Bought your Powerball ticket yet? There was no winner for the $350 million Powerball jackpot on May 15, so the prize has climbed to a whopping $550 million for the May 18 lottery drawing.
I've never bought a lottery ticket, but my husband spends $5 each month on Mega Millions, a multi-state lottery similar to Powerball. Unfortunately, he's never won. But -- fortunately -- he's not counting on the lottery to cover his retirement. Buying a lottery ticket isn't an investment, he says, it's buying a dream. And who doesn't dream of winning big some day?
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I don't worry about the fact that my husband spends $5 a month on lottery tickets. It's a nominal amount, and I know he's actively saving for retirement. However, if he were shelling out, say, $20 a week on lottery tickets, I would suggest better uses for the $1,040 it would amount to in a year. In fact, here are five ways to spend $1,040 with much better odds of getting a return than the 1 in 175,223,510 odds of winning the Powerball jackpot.
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.
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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.
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).
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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.
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.