With Mega Millions reaching over $1 billion and people of every income level buying tickets in quantity, financial experts everywhere are decrying the lack of financial education of the common man. They talk about the near-zero chance of winning the lottery, and how that money could be better invested in the stock market. Some even go so far as suggesting that taking the lump sum over the annuity is the better option.

The Stupid Person Tax

Back in the day, someone close to me described the lottery as a tax on stupid people. There were (and are) a lot of poor people playing the lottery with the hope of striking it rich. According to a Washington Post demographic study, “Those with middle-class and lower-middle-class incomes are more likely to play the lottery than those with higher incomes. Those with low incomes are just as likely to play as the wealthy – although they presumably have less to spend.” In 2005, a Texas Lottery report found the same proportions of players amongst income levels.

The presumption of my friend, who wrongfully believed that poor people were poor because they were stupid, was ill-conceived in its origins. However, less educated people are more likely to play the lottery than those who have graduated from college. More significantly, those who are employed are more likely to play than those who are unemployed.

Rather than a tax on stupid people, because there have to be few people that actually believe they’re going to win the lottery, especially when report after report tells them that how low that possibility is, it appears that the lottery is the American Dream tax. Admittedly, there may be some who, like Lloyd from Dumb and Dumber, are thinking, “So you’re telling me there’s a chance.”

The American Dream

As much as every American would like to believe the American still exists, that the average person can still get ahead, and that working hard will allow you to retire in comfort, it’s just not the case anymore. The gig economy, freelancing, and hobby-cum-business will not be able to support a majority of workers throughout their lives and into retirement. While the jobs within these areas have grown, they just don’t provide enough income for people to afford retirement, health care, or sick days. No matter how hard a person works at doing these things, in and of themselves, they will not lead to financial security. It’s a terrible business model for the working person when their income relies on the strength of someone ordering something and them receiving a tip large enough to cover expenses.

Even if you have a steady job paying a “living” wage of $15 an hour ($600 a week, $2,400 a month, $28,800 a year before taxes) unless that job includes retirement and other benefits, most people are stuck spinning their wheels. There’s no way to get ahead at that wage level, and those wages are what the U.S. economy is built on while being supported by freelance and gig workers. The structure is precarious and untenable. It is also unlikely to change. (Check out “the Hard Truth of the Gig Economy and Freelancing” on Medium.)

The Myth of Compound Interest

Some are still preaching tuppence prudently, thriftily, frugally invested in the bank will have compounded interest that will make a difference in your later years. Hogwash. A 401K, with interest rates of three one hundredths of one percent (.0003) doesn’t work for those who have low amounts invested. With $9,500 in my retirement account, I am making about 8 pennies (.08) a month; by the end of the year, I have 96 cents – not quite a dollar. The money in a retirement account is trapped unless the person has the financial savvy and time to find out how to reinvest it elsewhere without the financial penalties of early withdraw.

Even in a bank manage Money Market savings account, where interest rates are five times higher than those of the retirement account (.0015), the compound interest on any kind of account is easily wiped out by one bank fee, a candy bar, or a single lottery ticket. Still, most people wouldn’t count $1 as a positive gain, even when inflation is lower than its current percentages.

Play the Stock Market

Most professional financial people will tell you that its better to put the money in the stock market, where returns have been between seven (7) and 15 percent. Averaged out over whatever the number of years the analyst wants to look back on. “There are three types of lies in this world: lies, damn lies and statistics.” (The quote is variously attributed to Benjamin Disraeli, Mark Twain (who may have taken it from Disraeli), and Arthur James Balfour.) The problem with this statistic is that it doesn’t represent individual performance. It might be true of the group for the time period taken into account, but it has no bearing on an individual stock or an individual year.

In 2008, I lost $1000 of invested, real money and $4000 in gains because I chose the wrong stock. At the end, I had to pay extra to the robot account manager because the stocks I had were forced to be sold at a negative number after brokerage fees. That year, not only did I not make seven to 15 percent, I also lost all of what I had invested in the stock market with no way to recuperate it. For the brokerage firm, it was still a win because they got my fees for selling worthless stock. That same year, my mom lost half of her retirement account, which meant she had to retire later than she had planned because the stock market did not recover fast enough to refund her retirement account.

The stock market takes skill, knowledge, and resources to invest in. Those who are spending $2 a week on tickets have spent $104 over the course of a year. They would have to find a place to store that money and then find a firm or program (like Robin Hood or Acorns, which didn’t exist until recently) to use for investing. Then they would have to decide what to invest in, and with all the choices and possibilities for fraud, it’s too much overload for most people.

The Lump Sum Fallacy

While the accepted statistic is a fallacy, there are several tragic stories about lottery winners who had to declare bankruptcy within a decade after they won the lottery. Presumably, they took the lump sum payout. It’s a lot of money to ignore, especially for smaller prizes. But even at a billion dollars, there are some people who would still take the lump sum, reducing their prize to less than $700 million dollars.

If you happen to be the winner of the big prize, take the annuity. This is a sum of money that pays out every year for 30 years, and each check is worth more (percentage-wise) than the last. For someone younger than 70, that’s 30 years of guaranteed income. If you mess up one year, you still have next year to bail you out.

Someone Has to Win

Some people will say, “Someone has to win, it might as well be me.” The thing is, no one has to win. In fact, the reason why the jackpot is so large is because no one has won it, yet. They didn’t win for several weeks in a row. No one has to win this time or the next. One guy spent $100,000 on the Tuesday drawing (July 26, 2022); he didn’t win. If you’re playing because you think someone has to win, you need to rethink your strategy.

The Dream

What the lottery does do, for those who have realized that their hard work is forever going to keep them where they and for those who see no way of struggling out of their own financial issues, is gives them a ray of hope to cling to. Maybe, just maybe, they’ll be able to have the financial means to live life on their terms, rather than having to constantly be at the beck and call of customers, bosses, and bills. They can hold onto this glimmer and for a few days dream about what the windfall would mean to them, what they could do with the money, how they could change their circumstances.

If you happen to fall into this category, don’t go out and act like you’ve won, but feel free to indulge in the fantasies of winning. May those uplifting thoughts release you from your burdens, even if only for a little while, and allow you to practice using your imagination. Play only what you can afford to lose, and make sure this indulgence has more meaning than just a piece of paper that will likely be only paper come Friday night.

If you don’t fall in this category, stop telling people what they can do better with their money. Most people are working hard to change their destiny, let them have this moment of lightness and dreams, especially since so many others have been crushed.