The money you’re putting aside for your Lotto ticket could give you an almost certain $100,000 windfall.
Lotto’s Powerball is rolling over for a $20 million prize on Saturday and statistics show we spend a combined more than $700 million a year on Lotto products.
Investment experts say people might be missing out on a prize that they are much more likely to achieve.
The odds of winning Lotto First Division are about one-in-3.84 million per line. Powerball is even less likely — at about one-in-38 million.
On the other hand, if you put money away each week, fortnight or month, the power of compounding will deliver you a solid return, given time.
Hamilton Hindin Greene investment advisor Grant Davies calculated the outcome for someone investing $25 a week over 45 years at just over $58,000, without any investment returns.
If they received an after-tax and after-fee return of 4.5%, compounding weekly, they would grow their investment to $189,785.
Adjusting for inflation, both in the weekly contribution and the future value of the investment, the investor would end up with about $160,000.
“The allure of Lotto is that big win and the hope that comes along with it,” Davies said. “That’s why people do it, but if you start to do the maths, it often doesn’t stack up quite so well.
“The thing about compounding interest is that it does take a long time for small amounts to build up, but once they do build up, that’s when you start to see the real benefit.
“Over 45 years, it’s not until you get to the final 20 years that you see the real effects of compounding start to play out.
“That’s part of the human condition — we’re maybe more tuned to the short-term dopamine hit than the long-term one.”
Over a long-time horizon, he said most investments should perform, “but when you’re only dealing with small numbers at the beginning, it’s hard to see that result at the end”.
Hatch managing director Waimarie Marks said she knew people who spent a lot more than $25 a week on Lotto.
“I think it’s because it’s a habit they can’t break,” she said. “Although there is so much literature out there about the benefits of investing and compounding growth etc, the ‘hit’ of potentially striking big likely draws them in.
“I will say, though, an upside of Lotto is the good work this money can do in the community.”
Koura KiwiSaver founder Rupert Carlyon said a big win was more alluring than a slow and steady return.
“Even though you know that it is a one-in-38 million chance of winning, you think maybe you will be that person.
“It’s the same as a capital gains tax. Most people would benefit from it, yet it still polls negatively, because people think that one day they will benefit from a capital gain that they want to have tax free.
“Lotto are currently going through a process where they add an extra number. This will reduce the odds and allows them to offer bigger prizes.
“Their research is showing them that bigger prizes will mean more tickets sold. Unfortunately, it is human psychology.
“We love big numbers and love to believe we will be the lucky ones, despite what the logic says.”
Fisher Funds chief executive Ana-Marie Lockyer said it was behavioural economics.
“You only need to watch Lotto’s latest TV ads to understand it isn’t just about the money — it’s about your dreams coming true overnight.
“The prospect of winning millions offers an immediate emotional payoff that saving or investing can’t match, even though the odds of a big win are extremely low.
“Gambling a relatively small amount each week feels harmless and the occasional small win keeps people going back for more.
“Saving or investing, on the other hand, doesn’t offer the same excitement because the payoff is usually a long way off and it’s seen as complex and only for wealthy people.
“Most people don’t realise investing $25 a week into a balanced KiwiSaver fund earning 3.5% a year for 10 years could add up to $15,500.
“We need to change those perceptions, so investing is seen as the best way of achieving those same dreams.”
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