At odds with sense over lotto

DON’T test your luck by trying to win Set For Life lotto because smart people don’t play the lotto, says BAREFOOT INVESTOR.

BRON WRITES: I am curious as to the tax situation if someone wins the new “Set For Life” lotto, and no, I haven’t won it. Because you are paid monthly instead of in the usual lump sum, would it be classed as income and therefore taxable?

BAREFOOT REPLIES: No, it will be completely tax free. That’s because gambling winnings are classified by the Tax Office as a “windfall gain or a prize”, because they’re earned without any skill. I hate lotto for the same reason I hate credit cards: they’re a tax on low-income earners who can’t do maths. The chance of picking up the Set for Life first prize is one in 38,608,020. Yet what’s interesting about this new lotto game isn’t the odds — they’re always terrible — but the way it’s marketed. On the official Set For Life website, it says: “Everyone’s heard stories of people that won the lottery and it ruined their life, it happens to some in a matter of months who confess to being worse off after they purchased that life-changing ticket than they were before.”

Wowsers.

In other words, “you’ll only blow a multi-million-dollar payday, so we’ll hold on to the money for you, and dish it out over 20 years”. (And if you don’t see what the catch with this, you’re probably lotto’s ideal customer.) Someone who understands money would say: “Actually, just give me the $4.8 million today, and I’ll invest it in shares, and in 20 years it’ll be worth $22 million.” On second thoughts, no they wouldn’t. Smart people don’t play the lotto. Set For Life is for losers. Same dodgy odds, different spin. They’re just framing it for stupid people.

GOING FOR BROKER

BEC WRITES: I have been reading your stuff for a few months now and am concerned my situation is not getting me where I need to go. I am a 47-year-old single mum of three teens. I am in full-time employment on $67,000, owe $260,000 on a house worth $600,000, and have $3000 in savings and no other debt. Recently, however, I had some financial planners change my loan to interest only, and they told me to live off my credit card and then pay it off each month. I’ve lost the plot and now don’t understand my own loan. Help!

BAREFOOT REPLIES: The strategy would have looked totally awesome on a spreadsheet. The problem is that single mothers with three teenagers don’t live in spreadsheets. And advising you to live off a credit card is like your doctor prescribing you crystal meth for a headache. Here’s the deal: you’re bringing in $5800 a month (wages and family tax benefits), and your repayments are $1400 a month (with a principal and interest loan). That’s tight but doable — well, so long as your three teenagers get part-time jobs and pay for the things they want, instead of hitting you up. Here’s what I think happened: you didn’t go to see a financial adviser, you went to see a mortgage broker. That broker gets paid a kickback from a bank, based on how much you borrow. The more debt you have, the more he makes. That’s probably why he set you up with a “mortgage-credit-card-sweeper-strategy”. Ditch the credit card, start paying down your mortgage, and word your kids up that things are tight — but you’re a fighter, and you’ll win.

DIVERSE INTERESTS

DAWN ASKS: I took your advice and bought a heap of shares in The Reject Shop when they were at the low price of under $6. Now I have made a substantial amount of profit from it. My question is, do I leave the funds in there to see if I make more, or draw out the profit to buy another share that is at an all-time low?

BAREFOOT REPLIES: Well done on buying The Reject Shop. If only doubling your money was as easy as investing in companies that are at all-time lows! Sometimes, oftentimes, they’re priced that way for a reason. I’m happy to hang on to my Reject Shop shares, but if you’re not diversified enough you could look to sell them (after 12 months, so you get the 50 per cent discount in capital gains tax concession), and invest in something with a diverse portfolio: try Vanguard’s International Shares ETF, which gives you a slice of around 1500 companies worldwide, including Apple, Google, Facebook, Amazon, Microsoft, Toyota, Nestlé and Berkshire Hathaway.

If you’re going to gamble do it at a casino rather than day trading..

CHIPPING AWAY

GREG WRITES: I’m a little bored. I have a small share portfolio I manage from home ($80,000) and another managed through my financial adviser ($550,000). I have no debts or loans. I’m wanting to draw, say, $20,000 from the cash component of my adviser’s portfolio and do some day trading in stocks. For example, buy $10,000 worth of ANZ at $27, then sell when they hit $27.30. That would give me $10,101 less 2 x $19.90 brokerage = $61.20 profit. And keep repeating this to build $$$. But what are the complications in doing this?

BAREFOOT REPLIES: I couldn’t think of many things more boring than trading ANZ from $27 to $27.30 to earn a $61.20 profit (which you will pay full tax on at your marginal rate). Seriously, you’ve got to sit around and watch the share price all day: that works out to be $7.65 an hour — below the minimum wage! And if the shares go the other way, which they will 50 per cent of the time, you’re working for nothing. There’s no skill to day trading. It’s gambling, and if you’re going to gamble I’d rather you do it at a casino, where there are cheap drinks, airconditioners and pretty girls (though mostly only on the weekends). At least you’ll lose money with a smile on your face. Bottom line: you’re earning $27,500 a year in dividends on your financial adviser’s portfolio. That will compound over the years above the rate of inflation. If you’re bored, take up woodwork. Make birdbaths. Sell them at local markets. You’ll make a killing.

barefootinvestor.com

Originally published as At odds with sense over lotto