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Some Very High-Priced Advice

…for that person who just won the PowerBall

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So, you won the $2B Powerball haul. Congratulations. Any interest in buying Twitter in a month? I digress. We’ve got stuff to discuss. Psychology stuff. Your brain and money stuff.  

According to the National Endowment for Financial Education, about 70% of people who win the lottery, or receive a large windfall, go bankrupt within a few years. Why does this happen? Mental Accounting has something to do with it. US Economist Richard Thaler coined the term, and it looks at the ways in which we view and consider the money we have. 

When someone wins the lottery, they tend to view that money differently than the money they’ve earned. They value it differently, and so they tend to treat it differently, and spend it more easily. Actually, lottery winners are more likely to declare bankruptcy within 3 to 5 years.

Combine the reality of Mental Accounting with the stress of family… and neighbours, and friends, and dogs, and your friend’s cousin’s boyfriend’s roommate all thinking they’d like a piece of that sweet lottery pie, and suddenly you can understand why the few States that allow lottery winners to remain anonymous are praised, mostly by the winners of their lotteries.  

What are we getting at? The lottery is not a good investment. The return on your lottery ticket investment is almost always nothing. Zero. Zilch. And studies show that the majority of winners end up with less than they had before winning.

So, instead of spending $2 on a lottery ticket every week, put that money somewhere you know it will grow. But also… remember I’m your best friend and could use a new TV Car House. 

Kidding! Just not about the lottery stuff. x

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The Economics of A Lottery Win

Running the Numbers on Winning Numbers

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A Billion with two Bs… 

After 40 draws came up dry, the largest lottery purse in US history has claimed a winner, and they’re somewhere in Los Angeles County.

Talk about a Hollywood ending. 

Two billion-dollar lottery wins in six months. It may have you thinking, “geez, should I get in on this?!” 

2 billion is such a big number that if you counted to 2 billion, saying one number every second, it would take over 63 years.

Here are some other numbers to consider:

The odds of winning this $2.04B were about 1 in 292.2 million. In other words, you had a better chance of getting struck by lightning, getting eaten by a Grizzly, AND playing in the NBA than winning the lottery.

Still, in Pennsylvania, retailers were selling 200 tickets a second over lunch this week.

How Winning Works.

So, let’s say you DO win the lottery. Or maybe you just did. Congratulations! I’m so glad I’m your best friend in the world. Do you need me to clean your room or live in your mansion or anything?

A few things to consider: you won’t actually receive the $2B, for reasons we’ll get into. Before we do, you have a decision to make. You can receive your money as a lump sum, or you can receive your money in 30 payments over 29 years.

Which. To. Choose?

Option A. The Lump Sum.

Opt for the “lump sum”, and that $2 billion drops down to $997.6 million before you’ve even had a chance to pick up the bullet-proof briefcase. Turns out you pay a penalty for taking it all in one haul

Next, you’ll be taxed on the lump sum federally and locally (although not, coincidentally, in California). 

The Powerball winnings are expected to take a 50% tax hit, leaving you with a final sum of $498.8 million. It’s nothing to sneeze at, but it’s also a long way from $2B. 

Option B. The Annuity. 

Your other option is to take 30 payments over 29 years. The Annuity Option. With this option you won’t get “penalized” with a hit off the top, and before taxes, you’ll actually receive the full $2.04 billion over 29 years. 

At the time of posting, the annual after tax amount for this option isn’t known. But whatever it is, Option B will leave you with a significantly larger sum than Option A’s lump sum leftovers.

So, perhaps this seems like a no-brainer — “take the bigger number!” But wait. What IS the bigger number? As a savvy, financially literate investor, you could take Option A’s $498.8 million lump sum, invest it in a diversified portfolio, and in 29 years of compounding at 6%, you’d add over $3.96B to that smaller lump sum. 

An extra $4B? Maybe compound interest is what people mean when they say less is more…

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Extended warranties aren’t worth it

You’ve just plunked down $89.99 for the Veg-O-Magic 5000 because this is the week you finally start on that all cucumber juice diet. So, do you buy that extended warranty for just a few bucks a year? Money that you could otherwise be investing? I mean, you’re gonna be juicing until you’re 125, right? Maybe, […]

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You’ve just plunked down $89.99 for the Veg-O-Magic 5000 because this is the week you finally start on that all cucumber juice diet. So, do you buy that extended warranty for just a few bucks a year? Money that you could otherwise be investing? I mean, you’re gonna be juicing until you’re 125, right? Maybe, but here’s why it’s not worth it:

  1. Most big-ticket products are already covered with a year-long warranty — and your credit card may well extend that term.
  2. Companies make huge profits off extended warranties, as much as 60% according to Bloomberg News. Why? Mainly because …
  3. Things don’t break as often as we think. Consumers estimate a new TV has a 13% chance of failure over three years but the actual rate is more like 5%, according to one study.

The good news: Extended warranties are a bad buy because products are well built.

A well-built Veg-O-Magic ought to last well beyond your taste for cucumber juice. And if it needs a fix, pay out of pocket. Chances are, you’ll end up ahead.