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.
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.
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 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.
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