LOS ANGELES – The Butler family in Palmdale, Calif., hit it really big on Jan. 21 when the numbers they picked generated the only winning ticket in California's lottery.
The jackpot of $84 million not only enriches them — it's also worth $420,000 to Anup Singh, owner of the 7-Eleven in Palmdale where the winning ticket was bought.
The lottery certainly was a good investment for this family. After all, even if they'd squandered $10 every single week for the last 22 years, they have now easily recouped their original $11,400.
When they submitted their numbers to the clerk, the Butlers selected the cash payout option, instead of getting payments over 26 years. They'll be getting a check for about 50% of the $84 million, less 25% withheld for federal taxes. They'll walk away with $31 million in their pockets. States don't tax their lottery winnings. So that's a savings of 9.3%.
Since they're going to be in a 35% tax bracket, they'll still have to pay about another $4 million to IRS next April. So, they'd better still have some liquid cash around. On the other hand, a credit-card payment of that bill could net them some humongous mileage or other bonus points!
Smart money managers assure you that buying lottery tickets isn't a great investment for most people. Why? Your odds of winning the California Super Lotto Jackpot are only 1 in 18 million. Your odds of winning anything are about 1 in 23 tries.
Kind of a no-brainer, right?
So, what's a better use of the money you normally spend on lottery tickets? Let's work on the assumption that you buy lottery tickets for $5 every week of the year. What else could you spend that money on, that would be more satisfying?
What can you buy for $260?
Challenging experts around the country for the best use of $260 per year yielded some interesting responses.
Rob Bennett of Purcellville, Va., is the author of the book "Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work" and the Financial Freedom Blog at PassionSaving.com. Bennett suggests you invest the $260 on a budget. But you'll like his budgeting technique.
Use the $260 for a one-night stay at a bed-and-breakfast inn with your spouse. Use the short getaway to have a long walk together and a long conversation over dinner and a bottle of wine about your financial plan for the future. Leave the inn with a budget in hand, and return each year to rewrite the plan.
Actually, for $260, you just might be able to get a whole weekend at some charming inn — especially off-season. This expense wouldn't be deductible — but who cares?
Allan Keiter, president of MyRatePlan.com in Atlanta, would highlight VoIP telephone as an incredible value that can (in some cases) be had for $260 a year or less.
While the most well-known provider, Vonage, slightly exceeds the limit ($300), a popular alternative called SunRocket is available for $199 a year, including all taxes.
But since VoIP (voice over Internet protocol) phone service provides unlimited phone calls all over the U.S. and Canada, this could reduce your overall phone bills by, perhaps, $50 per month or more, saving you at least $600 per year. An immediate return on investment.
The cost wouldn't be deductible for business or employee business expenses — unless the VoIP service was exclusively for business. Why? The base cost of personal phone service is never deductible — only the business percentage of the additional cost of use.
Investing is a good idea too
According to Ellen Weiss, marketing director for the financial advisory firm Leonetti & Associates in Buffalo Grove, Ill, $260 could buy one-half of the latest and greatest game box, a trendy Dooney & Burke clutch purse — or an introduction to a lifetime saving and investing habit.
Weiss points out that the Leonetti Balanced Fund (LEONX) , is a no-load fund that can be opened for just $100, with subsequent investment amounts as low as $25 each. In fact, the fund can be opened as a Coverdell IRA, as a Roth IRA, a regular IRA, or as a plain vanilla taxable account.
Naturally, education IRAs and Roth IRAs won't yield an immediate tax deduction. But if the annual deposits grow at an average rate of 5% per year, in 20 years it would be worth $8,600. Better yet, when you pull the money out, for education or retirement, it comes to you tax-free.
Of course, in a regular investment account, the earnings will be taxed. So, if it earns 5% and you're in that combined 25% tax bracket, expect to cough up a chunk of money for taxes each year — the princely sum of $3.25. Yes, you can probably manage that.
The regular IRA, if it's deductible, will yield an immediate tax savings of $65 (based on a combined federal and state tax rate of 25%), which you could invest in the account — or spend on lottery tickets.
Eva Rosenberg is the founder of TaxMama.com and an enrolled agent licensed to represent taxpayers before the IRS. She is the author of the new book, "Small Business Taxes Made Easy."
Copyright (c) 2006 MarketWatch, Inc.