FOOL'S SCHOOL DAILY Q&A

Lotteries: A Losing Bet

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By Selena Maranjian (TMF Selena)
April 25, 2003

Q. What's the Fool take on lotteries?

A. One lottery ticket here and there won't hurt anyone, but too many people are buying too many tickets. It's a massive and destructive industry, and with many states now facing serious budget crises, we're likely to soon see more lotteries. Too bad.

When lottery jackpots get gargantuan, lottery organizers get excited. Convenience store owners get excited. And people across the nation get excited, too, dreaming of early retirement. There's a much more reliable way to retire early, though.

Consider Abner, who spends $50 per month on the lottery. That's $600 per year. If that money were invested and grew at the stock market's 10% average annual growth rate, it would become more than $113,000 after 30 years (and some $320,000 after 40 years!).

But Abner is buying lottery tickets. Lotteries typically pay back 50 cents for every dollar bet. On average, if Abner plays $50 every month, he'll lose half of his investment the first month, leaving him with $25. The following month he'll try again, and again lose half. After 40 years, having poured $24,000 into the lottery, the typical player, on average, will have just $12,000 left.

Lottery gamblers are ignoring mathematical realities. They're tens of times more likely to die from flesh-eating bacteria than to win a Powerball jackpot. And, the vast majority of players will lose most of what they wager over the years. They keep playing because the "who knows -- you could be next" message is heavily promoted by our states.

State governments have a higher calling. They'd serve the public better by scaling back or eliminating their lottery advertising and involvement. Oddly enough, casinos, which typically take 10 times less from a bet than lotteries do, live with tight advertising regulations.

Foolish investors shouldn't buy lottery tickets, except as infrequent amusements. Playing Powerball regularly means hurting your chances of methodically becoming wealthy. (After all, even just $10 per week amounts to more than $500 per year -- small sums add up.) Long-term investors, not short-term speculators, will retire early.

By the way, if thinking about money matters makes your head hurt and you'd like an actual person (a financial pro, no less) to talk to about your financial situation, look into our TMF Money Advisor. It's a valuable service we're offering, featuring customized independent advice from a variety of objective financial experts.

If you have any questions, thoughts or opinions on this column, share them with others on our Ask the Fool discussion board.

This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.