Everyone who knows me knows I love spreadsheets. I have a hundreds of spreadsheets for a range of different purposes (investment, taxation etc.) which come in useful for both my clients and my personal interests. I have recently revisited one of these models which analyses a person’s ‘investment’ (I use the term loosely) in lotto.
I speak to a variety of people every day about making prudent financial decisions. I frequently state that your net worth is the culmination of every small and large financial decision you have ever made.
One of the topics I speak about often is compounding (Albert Einstein was once asked “What do you, Mr. Einstein, consider to be man’s greatest invention?” He didn’t reply the wheel or the lever. He is reported to have said, “Compound interest.”). Investing small amounts on a periodic basis and leaving the income in the investment to ‘earn interest on the interest’ can lead to great outcomes.
This concept can be applied to lotto and the decision whether to buy a lotto ticket or save / invest the same amount each week.
Let’s picture the scenario where at the age of 18, a person purchases a lotto ticket every week until they retire at age 65. All we need is two assumptions (and a spreadsheet) to illustrate this example:
- The lotto ticket costs $17.70 (current price of a Saturday Lotto Ticket (Slick pick 25))
2. An after tax rate of return of 5% (relatively conservative)
Below shows the growth in the value of the funds built up over time (send me a message if you want the full spreadsheet):
At retirement, the person will have over $175,000! Given the latest second division prize for Saturday lotto, this is equivalent to winning second division more than 15 times (once every three years!):
Therefore if you never buy a lotto ticket, you are guaranteed to win second division many times over. Even if you put the money in the bank and achieved an after tax rate of return of a measly 1%, you would still end up with over $50,000.
Knowing this, what is your opinion on lotto tickets now? Are you still willing to risk over $175,000 for the very slim chance (don’t get me started on these odds!) to win a million or two in first division? Feel free to comment below.
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