A regular lottery player grabbing a ticket just once a week might spend $5.75. Could be more, could be less, but $5.75 for a lotto ticket just once a week isn’t really so much and works well for our hypothetical. We want to provide him, and the millions of people like him, with an alternative, a truly winning lottery strategy.
Residents of Rhode Island and South Dakota actually spend on average almost $800 per year on lottery tickets. Our hypothetical lotto player would be spending only $300 per year, which is just a little bit more than the U.S. national average. (You can see all of this in the graph at the top of the page.)
Our lotto player’s money is hard-earned and honest; he enjoys his small, weekly tradition and the possibility of hitting the jackpot. Where’s the harm in spending on a lotto ticket what others would spend on a latte at Starbucks several times per week?
Though this habit may seem acceptable and fine, but perhaps not wise, the harm is the opportunity cost. Opportunity cost is an economics term that captures the value of what one forgoes when choosing one option over another. If I could drive to work in 10 minutes but choose to walk there for an hour, my opportunity cost is the loss of 50 minutes of productivity, or what I would have gained by driving.
The opportunity cost of seemingly small habits is often enormous. In our little hypothetical above, where the lotto player spends just $5.75 per week, the opportunity cost of not investing that money could actually be $200,000. Yes, really.
When the lotto player chooses not to invest his $5.75 each week, he accepts the opportunity cost of choosing to play the lotto. He gives up the potential gains of investing. When chances of winning the lottery are often akin to one’s chances of being bit by a shark while being struck by lightning, opportunity cost becomes a pretty serious thing.
So, what are the gains from investing the $5.75/week?
If our lotto player quits the lottery at age 40 and starts investing instead, his $5.75/week could turn into about $40,000 by age 70. If he quits the lottery at age 30, he’d earn $90,973.
What if he never starts playing the lotto? Let’s say our gambler man gets a job at age 20 after getting a 2-year degree. He makes a normal wage, works 40 hour weeks, and kicks back on the weekends. Starting at age 20, if he doesn’t go down the lotto road and instead invests $5.75 a week, he could have $200,000 at age 70. A man with a decent degree and an honest job could be richer in retirement than most middle-class Americans. And we aren’t even counting any pension or social security!
The sooner you quit the lottery, the sooner you win.
Step one is, of course, accepting the fact that you will not win the jackpot.
Step three is winning: The sooner you quit, the sooner you win. While everyone else sticks with their weekly losing strategies, you can be growing a small fortune.
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*The graph above assumes a monthly $25 dollar investment in a broadly diversified portfolio of index funds. Following long-term historical trends, it assumes an 8% annual return. These numbers have not been adjusted for inflation and are compounded annually. Simple and complete explanations of these terms can be found in the ‘Learn’ section of this site!