Playing the lottery involves exceptionally long odds when the jackpot is big enough to change the winner’s life. Lotteries benefit the state like gambling benefits casinos — by design. That’s why few win anything worth writing home about.
The occasional Powerball ticket or scratch-off can be fun, even thrilling. But keep your expectations low and don’t spend more than you can afford to lose. Dipping into your entertainment budget can affect your quality of life. But you can get into more serious trouble using money marked for necessities.
It makes you wonder if you should bother playing the lottery at all.
Should You Play the Lottery?
The answer to this question isn’t as obvious as it seems. You have to look at the lottery’s shortcomings to answer it fairly.
Disadvantages of Playing the Lottery
There’s nothing wrong with playing the lottery. But three significant disadvantages stand out.
1. Low Odds of Winning
The odds of winning the lottery range from low to vanishing. The odds of landing a life-changing lottery jackpot are especially tiny. To illustrate this, take a look at the odds of winning one of the best-known lotto syndicates in the United States: Powerball.
Powerball’s jackpot odds change over time, but they’re always astronomical. According to CNBC, the odds of winning the jackpot in May 2019 were about 1 in 292 million. The odds of drawing the five winning numbers needed to score a $1 million second prize were a still-unbelievable 1 in 11.7 million. The odds of winning any prize at all were about 1 in 25.
To put that in perspective, compare the odds of winning the Powerball jackpot to your chances of dying in a car accident. The National Highway Transportation Safety Board recorded 1.37 deaths per 100 million vehicle miles traveled in the U.S. in 2020.
So on a 2-mile trip, your odds of dying in traffic are more than six times higher than your odds of taking home the winning ticket. On a 10-mile trip, your odds of dying in traffic are more than 30 times higher than your chances of hitting the jackpot.
Compared to high-jackpot drawings like Powerball, scratch-off games have better odds. But only just.
For example, the Texas Lottery Commission puts the odds of winning any prize in its Triple 777 game at about 1 in 5. But the chances of winning serious money are much lower: 1 in 4,000 for the $100 second prize and 1 in 600,000 for the $1,000 grand prize.
2. High Opportunity Cost to Play Frequently
The lottery’s astronomical odds aren’t enough to discourage many people from playing. If that’s you, think about the opportunity cost of frequent lottery ticket purchases. That’s the potential benefit you miss out on by playing the lottery instead of spending the money elsewhere.
Even if you’re financially comfortable, a modest lottery habit of $20 per month can add up to a small fortune over a working life: $6,000 over 25 years and $12,000 over 50 years.
That’s money you can’t save for retirement or use to pay off debt quickly. Although you’ll bag some small prizes if you do it long enough, you’re unlikely to break even. You’re unlikely to even come close.
You’re much better off investing that money in the stock market. Even with interest rates near historical lows, compound interest is a minor miracle.
Say you quit playing the lottery tomorrow. You begin investing the $20 you would have spent on it each month with a robo-advisor like Betterment. Your funds grow at a conservative average rate of 4% per year over the next 25 years. That’s a bit over half the S&P 500’s average inflation-adjusted historical return — 7.08%. How much would you have in the bank at the end of the period?
The answer is $10,048.33, an overall return of about 67%. At 7.08% growth, the average historical rate of return, you’ll have $15,465.83.
3. Winning the Lottery Could Change Your Life for the Worse
Even with such low odds, people do win the lottery. And a few win astonishingly big. Every time you see a headline about a lucky Powerball or Mega Millions winner, you witness a life forever changed.
It’s less clear-cut what these changes mean for a given lottery player.
Many lottery winners use their winnings responsibly. They pay off debt and set aside a percentage for charitable causes. And they treat the rest of their windfall with the gravity it deserves. That means:
- Putting together a long-term financial plan with the help of a financial advisor
- Investing their wealth in ways that suit their long-term goals and risk tolerance
- Developing an estate plan that protects their wealth for generations to come
Other winners are less careful. Limited financial literacy plays a role, but it’s more than that. Sudden wealth affects people in strange ways. Despite the high opinion we have of our personal finance habits, none of us can be sure how we’d react to becoming one of the richest 1% overnight.
A 2011 study published in the journal Review of Economics and Statistics suggests that many of us wouldn’t do well.
The study authors compared the financial trajectories of debt-laden Floridians who won state lottery prizes of between $50,000 and $150,000 with those of smaller prizewinners. They found that the windfalls only delayed bankruptcy rather than preventing it.
And when they did declare bankruptcy, the larger prizewinners’ net assets and debts were similar to the smaller winners’. That suggests their winnings didn’t improve their finances in the long run.
Advantages of Playing the Lottery
The lottery isn’t set up to benefit players. It’s a stretch to say that playing the lottery has any advantages at all.
But lottery proponents and casual players make the case for playing the lottery. These are the most common arguments for doing so responsibly.
1. A Big Lottery Jackpot Sets You Up for Life
You don’t need advanced math skills to understand the life-changing implications of winning a big lottery jackpot. Even after taxes, even if you’re in your 20s, a $50 million prize is more than enough to quit your job and live comfortably for the rest of your life.
For example, say you live in a high-tax state like Illinois. If you opt for the lump-sum option on your $50 million win, your gross payout is $30.5 million, or about 61% of the jackpot amount, according to Lottery Critic’s payout calculator. State and federal taxes take about 29% of the gross, leaving you with a final lump-sum payment just shy of $21.7 million.
That’s a lot of money to receive all at once. You’re responsible by nature, so you keep $1.7 million in cash to pay off debt and buy a bigger house without a mortgage. Then, you invest the remaining $20 million in the stock market.
For simplicity’s sake, let’s assume your investment produces an annual return equal to the S&P 500’s average return between 1956 and 2019. That’s 7.08%, or $1.41 million per year.
The vast majority of American households earn nowhere near $1.41 million per year. That includes many that qualify as rich by any reasonable definition. So you can live on far less, even after paying property taxes on a $1 million house and the lifestyle inflation likely to follow a massive windfall.
If you maintain a reasonable standard of living and manage your money responsibly, you can reinvest the majority of your investment earnings. Over time, those funds will grow, increasing your net worth and creating generational wealth.
With more money than you can spend in your lifetime, you can set up trusts that avoid estate tax. Those can benefit your descendants and the causes you care about long after you’re gone.
Now, imagine these numbers scaled up to a $1 billion Powerball or Mega Millions jackpot.
2. Lotto Sales Fund Public Education & Other Social Programs
Some state governments use revenue from state lottery programs to fund public initiatives like education. For example, the California Lottery gave more than $1.8 billion to the state’s public education system in fiscal year 2018-19. That’s about 1% of the statewide education budget for the year. The vast majority went to K-12 public education.
In some cases, lottery revenue is a crucial component of education budgets. Illinois’s lottery income accounts for more than 10% of its total education funding. Amid the first months of the 2020-21 COVID-19 pandemic, revenues dropped by $90 million compared with 2019. Without that revenue, local school districts had to slash spending and shelve growth plans.
However, a Public School Review analysis shows the lottery isn’t a very efficient education funding tool. State legislatures sometimes treat lottery sales as a revenue offset that allows them to cut taxes, reduce state funding for public education, or both. These measures shrink or even cancel out the lotto budget boost.
They can also put public schools in a bind if fewer people play the lottery, as occurred at the beginning of the pandemic.
3. Lottery Revenues Give State Governments More Fiscal Flexibility
One argument in favor of a national lottery is that it could help slow or even reverse the growth of the national debt.
This argument doesn’t translate well at the state level. Most state governments are bound by stricter balanced-budget requirements. These requirements force states to run much tighter fiscal ships than the federal government, which can literally print money at will, increasing the national debt.
When state governments face budget shortfalls, they only have two options: cut spending or increase revenue. You can only cut spending by so much. And it’s politically difficult to raise taxes paid by many or most state residents (like sales and income taxes).
So states prefer to jack up so-called sin taxes on things like alcohol, tobacco, cannabis, and casino gambling.
Though state lottery revenue isn’t tax revenue, it’s a surprisingly vital ingredient in most state budgets. According to the North American Association of State and Provincial Lotteries, the 45 state lotteries operating in 2019 brought in $25.1 billion in net proceeds. So lottery revenue increases states’ budgeting flexibility.
4. Retailers Benefit From Lotto Sales & Winnings Too
Lottery programs return a small but significant portion of every dollar spent on lottery tickets to the retailers that sell them. In Florida, retailers earn a 5% commission on all draw and scratch-off tickets sold plus variable bonuses for selling or cashing winning tickets. In North Carolina, the retailer commission is 7% of sales.
Most retailers never sell a $1 million winner, let alone a Powerball or Mega Millions jackpot ticket. But lottery ticket sales commissions still provide crucial revenue for retailers like convenience stores, grocery stores, and bars and restaurants. Many are owned by hardworking community members who pay taxes and create jobs.
Final Word
Millions of Americans buy lottery tickets. A daily lottery routine is likely to damage your finances and personal relationships. But most players suffer no ill effects from their casual gaming habit.
Although the vast majority of those tickets are worthless, the lottery isn’t a great evil to avoid at all costs. I’d be a hypocrite to suggest otherwise. It’s fine as long as you treat the lottery as nothing more than a diversion — fleeting entertainment purchased with small amounts of money you can afford to lose.
But expecting to win or thinking of it as a literal ticket to quick riches is a fool’s errand. The odds against winning a lottery prize big enough to change your financial situation are overwhelming. You could buy multiple lottery tickets every day for the rest of your life and have nothing to show for it but a smaller savings account balance.
