If you are one of the millions of people who spend regularly on lotteries or prize draws, you might have wondered at some point what that money could have grown to if it was invested instead.
By our calculations, after 20 years, you might have enough cash to put down a deposit on a house, pay for student fees or accumulate a significant supplement for your retirement pot.
How much money do people spend on lotteries?
According to the National Lottery, Brits spend just over £8 billion a year on lottery tickets alone. Their survey found that on average people spend around £420 a year, or £35 a month on, scratchcards and the lottery combined.
These numbers exclude subscription draws like The Peoples Lottery and Omaze which cost £10 to £15 per month, suggesting the actual amount spent by those who participate could be closer to £50 per month.
Taking this figure as a guide means spending £6,000 over a decade and £12,000 over 20 –years on lotteries.
Is a lottery ticket worth the cost?
For those who play the lottery purely for entertainment, it is difficult to put an exact value on a lottery ticket.
But for those who play purely to win, how much are those tickets truly worth?
The odds of winning has an estimated value of 45p for every £1 spent. The reason it is not zero is because of the possibility of small wins along the way. The chances of pocketing the jackpot are miniscule.
This means £12,000 spent has a theoretical value of £5,400. For some people, may feel like a reasonable entertainment value, while those playing to win may feel shorted.
How does investing compare?
By contrast, putting £50 per month into a fund that invests in global equities, like a fund tracking the FTSE All-World Index, gives you a slice of the global economy.
That is the equivalent of owning a small stake in some of the world’s largest and most successful companies.
Applying a conservative 7% average annual return (a common benchmark for global stocks over long periods), the £12,000 invested would have an estimated value of around £24,000 in 20-years.
This includes a small a deduction for investment charges.
It is also important to remember that if the investment was made via a Stocks and shares ISA (Individual savings account), all gains and dividend income would be tax free under current government rules.
In summary, on a like-for-like basis, the investing choice is worth (£24,000 minus £5,400) £18,600 more than the lottery option.
The importance of compounding
The real cost of choosing the lottery over investing is not just the £50 per month; it’s the potential compounding that you miss out on by not participating in the growth of some of the world’s best businesses.
Some of these companies generate more cash each year than they need to remain competitive and grow.
They often pay out excess cash flows to shareholders through dividends and share buybacks, which literally puts cash into shareholders’ pockets.
Reinvesting the cash into new shares can deliver even greater value of investments over time. Compounding is like a snowball- the gains look skinny to start with, but once the snowball gathers pace, it becomes unstoppable.
Eagle-eyed readers will have noted that investing in a broad diversified index like the FTSE All-World index will be also mean holding stakes in less successful companies too.
While this is true, the advantages of owning a broad basket of stocks far outweigh the disadvantages.
Investors interested in exploring different scenarios for investment returns over a range of periods can find a calculator tool here.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
