. Pop was a regular guy just like the rest of us, working hard and hoping retirement will happen.

Based on an article written by Patrick Egan[1] for City Limits, about 80% of New Yorkers spend an average of  $630 per year on Lotto. I know that amount doesn't sound like a lot since works out to roughly about $50 a month. But, what if you looked at this over time and, in terms of the future, once time is gone...well, you get the picture.

Here's the scenario:

Every month, you will either:

A. Spend $50 on Lotto                  or           B. Invest $50 for your future

And do each over a period of 20 years.

A. Annual cost = $630                                  B. Annual cost = $630

   $12,600 out of pocket                                 $12,600 out of pocket

  Accumulation = unknown                          Accumulation @8%= 31,136

In A, you may win or you may not, but either way you have no idea if it is going to help you plan for the future. Out of pocket for $12,600 and a questionable, if any, rate of return.

Using B, putting the $630 away on an annual basis in a tax-free Roth IRA at 8%, you could accumulate $31,136. Because compounding rates of return works in your favor, if you did the calculation monthly, the savings would grow to even more. And, if you chose to put the money away in a non tax preferred account, your tax rate was 25%, you would still have been able to accumulate $24,565 in the same twenty years!

So, since the point for me was to look at the possibility of what we can do to get more wealth into our lives, it just makes sense to at least be aware of what options are available to you when you decide to spend or invest.

There are obviously other considerations surrounding Lotto spending, but, I'm keeping to the basics.

As, always, please discuss any investments with your personal finance coach or other financial adviser. This discussion is meant only to discuss the concept of Lotto vs. saving.

[1] "Lottery Opponents Want Warnings", Egan, P., 4/15/2010, http://www.citylmits.org/news/article_print.cfm?article_id=3935