Wednesday, April 9, 2008

A Gambling Lesson

No, I'm not going to teach you how to gamble!

As I mentioned last week, Dave Ramsey was interviewed by Dr. Dobson on the Focus on the Family radio show last Thursday. Toward the end of that broadcast, Dr. Dobson and Dave went off on a little tangent about how gambling in the US, specifically the lottery, is an exploitation of the poor. They had a lot of neat statistics and stories to back this up, but one statistic really stood out to me.

The Claim

The average lottery player spends $35.84 per month on the lottery. Dave went on to say that if you invest that $35.84 in a decent growth stock mutual fund from age 22 to age 72, you'd be a millionaire.

How funny is that? People are willing to spend $35 a month trying to become a millionaire via the lottery and only one in about a billion will succeed. If you take that same $35 a month and invest it instead, you're practically guaranteed to be a millionaire!

Checking It Out

I was a little skeptical of Dave's math, so I decided to look into his claim. Since I work for a financial services firm, I randomly chose two funds I knew had been around for 50 years, which is the number of years Dave's calculation of ages 22-72 would work out to.

I entered two American Funds into my calculator, Investment Company of America (AIVSX) and the Washington Mutual Fund (AWSHX). I tried to enter in everyone's favorite, the Vanguard 500 Index, but it's only been around for about 30 years. Also noteworthy is that AIVSX and AWSHX are actually growth and income funds, so a growth fund like Dave mentioned should perform even better!

$35/month invested for 50 years with dividends and capital gains reinvested brought AIVSX to a value of $1,079,117. Investing into AWSHX would also make you a millionaire at $1,078,581.

The Conclusion

It works! I found it to be completely amazing that a mere $35 can get you to a million dollars eventually. This information should be posted at all locations that sell lottery tickets. Do you think it would make a difference?


Mrs. Micah said...

Interesting. It's nice to see someone actually run the numbers. I've heard him say that elsewhere, but I never followed it up.

Kimberly said...

No, I don't think it would make much difference if it was posted ... people crave instant gratification... They want to be a millionaire now not when they are 72.. People dream big about leaving their job now, taking vacations now, buying big houses and cars now. Most people don't think about 72....

My husband likes to play the lotto (only $4-$5 a month) I always tease him and say "should we buy the ticket or just throw this dollar on the ground, it's all the same". :) But really it doesn't bother me, it's only a tiny bit of money and he enjoys it plus we save money every month so when we are 72 we won't have to be working :)

Good post... I do think if more people knew this information they would certainly take advantage of it... of course that's in addition to buying their lottery tickets :)

Ken Clark - said...

There is an old saying that says, "The lottery is a tax on people who don't understand math."


Becky@FamilyandFinances said...

Mrs. Micah: Thanks!

Kimberly: I would agree with you!

Ken: So true!

indie pride said...

My sister adores the lottery and she wins most of the times anyway (just not the jackpot or we'll be filthy rich now). Lol.

So I don't mind.


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Kym said...

I've just started reading your blog and have been reading some old posts. I just found this one, and guess what - I believe we work for the same company ;) Which office are you in? I'm in IRV

Becky@FamilyandFinances said...

Lol! I'm not sure you're right! The company I work for has about 10,000 offices. Let me know if you still think we work for the same company :)

Kym said...

Doh! Yeah, I guess not the same one. My company has almost as many employees as yours has offices, haha.