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Is playing the lottery worth the money?
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With the potential of winning millions, it’s no wonder people are willing to take a chance on the lottery. The biggest jackpot to date is $2.04 billion, awarded last November in California. The Powerball winner became the first lottery billionaire in California.The Powerball grand prize recently jumped up to $754.6 million (ninth largest in history), with the winning ticket being sold in the state of Washington on Feb. 6. It’s only a matter of time before the numbers jump up again, but should you really play the lottery if you want to become rich? Let’s break down your real chances of winning big and if it’s something worth pursuing.
Your chances of winning big money
The odds of hitting the jackpot in a lottery drawing are incredibly low, but that doesn’t stop people from playing. According to the Powerball website, here are the odds of winning the different award amounts:
To win the grand prize, the odds are one out of nearly 300 million. Just to put in this perspective, a person has a 1-in-15,300 chance of getting struck by lightning if they live 80 years. In other words, the odds of you being struck by lightning is 19,000 times higher than winning the lottery.
There are 735 billionaires in the U.S., which means you have a 1-in-451,700 chance of becoming a billionaire — about 650 times higher than winning the lottery. The odds of becoming an Olympian? One in 500,000. The odds of becoming president? One in 32.6 million. Get the drift? If your chances of becoming a billionaire are higher than winning the lottery grand prize, then you should focus on that! Best of all, it isn’t purely random like the lottery. Anyone can follow these four strategies that made billionaires rich.
The math behind playing the lottery
When considering whether you should play the lottery, it’s important to understand how it works. In order to calculate your expected return after buying a ticket for one draw, you need to multiply [(1/odds) x (prize amount − cost of the ticket)] and then subtract the cost of the ticket. As of Feb. 11, 2023, the Powerball Jackpot is at $34 million dollars (a far cry from the $2 billion last year but still a large sum). Here’s how the math works.
So looking at just the chances of winning the lottery with the current value of the jackpot, the expected value is a loss of $1.57 for every ticket you play. This means that for every $2 spent on a ticket, one can expect an average return of losing $1.57 — not exactly what most people had in mind when they bought their ticket!
It’s also important to consider taxes when looking at your potential winnings; depending on where you live and how much money you win, federal and state taxes may be as high as 50%! And if you do win the lottery, you’ll hit the top tax bracket. So if we factor taxes into our calculation, the expected value equals negative $1.74. This number gets worse due to taxes and unfavorable odds. If the expected value of a game is negative, it is not a good idea to play the game, since on average you will lose money. It would be better to play a game with a positive expected value.
How much does the average person spend on the lottery?
According to a study by LendingTree, the average American spends anywhere from $32.24 (North Dakota) to $805.30 (Massachusetts). In 2021, Americans bought $105.26 billion worth of lottery tickets. This is more than what Americans spent on cigarettes, coffee, or smartphones. With 260 million Americans over the age of 18, this means the average person eligible to purchase lottery tickets spent on average $405 a year on lottery tickets! And these numbers continue to increase every year.
Remember how we said it’s better to play a game with a positive expected value? While investing in the stock market can be risky, over the long run, the data shows a positive expected return. From 1980 to today, the annualized returns of the S&P 500 (assuming dividend reinvestment) is 11.3%. Let’s say instead a 30 year-old took that $405 and invested in the S&P 500 with annual returns of 12%. After 35 years when they’re ready to retire, they’d have close to $215,000. What if they invest $2 a day? They’d have close to $390,000 sitting in their investment account!
The chances of this happening is significantly higher than winning the lottery. Unfortunately, about half of Americans play state lotteries, and 40% of Americans, including 60% of millennials, believe that winning the lottery is a means for retirement. Even if the jackpot becomes so large that the expected value is positive, the odds of winning are the same, and with more tickets being sold, there is a much higher likelihood of having to split the jackpot with someone else.
As with any type of gambling or investing activity, playing the lottery carries risk. The odds of winning big are incredibly small, and factoring in taxes makes it an even less desirable option for those hoping to become rich overnight. While playing the lottery may be fun once in a while just for kicks, we recommend avoiding it as an investment strategy. There are better ways to build wealth over time.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
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