Many people claim to have a system for winning the lottery. Or they have a dream in which they saw the winning numbers, only the numbers were in a parallel universe and never win in this world. Or they play their birthday or their children’s birthdays, which is why certain numbers tend to have more winners when they do come up.
Learn the smartest way to play the lottery.
Image of number balls in a lottery drawing.
The smartest way to play the lottery is not to buy a lottery ticket.
The Best Bet Is Not to Play the Lottery
The lottery is like the military simulations in the 1983 science fiction movie, WarGames. At the end of the movie, the computer, called WOPR, runs a series of doomsday scenarios and then says, “A strange game. The only winning move is not to play.”
The odds of winning the Powerball jackpot are 1 in 292.2 million. The odds of winning the Mega Millions jackpot are even lower, 1 in 302.6 million.
Even if you buy two tickets, doubling your odds of winning, your odds of winning are still extremely low. Mathematicians refer to an arbitrarily small quantity as epsilon, just as infinity is an arbitrarily large number. Epsilon is as close to zero as you can get without reaching zero. Twice epsilon is still epsilon. It is not uncommon for mathematicians to refer to the odds of winning a jackpot as epsilon.
Even when the jackpot is more than $600 million, so that the expected value of a ticket is equal to the cost of the ticket, the odds of winning are still so incredibly low that you are much more likely to win nothing than to win something. You are more likely to get struck by lightning or to die in a car crash than to win the jackpot.
So, aside from insider cheating or a mathematician finding a flaw in the lottery design, financially you are better off not playing the lottery.
But, people like to dream. Playing the lottery is a form of entertainment. It doesn’t do much harm if you limit your spending to a minimal amount.
Playing the lottery can be addictive, however. Low-income people are more likely to play, and to play too much, spending money they cannot afford to lose.
What to Do If You Win the Lottery
If you do happen to win the lottery, the first thing you should do is tell no one. If the lottery allows you to collect your winnings anonymously, take advantage of this.
Otherwise, you will learn that everybody wants your money. Long-lost friends and relatives will ask for a handout or have advice on how you should spend your money. If you value your privacy, the answer should be “no” to any unsolicited requests for money.
Give yourself time to plan for the winnings before claiming your prize. Most lotteries allow winners several months to claim their prize.
Talk to a qualified accountant of your choosing to plan for the taxes. Lottery winners often don’t realize how much they’ll have to pay in taxes on their winnings.
Decide whether to take a lump-sum or long-term payout. A lump-sum payout lets you invest the money yourself, potentially yielding a greater return on investment. A long-term payout reduces the risk of spending all of the money and provides long-term cash flow. Think about the pros and cons carefully, as you can’t change your mind later.
If you take the money in a lump sum, you may wish to make charitable contributions in the same year as you get the check. This will reduce your tax bill. If you don’t know yet which charities you will support, look into a charitable gift fund. Giving money to a charitable gift fund lets you take the charitable deduction this year and choose the recipients later.
Instead of spending the money, save it and spend just the income it earns. This will ensure that you gain a long-term benefit from the money. You can also use a portion of the winnings to pay off debt.
It is a good idea to set aside a year’s salary in an emergency fund. Also, set aside money for retirement.
But, try to resist the temptation to spend it on luxuries, as this can cause your winnings to quickly disappear. Give yourself time to learn about your options.
Beware of investing advice. People will approach you with a lot of crazy investment ideas, most of which will lose money. It is better to keep most of the money in safer investments.
Instead, keep a portion of the winnings in cash, such as in a high-yield savings account, and invest the rest in broad-based stock market index funds or ETFs, such as an S&P 500 fund. Most investments do not beat the S&P 500 in the long term.
If you have young children, you may wish to set up 529 college savings plans for each child. Use a direct-sold 529 plan, as the fees are lower, and choose an age-based asset allocation.
Hire an attorney to draft a will and trust for you. A trust can help protect your money from estate and inheritance taxes. It can help you leave a legacy for your children and grandchildren.