All About Investing
Young Fools
March 25, 1998

Ways to Lose Your Money

We've covered ways that you can put your money to work earning you more money. There are also a lot of ways that you can lose your money.

Below we discuss one of our pet peeves -- lotteries. We invite you to send us your own ideas of bad money moves, so that we can add them to ours and make a list of things to avoid doing. (Got that? All young people out there -- think about some other bad money moves and send them in to us -- we'll publish the best ones here.)

Lotteries: Hoping Against All Odds

Many people who don't have much money spend a lot on lottery tickets, hoping to win. Sure, some people do win. And yes, it might be you. But it really, really, really probably won't be you. (There should have been more "really"s in that last sentence, but we didn't want you to fall asleep or go looking for a snack.)

Consider these facts assembled by the television show Frontline (which appears on PBS). They looked at the California lottery and found that the odds of winning the Super Lotto Jackpot were 1 in 18 million. The regular Lotto Jackpot offered odds of 1 in 14 million. Consider these facts from their findings:

-- If you buy 50 Lotto tickets each week, you will [on average] win the jackpot about once every 5,000 years.

-- You're more likely to be killed by terrorists while traveling abroad (odds: 1 in 650,000), to die from flesh-eating bacteria (1 in 1,000,000), or to be struck by lightning (1 in 30,000) than to win the lottery.

That's right -- you're more likely to get hit by lightning than to win a big lottery payoff. It can be hard to understand these kinds of odds, as the numbers are so gigantic. Not many people can imagine how big a million is. So let's start small as we try to fathom these odds.

Imagine that you are standing in a room with nine friends -- so there are 10 of you. And there are 10 boxes in the room. One has $1,000 in it, and the other nine are empty. Each of you goes to a box and opens it. One of you gets the $1,000. Are you going to be the one who gets the money? Maybe. But the odds are against you. In fact, the odds are only one in 10 that you'll win, and nine in 10 that you'll lose.

Now, imagine that instead of 10 people with 10 boxes, you're 100 people with 100 boxes, and again, only one has the $1,000 in it. 100 people is a big crowd. It's probably like four to six of your classes at school combined. Now it's even more unlikely that you'll win, right? Imagine 500 people. 1,000 people. 5,000. A small town might have 10,000 people. A small city might have 100,000. Can you see that if only one person in a small city of 100,000 people could win the money, it's very unlikely that it will be you?

Where am I going with this? Well, if you buy a lottery ticket, especially one offering a really big jackpot, then you can be sure that lots of other people are doing the same thing. And your odds of winning the jackpot are very, very small. Maybe one in a million, sometimes one in 20 million -- or more. One million is like 10 small cities or 100 small towns. 20 million is like 40,000 school assemblies of 500 people each. Are you beginning to see how unlikely it is that you will win the jackpot in a group the size of 40,000 school assemblies?

Another thing to think about is why there are lotteries. Do they exist so that some people can get rich? No. Lotteries are organized to raise money. If a state offers a lottery, that means that the state is doing so to raise money. So it's almost like a tax. In fact, some people joke that the lottery was invented to be a tax for people who aren't good at math. Sure, a few people win. But overall, most people lose. And most lose a lot of money over the years. Even the people who win probably lose, in the long run. They might win $1,000, but that just encourages then to keep playing, and they may end up spending $2,000 in lottery tickets. So who really wins? The people raising money by running the lottery. Because on average, they end up keeping roughly half of all the money people spend on tickets.

One of our readers, [email protected], offers another way of looking at your odds of winning the lottery:

Imagine that you have to find a friend of yours. Only your friend is somewhere in New York City and you don't know where. You get to the city and randomly pick an area to search -- Queens, for example, or Brooklyn or Manhattan. Then you randomly pick a street. (Remember, you're not doing any thinking here about where your friend would likely hang out. It's as if you're closing your eyes and picking an address out of the fat telephone book.) Next, you randomly choose a building. You go to any floor in that building and walk up to any door. You knock on the door and one of four people inside opens it. How likely is it that the friend you're looking for will be the one to answer the door? Not too likely, right? Well, this is a lot like your chance of winning the lottery.

All About Investing

Risk and Return
The Rule of 72
Ways to Grow Your Money
Ways to Lose Your Money