Is entering a ‘Dream House’ raffle worthwhile?

The Odds of winning a prize are 1 in 50

The Odds of winning a prize are 1 in 50

I was reading a forum recently, and there was a question posed about whether entering a dream house raffle is worth it.

They asked, “The odds of winning something are 1 and 50 apparently. They have other prices like vehicles and vacations, etc.  Is this worth buying a ticket for, or should I stay away?”

I was curious as to the answer, so I thought I would investigate.

The grand prize is a multi million dollar home in San Francisco. Also, there are many large prizes including numerous cars and international holidays. With the odds of winning a tempting 1 in 50 and tickets only $150, this sounds like a tempting deal.

The raffle : http://sfraffle.com/Overview.aspx

The site lists a lot of details about the prizes, and are very upfront about what’s on offer. Which is always a good sign that they are being trustworthy.

Unfortunately, they know that humans are instinctively lazy, and will take everything at face value and won’t bother to dig deeper to see just how beneficial – or how bad, this ‘Dream House’ raffle really is. Fortunately, I quite enjoy wasting an hour determining the maths behind deals like these.

To be fair, I had no clue what the payoff would be for someone who participated. I was expecting it to be similar to scratch-it cards or physical pokie machines at the casino. Which are in the 60%-80% payout range.

In this instance it is a charity organisation so you can expect a poorer result than you would for a commercial organisation. Although investigating where their funds go, this doesn’t appear to be that enticing as they are just trying to provide funds to an arts hall.

So lets begin.

 

Money In

This competition provides the punter with a 1 in 50 chance of winning. The tickets are a mere $150 each. Which seems like a fairly decent deal. 1 in 50 chance to win! Those are fairly good odds, particularly with holidays, cars and your dream house on offer.

But before we get too excited, lets determine the amount of ticket revenue that comes in.

After going through their list of prizes I can only find 1705 prizes listed. Which comes to $12,780,000. Since this is the only thing I can legitimately verify, this is the number I will use.

Note: The headline states that there are over 1800 prizes. That’s $13.5 million in ticket revenue.

 

Money Out

The costs for the organisations are in 3 parts.

  1. Advertising costs, in promoting it and sending out letters.
  2. Employee costs.
  3. Buying prizes for participants to win.

We do not know what the first 2 are, but the third is relatively straightforward to determine. We just grab the prize list from their site, and do some searching to determine it’s market costs or RRP. Calculate the number of prizes on offer by the individual cost and we have our total payout.

Notes: How i calculated the prizes:

  • For products like Samsung or Apple, i went to the companies own websites and took the prices in US$.
  • For the others, i either used Amazon (new) prices. Else took the top search item in google.
  • For some options, the winner can choose to take a cash offering instead of the original prize. This is for all top tier prizes such as cars, holidays, and the dream house. In these instances, I simply took the cash option every time.

We can see the final result here.

Determining The Cost For Providing Prizes

Determining The Cost For Providing Prizes

 

Final Outcome

The total value of the prizes comes to $4,332,427. Which pales in comparison to the 12.78 million in ticket revenue. That is a 66% return when calculating the prizes alone.

I highly doubt that employee costs, and advertising/ pamphlet mail outs will make much of a dent in those figures.

Note that, although you have a 1-in-50 chance of winning a prize, over 90% of those prizes are worth less than the price of the ticket. So like all good gambling products it is just the illusion of winning, and you still lose. Your chances of breaking even in this competition is closer to 1-in-500.

Like most gambling products, this is extremely profitable for the companies organising it and a poor choice for consumers.

 

Final Word

If you want to donate to a charity. Then cut out the middle men and donate directly to the charity. (Which also provides tax incentives for doing so).

If you want to enter a raffle to win a dream house, then know that they are robbing you blind under the pretense that you have good odds. Anything that takes a dollar and returns 44cents in return via prizes is not a way to become rich.

Be wary of mass media inspired financial advice

My dream summer holiday house.

Mass media is telling me to ignore my logic and just buy my dream house.

I was reading a generic article on real estate in the finance section in one of the larger news websites in Australia.

You would hope that the advice is sensible financial guidance helping point people in the right direction to achieve their dreams. In fact the heading ‘Home ownership is a dream but a mortgage doesn’t have to be a nightmare’ leads us to believe it will give us advice on how to not fall into a nightmare.

Yet the advice within was shockingly terrible. I just do not understand how this rubbish could be published within the mainstream media. It is no wonder that the average persons’ knowledge on finance is so poor when this is the sort of advice that they are provided with on a daily basis.

Lets look at the worst paragraph.

My friends in banking think that paying back the capital on mortgages is crazy. They see a mortgage as a way of leveraging a great lifestyle. The more debt you can get, the better. It means more toys, more art, better wine and bigger houses.

With “friends” like this leading by example, who needs enemies?

There is so much wrong with this paragraph. I was expecting to read a follow on paragraph tearing it to pieces, explaining why his friends are idiots and showing the average reader why this is terrible advice. But it never comes. Even if his friends in banking are earning a million a year this is still poor advice. The GFC in 2008 showed how easily it was for bankers to suddenly go from being paper millionaires to all being sacked en-mass.

The easiest way to get ahead is to save a significant portion of your earnings. Invest it. Then add time. With the power of compounding those savings will multiply and eventually that money will start working for you. Hopefully to the extent that you no longer have to work 9 to 5.

A house is a personal place for you and your family. A place of security. It should not be mortgaged to the hilt, forcing your entire families welfare and dependence to be totally reliant on your next paycheck. And for what? So that in the meantime you can live life now and have more art and better wine?

“Living in the now” increases lifestyle risks which . Throughout your life you will face many unexpected hurdles. When you are not prepared for these bumps, then a mild financial discomfort can morph into a major calamity. Thinking of the future and preparing with an emergency fund will help to mitigate these issues. While living only in the now will compound them.

If you live only in the now, one day you will wake up struggling to survive on the pension for the remaining years of your life. That is not the way I wish to spend my twilight years.

At the very least a happy medium can be found, but that is a long way away from the extremes shown in the article.

 

Can You Buy Dreams?

Big debt at a young age can be crippling for some and yet highly motivating for others. Inspired by my fanciful banking friends, I finally got over my fear of debt and now live in a huge pile by the sea.

 

My name is on the deeds, but I know that the bank really owns it. Nonetheless, I can live with that. I’m living the life I want, and I love it.

Which sums up the point of the article. Everyone should ignore monetary issues as you only get to live once. As such, everyone should follow their fantasies to buy their dream house now.

But why stop there? How about that new Ferrari? Or a yacht? If i was living only for now, I’d be on a plane to Europe to visit the Hagia Sophia and the roman coliseums. Perhaps dropping by Egypt to visit the tombs and the pyramids. Of course this all ignores that I would come back with a lot fewer options than when I left. As i would no longer have the financial firepower to choose to do whatever it is I want.

Spending money does not buy freedom. It only buys inservitude. Forced to remain on the hampster wheel of perpetual work. It is through the ownership of money that someone truly buys freedom. As it provides options and the ability to do whatever they want. If you choose instead to save further, then eventually it will provide enough passive income to fund your entire future.

That is freedom. That is the ability to live your dreams.

 

Summing up

Terrible finance advice. The author finishes with;

… regardless of the logic. It’s your life. Live it.

This is the one great sale pitch of all corporations. Always endeavoring to make consumers buy on emotion rather than on need and logic. This is why car ads are always showing all of the fun you can have in their car instead of actually talking about whether it’s a superior product.

Financial decisions need to be made logically. It is only with via emotion that people are tricked into spending 3 months total wages on a ring just to prove how much you love someone. Or buying that new Jeep with a great deal on finance so you can have those amazing adventures all the time.

People can only get ahead by living a lifestyle that is well within their financial means. You can’t do that by leveraging yourself to the hilt.

I just hope the author isn’t trying to fund his beach side lifestyle by writing financial articles.

The article can be read in full here.

 

Looking Deeper

After tracking down the author of the reader and reading his personal synopsis it starts to make sense. This person appears to have done quite well for himself and can easily afford a beach lifestyle. But this is not advice for the average joe. Yet that is who he is targeting this article at.

After reading a few inane articles like this, people will start to form the belief that this is standard behavior. Not only that, but it is good financial practice!

Everyone should be very wary of mass media inspired financial advice.

The price of gluttony

A deep fried mars bar a day helps you work, rest and die early.

Half your daily intake in a single snack. A deep fried mars bar a day helps you work, rest and play.

Many people confuse frugalness with being cheap. Being frugal isn’t just about not spending money, or always buying the cheapest option. Being frugal is choosing to be wise with your money. You can’t make wise decisions without taking into account all variables. Today we’ll expand that into the realm of food.

Australia is one of the most overfed and undernourished countries on the planet. With the transformation in the quality of life that has occurred over the past 50 years you would think every aspect of our lives would be improved.

But it’s a sad state of affairs when potato chips are the top source of oils in our diet, and carbonated beverages account for more than a third of added sugars. So, as a society we continue to gourge ourselves on comfort foods and our waste lines continue their inevitable march outwards.

“Around 60 per cent of adults and one in four children are overweight or obese, and the National Health and Medical Research Council predicts that by 2025, 83 per cent of men and 75 per cent of women will be overweight or obese if current trends continue.”

Why is this the case? It’s not that Australians are too poor to afford good food. Recent articles suggest that as a society we now spend more on food than at any time in our history.

Household weekly spending on meals away from home has jumped more than 55 per cent in real terms since 1984.

Nor is there a food shortage. Nowadays there is an enormous selection of foods on offer that wasn’t available to past generations. In fact due to the expansion of globalisation and the relative affordability of shipping. Combined with improvements in agricultural techniques, the availability of food is at an all time high. In both it’s ease of access (the local shopping centre), and it’s total range (the number of products available). This convenience has all but eliminated the need for a hunter gatherer society.

The problem is with the food that is purchased and consumed.

“The diet now is based on processed foods, foods that have calories added to them, where food is relatively cheap and bad food even cheaper.”

Gone are the simple foods of yester-year that were whipped up into a meal. They have been replaced by pre-packaged instant meals packed full of things that make it taste good but lacking the vitamins and minerals required to live a healthy lifestyle.

 

The laziness of humanity

Why do people buy these products?

Some people justify it that they are too busy or too tired after a full days work to cook. Partly due to change in the family structure. No longer do housewives stay at home preparing dinner for their darling husbands.

Others, that food is one of their passions, or they enjoy the socializing. Realistically humans are just lazy, and enjoy taking shortcuts.

I’m sure that the food manufacturers and mass marketing also has a role to play in the ongoing trend. The markup on pre-packaged food with a brand name is much higher than a boring old apple.

None of these justifications take away the fact that eating out is damn expensive. Not only does it make a big dent in the size of your wallet, but the cost of laziness hurts your waste-line, self esteem and potential longevity.

 

The Cost of Eating out – Hip pocket

I thought I’d try and find out how much people normally spend when eating out. It was hard finding statistics but i came across the following two points:

  • The average household spent $2678 on food away from home in 2012, accounting for 5.21% of total expenditures.
  • On average, Australians eat out 3.5 times a month and buy takeaway food 4.1 times.

Given that there are 2.3 people in a given “average family”. That mean’s the average cost per meal is $12.77. (2678 / 2.3 / ((3.5 + 4.1) * 12)). Considering that most lunches would be around $10. Then this seems fairly accurate.

Of course, this only applies to the ‘average family’. There would be a large number of people who spend way less than this. Which means conversely, that there are a large number of people who spend much more than this as well. But let’s just stick with the averages.

Every time you eat out you are spending roughly 15.50 of your pre-tax dollars. This may not sound too much in an affluent country such as Australia. But over a lifetime this becomes an insane waste of money.

 

The cost of eating out – Health

As our waistlines expand, diet-related diseases and their associated costs grow along with them.

Even rickets, a disease caused from malnutrition has made a resurgence in recent years. A recent court case outlined a couple who held their family to a strict vegetarian diet, which resulted in their child dying of malnutrition. It’s not a stand alone case. The UK had 900 cases of rickets in 2012. When only 1 had been identified in the 30 years prior.

Diet Fads and Weight Loss programs are also to blame. Fad diets are very similar in nature to get rich quick schemes. Everyone wants an easy way to fame and riches without doing anything to achieve it. Throw in a catchy title while promoting a new fad is a surefire way to riches. Pure carbs. No carbs. Cocoa 3 meals a day. Drink nothing but health shakes.

All of which are doomed to fail, as the only people on them are those looking for the easy way out.

 

The solution

Eating better

Ignore the fad diets, and just eat a good range of healthy nutrient-dense fruits and vegetables, beans, and whole grains. Save the sugary snacks and fatty foods as an occasional treat.

A lot of this means ditching the pre-packaged foods and cooking yourself at home. A lot of the time i will just cook a huge meal on sunday night. Have it for dinner, then box it up and have it every day for lunch throughout the week. Not only do i save a fortune by not eating out, but i know exactly what is in the food that i’m eating.

To put it simply. Buy whole foods. Cook yourself. Eat in moderation. Eat better.

Eating Cheaper

If you were to halve the ‘average families’ cost of eating out a year, and invested it instead at 7%. you would have an extra $126,000 after 30 years.

The cost to both your hip-pocket and your health is too big of a cost to pay for the price of convenience.

 

Final Word

Dieting and eating right is all relatively simple. You add up your calories going in. You take out the amount of energy you burn off in a day. If you burn off more than what goes in, then you lose weight.

If your calorie intake increases, then so does your need to burn it off. If you don’t, then you’ll start adding on the pounds.

If you eat better you will not only save on food costs but also on medical costs later in life. Which gives you the added bonus of living longer.

View Of The World 2014

Australia Inc vs World Co™

Australia Inc versus World Co™

I was reading some forums recently and I came to a realization today. I’m bearish on almost everything that exists in the market at the moment. So I thought that I would list asset classes and geographical locations and some very minor thoughts on them all.

I am a firm believer in either reversion to the mean, or at least ‘every dog has it’s day’. That is, everything is in vogue at one point in time. I am always skeptical of ‘miracle’ stories or never-ending growth estimates for companies or countries. Nothing can grow forever, and growth brings it’s own unique problems. Just because something is in vogue today doesn’t mean it will be in a few years.

With that in mind here are my thoughts.

 

Assets Classes In Australia

AUD – bearish. Prefer to hold international denominated assets, else assets that derive income from overseas.

Shares – bearish. I think Australia Inc is heading into trouble in a few years. Although the market is still well below the highs of 2007/2008. If you apply the USA’s rule that the stock market has always recovered to it’s pre-crash highs within 7 years. Then we’ll see a surge sometime over the next two years. Rising interest rates will also be a drag on the market. Either way, I’m still heavily invested.

Property – Bubble. I have been questioning myself lately mainly in relation to supply constrains as Australia only has a few locations that are both liveable and have plenty of work available. There are only really 4 cities, which puts a real supply constraint in place. But that doesn’t explain astronomical prices in other locations. I’m standing by my bubble stance.

Interest rates – Going up. That can be both bullish and bearish depending on the assets. They are well below overage, overtime they will rise back to historical levels

Bonds – bearish. Interest rates may fall more if further bad news occurs. But when rates start to rise back to higher levels it will adversely affect the price of bonds.

Gold / Silver – bearish. Gold bugs talk about how its dropped a lot recently, but even so it is 4 times the price it was a decade ago. I like buying low, not buying high. I do like warren buffets take on it, you can choose one of;

  • All the worlds gold. Which amounts to 67 feet cubed.
  • 7 Exxon Mobil’s plus all of the farmland in the world plus a trillion dollars.

I don’t know many people who would choose gold given this option.

 

Thoughts on Geographical Locations

Australia Inc – bearish. Property bubble. Mining boom. Potential dutch disease. Union power. High minimum wage. Massive social safety net. I think the next recession is going to hit really hard.

China – bearish. China has had an awesome run, and also have the huge potential of continuing to do well. I am mainly bearish due to property speculation. Provincial debt. Poorly built infrastructure (apartment blocks with no foundations – bridge supports filled with garbage etc. Massive over-spend on unnecessary infrastructure returning ever smaller productivity gains.

Japan – bearish. Government debt. The general populations view on savings is something that the rest of the world could learn from, but in part helps to cause the constant stagnation.

Asia – bullish. hard workers. good with money. cheap labour.

America – unknown. A battle between debt vs recovery. probably on the bearish side.

Europe – bullish. Region has been in the doldrums. It will recover. Migration will be a huge problem for them, but also a source of cheap labor. The euro has it’s own problems.

Except for France. whose combination of socialist governance, work laws, taxation, social benefits and work culture will see it continue to fall or stagnate.

Africa – bearish. no infrastructure. corruption. government issues. Inefficient racial policies. a lot of countries where people can’t really own land / no property rights for owners.

Russia – unknown. don’t know enough. mildly bullish with no knowledge or information as to why. Crap weather will hinder them. Natural resources will help them.

South America – unknown. bearish. governments. work ethic/culture issues.

Antarctica – bullish! A virgin land that is ripe for the plundering. Beware the penguins.

 

Job Security When The Worlds In Turmoil

Most people are reliant on their jobs for income. If they lose that then they are in real trouble. I am fortunate as my current job earns its income from international companies and is in an anti recessionary area which would give me a better chance than most.

If the world is in trouble, our income actually improves which makes our positions safer. If only Australia is in trouble, we should be shielded as our income is derived from outside of Australia. If Australia performs well and I lose my job, the economy would be steaming along and I should be able to get another job fairly easily.

It’s almost a win win situation or at the very least a ‘not lose too much’ option. This gives me a fairly safe and secure position in terms of personal income given an uncertain future.

I am young, and if the markets do crash (as long as i maintain my job) i can just snap up the bargains on offer and buy more. This will set me up well.

 

Reading Tea Leaves

As such I see 3 possible futures for Australia Inc and World Co.

  1. The entire world goes down the toilet.
  2. The rest of the world does fine. Australia does fine.
  3. The rest of the world does fine. Australia is in strife.

For me the fourth logical option doesn’t exist. I can’t see Australia being fine if the world decides to take a turn for the worst again. China saved us last time, I don’t think it will occur again. Next time we’ll follow them down.

Option 1 – If the entire world is in strife, then Aus is in trouble. Potentially both my job and my investments would all suffer. But nothing will be safe in this instance.

Option 2 – If Australia does well, then my income is safe, and it doesn’t really matter what happens to my investments. Short term it would mean I do well, as my investments and job are both safe. Longer term my net-worth would take a hit as I don’t get to supercharge it with bargains.

Option 3 – This is the real option that shapes my investment choices and where I have the most potential to do well. If Australia is in trouble, both Australian property and shares will be on fire sale. Hence I need assets that will do well in this situation

As such my preference is for:

  • International ETF’s. (VEU, VTS)
  • Australian companies that derive money from overseas (QBE).
  • Cash

As a partial hedge I also have a soft spot for defensive non-discretionary plays. Mainly the domestic supermarket retailers (WES, WOW) as a super long term play. WES was one of my original share purchases back in 2008. It has been a nice ride since then but I am not sure if I’d buy now. Perhaps i’m being too emotional with it by keeping it.

 

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