With Powerball jackpots hitting $500 million-plus payout levels more frequently these days, you might be wondering whether it's time to start spending a few bucks everyday playing the lottery.
But you'd be mistaken to take this as a serious path to wealth.
After all, the odds of winning the Powerball are tiny -- just 1 in 175 million. In fact, you're more likely to win an Academy award (1 in 11,500), die from a shark attack (1 in 60,453), or even date a supermodel (1 in 88,000) than you are to strike it rich playing the lottery.
And, as I'm sure you can gather, those are events you'll probably never experience.
And Yet People Still Play!
Even with such remote odds, people continue to play. In fact, it was one of the few purchases that didn't slow down during the recession.
In 2012 alone, Americans spent $78 billion on lottery tickets. And over the past 12 months alone, 57 percent of Americans bought a lottery ticket, according to Gallup.
But why? Most obvious is the "get rich quick" element. But it's more than just that.
One explanation is that people are blind to exactly how unlikely these odds are. (See examples above as a reminder.) In Adam Piore's recent article "Why We Keep Playing the Lottery," he quotes Canadian professor of health sciences Robert Williams, who studies lotteries: "[W]e have nothing in our evolutionary history that prepares us or primes us ... to try and grasp the remoteness of those odds."
Another way to look at it, as Piore himself puts it, is that it's an understandable way for those in dire financial circumstances -- with no obvious way out -- to feel like they're "buying hope."
Whatever the reason, it's not a serious way to accumulate wealth.
And although some may write it off as "just a few dollars here and there," let's take a look at how a similar amount could look over decades of playing.
I've heard a few acquaintances talk about spending $5 a day on lottery tickets. Some spend more, some less -- but I'll use $5 a day for this example.
Over the course of a year, that habit adds up to $1,825. A fair sum. But not life-changing.
But here's what happens to that money if you set it aside over decades instead of playing this game of chance:
After 10 Years
After 20 Years
After 30 Years
After 40 Years
After 50 years
Remarkable, right? After half a century playing the lottery, this $5-a-day habit could've amounted to more than $90,000 in your bank account.
But Wait. It Gets Better.
You see, that money doesn't -- or shouldn't -- have to be idly sitting there. After all, if you've got it in a bank account, you'd be making a tiny amount of interest. But maybe you'd set it aside in higher-yielding CDs. Or maybe you'd even try investing.
Here's what that same habit would look like over the same amount of time:
In 5-year CDs*
In an S&P 500 Index Fund**
After 10 Years
After 20 Years
After 30 Years
After 40 Years
After 50 years
*Assumes Bankrate.com's average 5-year CD yield of 1.4%. **Assumes the market's average 10% return.
Now I'll admit -- it's not a hundred-million-dollar payout. And it's certainly not easy. There'd be regular temptation to cash it out and spend it. What's more, it takes decades to get there.
Yet even so, ending up with nearly $150 grand in a brokerage account is a heck of a lot better than looking at an empty bank account after a lifetime spent futilely "buying hope."
Adam Wiederman is a Motley Fool contributing writer.
8 Things You Never Knew Were Taxable
Why Playing Powerball Isn't Your Best Bet for Getting Rich
It may seem like adding insult to injury to force workers who've lost their jobs to pay taxes on their unemployment checks. But with unemployment acting as a substitute for your regular wages, federal tax laws treat it the same way for tax purposes. Most states also impose income taxes on unemployment benefits as well.
Not all Social Security recipients have to pay taxes on their benefits, but if your income is above certain limits, then a portion of what you get in Social Security is subject to tax. To figure out what you owe, take half your Social Security benefits and add in your other income. For single filers, if the result is between $25,000 and $34,000, you might have to add in up to half your benefits as taxable income. Above $34,000, as much as 85 percent of your benefits could be taxable. The corresponding figures for joint filers are $32,000 and $44,000.
Many struggling borrowers seek debt restructuring deals with their lenders that involve having a portion of their outstanding debt written off. If you're fortunate enough to get banks to forgive part of your debt, the IRS will treat the amount forgiven as income and charge you tax on it. One big exception: forgiveness of mortgage debt on primary residences, which became a hot-button issue during the housing bust and the ensuing financial crisis.
If you get divorced, then the alimony payments that one spouse makes to the other are generally treated as deductible by the paying spouse and must be included in the receiving spouse's income. Keep in mind, though, that payments for child support are not the same as alimony and aren't includible as taxable income.
The tiny amount that most jurors get for doing their civic duty may seem insignificant, but Uncle Sam still wants his share. Jury duty is taxable unless you have a deal with your employer that requires you to turn it over in exchange for earning your regular pay.
Stories about lottery winners often bemoan the fact that after taxes, winners end up with far less than the official jackpot amount. But what many people don't realize is that all gambling winnings are taxable, and in most cases, you can't simply offset corresponding gambling losses. Instead, those losses have to be taken as itemized deductions and are subject to limitations. Casinos are required to report winnings of $1,200 or more on slot machines, while lottery winnings of $600 or more are often reported as well. You'll typically have to fill out a form with the casino to claim your winnings, and failing to report those winnings on your return will trigger a red flag with the IRS.
Students who are fortunate enough to get money from scholarships often don't realize the tax implications involved. Scholarships that go toward tuition, as well as required fees, books, supplies, and equipment, qualify for tax-free status if the student is in a degree program. But amounts for room and board and travel, as well as compensation for teaching or research, are subject to tax.
Many businesses offer rebates to customers for doing business with them, and often, those rebates aren't taxable. If the rebate effectively reduces the price of something you buy, then it's usually not taxable. But if you get cash or other gifts upfront just for opening an account, the IRS has a much better argument that it's taxable. Many companies offering those rebates report them on a 1099-MISC form, forcing you to include them on your return to avoid an IRS audit flag.
Tax season will soon be behind us for another year. But the complexity in figuring out what's taxable and what's not will be with us for a long time to come.