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Chip Rogers

5 Better Investments than the $550 Million Lottery

By Chip Rogers Posted May 17, 2013 10:44am (EDT)
The Powerball Lottery is Expected to Reach Record Prize Levels this Weekend

The Powerball Lottery is Expected to Reach Record Prize Levels this Weekend


The Powerball lottery has reached more than half a billion dollars for the Saturday night drawing.

It is the currently third largest jackpot in American history and expected to surpass the record of $587.5 million before the numbers are picked Saturday night.

Yet, even with the allure of hundreds of millions of dollars financial experts say there are much better ways to invest your hard-earned dollars.

The experts at Kiplinger point out that someone who spends $20 a week on lottery tickets would have $1040 a year to invest elsewhere. And with the odds of winning the Powerball drawing at greater than 1 in 175 million, they have identified 5 better places to use those lottery dollars.

1. Pay down credit-card debt. Paying off a balance with an 13% interest rate (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.

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 with pretax dollars, the real cost to you is just $15,601. So you effectively triple your money in 20 years. Use our Power of Boosting 401(k) Contributions calculator to see how additional contributions to your account can add up over time.

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 59½. For 2013, you may contribute to a Roth if your modified adjusted gross income is less than $127,000 if you're single ($188,000 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 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.

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