This Week in Your Wallet: Hitting the Lottery (or Not)
Did you buy a Powerball ticket last week? I’ll confess: I did. I don’t always indulge in the lottery, but when the buzz (and jackpot) gets to be as large as it did last week, my curiosity gets the better of me and I just have to test whether or not my lucky numbers are, in fact, lucky.
This time around, they weren’t so lucky, but I should have predicted that. After all, the odds of winning the lottery are extraordinarily slim, and the odds of winning the Powerball are even slimmer: players have a 1 in 175 million chance of winning, according to this great column by Tara Siegel Bernard. The sobering odds don’t end there, either. Bernard notes that to improve your chances of winning, you would need to buy 126,000 tickets a month for the next 80 years — and even then, you’d only have a 50 percent chance of winning.
Yet despite these odds, I don’t feel silly for wanting my own Powerball ticket — and you shouldn’t feel silly for buying yours, either. It’s fun to get caught up in the excitement every once in awhile, and as Nobel-winning psychologist Daniel Kahneman told Bernard, it’s also fun to think about the mere possibility of success: “What matters is the possibility of winning,” he said. “People are excited by the image in their mind. The excitement grows with the size of the prize, but it doesn’t diminish with the size of the probability.”
The key to playing the lottery is not to let the excitement of playing override your more rational impulses. A $2 ticket every once and a while won’t hurt your budget, but a $2 daily habit is $60 per month that could otherwise go in your emergency fund, or $730 per year that could go in a vacation fund. In my opinion, a week on a beach in Florida will give you much more enjoyment than the anticipation leading up to a lottery drawing!
And now, here are the other headlines for the week:
So Misunderstood
What investing terms trip you up the most? According to a new Wall Street Journal article, you’re not alone if terms like “risk” and “diversification” give you a bit of pause. The Journal’s latest edition of “The Experts” asked a handful of financial and investment experts what clients frequently misunderstand, and risk and diversification were at the top of that list. People might understand the dictionary definition of these words, The Experts explained, but they don’t put them to action in their own financial life.
Terrance Odean, chair of the finance group at the Haas School of Business at the University of California, Berkeley explained how this happened to a friend of his: the friend worked for a Silicon Valley tech firm and owned a significant amount of tech stocks, including his own company. Odean told his friend to diversify, but the friend “diversified” by selling his company’s stock but buying other tech stocks — so when the tech bubble burst in the early 2000’s, the friend lost money, money that could have been saved if he had truly diversified and invested in a different industry (or five).
Moral of the story? If your adviser tells you do to something and uses a term whose dictionary definition makes sense but whose financial application seems a bit blurry, don’t be afraid to ask questions and get your adviser to explain exactly HOW to diversify, or HOW you should be taking risk.
Paying Off Debt… With a Credit Card?
Last week, news hit that Wells Fargo is planning new credit card offerings that will help consumers pay down student or auto loans by providing a rebate (cash-back) that can be applied directly toward the debt (the bank has had a similar card, for home mortgages, since 2007). Naturally, Credit.com is asking, “Should you pay off debt with your credit card?” The answer: only if you’re very, very careful. As the Credit.com article notes, a credit card with a cash back or rebate rewards will carry a higher interest rate than a card without rewards — and this rate will almost certainly be higher than the rate on your mortgage or even student loans. Unless you can pay off your rebate card in full at the end of every month, it makes little sense to pay off one type of debt with an even costlier type of debt.
For Those Who Love Lists
This item is less instructional and more for your viewing pleasure: Money magazine just released its list of the best towns in America — those that are not only thriving economically but offer a safe place to raise a family — as well as a list of the 25 best places for affordable homes. Does your town make either list?
Have a great week!
Jean
