The odds of winning the lottery are astronomically long. Yet, the allure of pocketing hundreds of millions of dollars can tempt even the staunchest penny pincher. While there's no harm in playing your lucky numbers every now and again, coming down with a serious case of lottery fever can prove costly.
Consider this: A $20-a-week lottery habit adds up to $1,040 over the course of a year. Suddenly, we're talking real money. Here are three better ways to use that cash than buying lottery tickets.
Contribute to a 401(k)
Why not contribute to your retirement savings account at work, instead? After 20 years, investing an extra $1,040 a year in a 401(k) will provide an extra $86.67 a month, which is what $1,040 breaks down to over 12 months, in a 401(k) over 20 years will sock away an extra $20,800 toward your retirement. That's good, but here's the best part: The account balance will actually increase to nearly $50,000, assuming an 8% annual return and a 25% tax bracket. If your company matches 401(k) contributions, as many do, the balance will grow even faster.
Open a Roth IRA
If you're already maxing out your retirement account at work, then open a Roth IRA. By investing $1,040 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 59 1/2.
Make an extra mortgage payment
Lastly, consider increasing your mortgage payments. Say, you've got a $200,000 mortgage at 4% over 30 years. That works out to a monthly payment of $955 excluding taxes and insurance. You'll pay about $144,000 in interest alone over the term of the mortgage. By paying an extra $1,040 a year, you'll save almost $24,000 in interest and retire your loan four years early.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.