Why Buying Lottery Tickets is a Bad Investment

The state sponsored lotteries are a hidden tax. It is a way for the government to raise money without openly taxing the people. Quite simply, lotteries are a way to tax the belief that someone can get lucky and become rich.

It is a common belief. At least, among those who are poor and see no other way to riches. Lotteries collect most of their money from poor people, those who are hoping that the fickle god of luck will reach down and pluck them up from the mud. The more you know about money management, and are successful at creating wealth, the less likely it is that you will play the lottery.

I will admit that I used to play the lottery. And occasionally when the prize for the drawing approaches record amounts, I still do. I am getting better at ignoring it; the last time I played was a couple of years ago. So why did I quit playing the lottery? Simple, I realized that there were better things to do with my money.

When I played the lottery on a regular basis, I was young and naïve about financial matters. At the time, I was cashing my paychecks at one of those check cashing places. You know the type---the ones that charge you a fee and a percentage to exchange your paycheck for some green folding stuff and possibly some money orders. The type of place that also sells lottery tickets. At the time, I was buying a ticket per drawing. It was a long shot, but I felt that it was the only way I was ever going to get out of my burger flipping job.

It was a mark of maturity and financial wisdom on my part that when the local state lottery increased the number of drawings to two a week that I decided to quit playing. I said that I felt that they were getting too greedy; already I was beginning to think that lottery was actually a tax.

Shortly after that point, I decided to start taking my checks to a bank. I don't know about your bank, but my bank rather would have me start a saving account than buy lottery tickets. Why? Because they would like their customers to start generating wealth, and banks make most of their money by convincing you to keep your money safe in one of their accounts. The more money you keep with them, the more money that they have to loan to other people. Fortunately, this helps you as much as it helps them (if nothing else, it is a way to help build up your credit rating).

Since I have quit playing, the state I live in (Colorado) has also started to participate in a multiple state drawing, the Powerball. So at present, if I wanted have a ticket for every drawing, I would need to buy four tickets---two regular and two Powerball. And the Powerball is more expensive, to hope to win the grand prize, you have to buy the Powerplay option. All together to have a chance in every drawing, I would have to shell out six dollars every week. That is three hundred and twelve dollars a year.

Ask yourself this: Can you think of something better to do than threw away three hundred and twelve dollars a year? Like perhaps start a saving account? Or pay down some of your credit cards? Or perhaps investing in some stocks or bonds? The bottom line is that anyone with a modicum of financial knowledge can think of better things to do with the money than play the lottery.

The lottery commissions will not inform you that there are better things to do with your money. They don't want you to realize that you are wasting your money. They would rather keep collecting the money for their states.

Think of the lottery as it really is and not what they want you to believe it is. It is a tax. A well hidden tax, in the sense that they never draw serious attention to the fact that it is a source of state government revenue, it is. In my state, the money collected that does not go to prizes, administrative and advertising goes towards parks and recreation. A noble cause, but they downplay that in the advertising. Instead they talk about how you can't win if you do not buy a ticket, and they make it sound like such fun. Gee, don't you want to win the lottery?

It would be nice, but it is unlikely to happen. Think about it---you have a better chance of getting stuck by lightning. If you understand probability theory and the miracle of compound interest, odds are that you will not play the lottery if you think about it for more than a couple of minutes.

Let us look at the possibility of winning a one million dollar lottery. The ticket would probably cost just a dollar. Let say that there are another five million people are playing. Even if every drawing had a winner, your odds of winning are less than one in five million.

Did you catch the tax revenue? The lottery in this example collected five million and only paid back one million. Ok, that is an exaggeration. But unless you are a winner, it is a tax; money is taken from your pocket. Bottom line unless you win, you have tossed your money away. And your typical lottery keeps half of the money they collect, so that is two and a half million dollars that they would keep in this example.

And even if you win the big prize, they do not hand you a whole one million dollars. Either you accept a check for a tenth of a million, or they issue it to you in payments over the space of ten to thirty years. Accounting for inflation, in today's dollars you get less than a million. In terms of expected return, accounting for all winners, the expected rate of return is less than fifty cents per dollar spent for your typical lottery. Surely, you can find an investment with a better rate of return than that.

If the rate of return did not convince you that lotteries are a bad investment, consider this: Thomas J. Stanley, Ph. D., the author of "The Millionaire Mind" discovered that the higher a person's ability to generate wealth, the less likely it is that the person plays the lottery. Is it because they have no need to play the lottery, or is it because they know better ways to generate wealth? The instant you understand the advice "The harder you work, the luckier you become," you know why they avoid the lottery and gambling in general. And won't you rather have something to show for your dollar than a worthless piece of paper?

Besides learning to generate wealth is a skill that you will always have. That is not true of lottery winnings. For instance, the first winner of the Pennsylvanian lottery, after receiving his last annual check, ended up working as a janitor. His luck had run out.

In the end, for most of us, the skill of wealth generation will trump random luck over the course of our lifetimes. And we will reap a bigger return by investing our money in something other than lottery tickets.