Sean Cole's story on the Facebook app Double Down Casino got us to thinking about... gambling and personal finance. What else? It turns out a lot of people put the two together. Barbara Friedberg is editor-in-chief of Barbara Friedberg Personal Finance.com and she notes that in a recent survey 22 percent of the respondents planned on boosting their savings this year by... winning the lottery! She has a better idea:
According to a "USA TODAY Snapshot" from American Express Spending and Saving Tracker on January 18, 2011, this is how Americans plan to save in 2011.
HOW WILL YOU SAVE ENOUGH IN 2011?
- Save portion of Income: 51 percent
- Cut back on little luxuries: 25 percent
- WIN THE LOTTERY: 22 percent
- Save tax refund: 21 percent
- Sell items: 17 percent
My stomach is churning as I read this. It is so wrong to consider the lottery as a method of saving. In fact, not only is the lottery not a viable option for saving, but it is a method for wasting money.
Princeton University's website, explains probability quite simply: "A measure of how likely it is that some event will occur"
The number shows the ratio of favorable cases to the whole number of cases possible. For example, the likelihood that independent coin tosses will fall heads up is 50 percent or once out of two tosses.
So you're wondering, when I buy a lottery ticket what are my chances of winning? According to the website mathmistakes , the chances of winning the lottery with $1 is 1/3,838,380, or 0.0000002605.
Let's say you're a big spender and go all in with 50 bucks. The probability of winning the lottery with $50 is 1/76767.6, OR 0.0000130263288.
In other words, if you put $50 on one lottery, the likelihood of winning is 3,838,380/50.
Let me spell it out: Pay $50 to the lottery and you have one chance out of 76,767.60 that you will win.
**YOUR CHANCES OF LOSING **
Flip it around and consider, "What is the probability of losing"
Play $50 and your probability of losing is 0.9999869736712. That looks fairly close to 1. In other words, you have almost a 100 percent chance of losing!
I can hear you shouting out there, "The more tickets I buy, the greater chance of winning I have!" Sure, that's true; every dollar you spend increases your chances of winning. Spend $2 and your chances go from 80 million: 1 to 40 million: 1.
Still want to take the chance?
Don't like math, then read this; you have a better chance of getting into a car accident, plane accident, or struck by lightning, than to win the lottery!
TRY THIS STRATEGY INSTEAD
Take the $50 you spend on the lottery every week and put it in a jar in your closet.
At the end of the month, put it in the bank. At the end of the year, transfer the $2,400 into a low-cost, broad based stock index fund like the Vanguard Total Stock Market Index Fund. With $50 per week, at the end of 10 years your lottery money will probably be worth close to $33,159.48. (Assume a long term annual return of 7 percent)
Ask yourself this; "Would you rather lose $24,000 or earn $33,159.48 over the next 10 years?