Bought your Powerball ticket yet? There was no jackpot winner on January 6, so the grand prize has climbed to $700 million for the January 9 lottery drawing.
There’s nothing wrong with putting a couple of bucks toward a Powerball ticket every once in a while. Who doesn’t dream of winning big some day? But don’t confuse fantasy with reality. The odds of hitting the Powerball jackpot are 1 in 292,201,338.
There are smarter ways to spend your hard-earned cash. Let’s say you’ve gone from buying a single $2 lottery ticket every month to shelling out $20 a week. That adds up to $1,040 over the course of a year. Rather than dropping a grand on your lottery habit, spend the money in one of these five ways instead. You’re all but guaranteed to come out ahead.
1. Pay down credit-card debt. Paying off a balance with a 13% interest rate (about the average on fixed-rate cards now) is like earning 13% on your investments — an incredibly valuable use of the money. And once you pay off your credit-card debt, you can start using that money to build your retirement savings (see also: The Best Credit Cards of 2015).
2. Boost your 401(k) contributions. If you have an extra $1,040 to spare, then put that money to work for you in your retirement account. You’ll really benefit if your employer matches your contributions. Investing an extra $86.67 a month (which is what $1,040 breaks down to over 12 months) in a 401(k) over 20 years costs you $20,801, but after two decades the account balance will be $49,632, assuming an 8% annual return and a 25% tax bracket. And that’s with no company match. After factoring in the 25% tax savings, since the investment was made with pretax dollars, the real cost to you is just $15,601. So you effectively triple your money in 20 years (see also: 10 Things You Must Know About 401(k)s).
3. Open a Roth IRA. If you’re already maxing out your retirement account at work, contribute to a Roth IRA. If you invest $86.67 every month in a fund that earns a 7% annual return, in 30 years you’ll have nearly $106,000. And you can withdraw your earnings tax-free after you turn 59A1/2. For 2016, you can contribute to a Roth if your modified adjusted gross income is less than $132,000 if you’re single ($194,000 for couples who file jointly).
4. Increase mortgage payments. A little extra goes a long way. A $200,000 mortgage at 4% over 30 years works out to a monthly payment of about $955 (excluding real-estate taxes and insurance). You’ll pay nearly $144,000 in interest alone. But put an extra $86.67 a month toward the same mortgage and you’ll save almost $24,000 in interest and retire the loan four-and-a-half years early.
5. Invest in a taxable account. You might want to use the money to buy stocks or shares of mutual funds outside of your retirement account. If you invest $86.67 a month for 20 years in stocks or mutual funds with a 7% annual return, you’ll have nearly $42,000. Spend that same amount on lottery tickets each month for 20 years, and you will have shelled out $20,800. See our picks for the 25 favorite no-load mutual funds and 26 best stocks for 2016.
(Source: Tribune Content Agency, LLC)