Lazy Man and Money

What’s the Difference between a Promotion and a Lottery?

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A few months ago, a friend pointed me to this news story about a Seattle car dealership, Jet Chevrolet, having to pay out money for a promotion it ran. The promotion was that if the Seattle Seahawks shut out the NY Giants, they’d give away $420,000 to 12 people ($35,000 each). I’m not sure where they came up with the $35,000 number, but I’m guessing the picked the 12 for Seattle’s famous 12th man, another term for the fans.

Life does crazy things sometimes. This time, it caused havoc for the car dealership as the Seahawks actually did shut out the Giants. One of the owners said, “This is crazy. We never expected that we’d actually be giving away the money.” My response would be, then don’t offer it and advertise it everywhere.

Fortunately for the dealership, they bought insurance for $7,000. They were paying $7,000 anyway, so this is almost a best case scenario since it got them so much extra publicity. Sure that insurance company is going to raise the insurance premiums on the car dealership, but I hope they’ll never run a promotion like this again they ran it again with increased premiums, but didn’t have to pay up again.

Before I get to the main point of the article, I’ll share one other oddity that my friend, Kosmo, spotted:

Reached Sunday night, Johnson said he still doesn’t know how the dealership will actually work the drawing and was waiting on guidance from the insurance company.

“We’re a car dealership, we’re not used to doing something like this,” Johnson said.

His email to me nailed exactly what I was thinking:

Uh, what? You paid the insurance company $7000 to insure against a shutout. Once they give you a check for $420K, their job is done. If they are smart, they don’t touch the drawing with a ten foot pole – that’s just begging for a lawsuit.

Ahhh the drawing. Let me tell you about those details. The company worked with their legal department (kudos to them) and realized that they had to make the opportunity available to everyone. It’s for the same reason you always hear the “no purchase necessary.” If you charge people money for a chance to win a big jackpot you are essentially running a lottery, which is only legal for the government I guess. Similarly, in many states 50/50 raffles are illegal… and in some they have extensive restrictions.

Jet Chevrolet made the opportunity available to the public. You could enter the drawing without buying a car (I presume by going to the dealership and filling out an entry.) If you bought a car during the promotion, you got 100 entries. It turns out that 12 people filled out a form who didn’t buy cars and 20 people bought cars. Thus there should have been 2012 entries in the “hat” when the 12 names were picked.

There’s some information on the winners here, but I couldn’t tell if they were the ones who bought cars.

Clearly the odds are greatly, greatly (it bears repeating) in favor for those who bought cars, right? Jet Chevrolet made up their own terms for the promotion and they had their legal team involved, so of course everything is on the level, right?

I’m not going to comment on the specific representation of their promotion. They said that they ran it by their lawyers and it was legal. However, I was thinking about extrapolating it as an example for myself. Let’s imagine that I create a one-page ebook with just average content… nothing special about it at all. I sell it for $10 and offer a prize of $100 where people who buy the book get a million entries and other people can enter once for free. While it is technically open to the public, it is essentially a contest where the only reasonable chance to win is to buy my book.

Suddenly it looks a lot like running a lottery, right? Running a lottery is illegal in most states (perhaps all of them).

At what point does running a “promotion” become running a lottery? I don’t have the answer, so I’ll just end with that question.

How Many Mega Millions Tickets Are You Buying?

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If you have walked near a television, radio, or a general news site, you probably heard that the Mega Millions jackpot for Friday is up to over $500 million. Winning the lottery is always worth some serious coin, but $500 million means you can buy your own sports team right?

Well not exactly. The relatively poor performers of the Los Angeles Dodgers went for over 2 billion recently, but maybe you can set your sites on a team that isn’t so high profile? I wonder what the Kansas City Royals would go for?

The other reason why you won’t be buying a major sports franchise is that you won’t get all $500 million. The last time I wrote about a high lottery in nearly 5 years ago, the $390 winner ended up with around $65 million: Just won $390 Million in the Lottery? Maybe not so quick.

How much would you get with $500 million? If you choose to take it as a lump sum instead of a 20-year annuity you’d get about half that amount. Let’s call it $275 to err on the generous side of things. Then you’d pay taxes of about 35% on that money. This would leave with around $180 million left to spend. It wouldn’t buy you much of a sports franchise. That also assumes that you don’t have to split it with one or more other winners. The odds of winning Mega Millions is 1 in 176 million, but with all the attention this lottery is gathering the odds of multiple winners is growing every minute.

Let’s go into fantasy world for a minute or two here. What if you did win? What would you do? The very thing that people suggest is to hire an attorney and a darn good accountant. That’s sound advice. Hopefully they help navigate on of the bigger questions: Should you take the lump sum or the annuity? That website tells you how you can do the math for your own state’s circumstances, but it looks to me that in most cases you are better off with the annuity. Personally, I’d like the annuity option because it forces me to not spend it all on a sports team. The next thing I would do with the $16 million in my first year winnings (after taxes) is buy another annuity that pays out over a longer term, something that will ensure that I’ll be covered even after the 20 year lottery winnings. From there, I’d probably need some help in figuring out how to put that money to work for me, especially in making sure that I’m covered with FDIC insurance or something similar in the places I put it. You’d also see me start buying up real estate. There are a lot of foreclosures on the market and putting the cash to work on a few of them could be great investments in the future. This may even include perhaps buying a modest home in Silicon Valley (though it is much cheaper to rent here).

To answer my question in the title, I plan on buying 10 tickets for the lottery tomorrow. Is it a smart move? Nope. Playing the lottery is a tax on those who are mathematically challenged. If you don’t believe me, simulate playing Mega Millions here. I just simulated 1,000 tickets and won $79. However, tomorrow is my birthday, so for those who believe in such things, perhaps I’ll get a little birthday luck. So what about you? Are you buying a bunch of tickets?

No More Alternative Income Reports

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Today, I’ve decided to formally end my Alternative Income reports. I don’t think too many people will miss them since I haven’t done the reports in around months. Some might wonder why I stopped doing them. Well, a wise friend of mine once said that if he ever hit the lottery, he wouldn’t tell a soul for six months, while he set up proper estate planning. Nearly six months ago, I found myself in that exact situation. So behind the scenes here , I’ve been taking his advice and implementing his plan.

With that fortunate bounce of the ping-pong balls, I had been more preoccupied with making sure that it was protected than blogging about my Alternative Income. The few thousand a month that I make is really just a drop in the bucket in the grand scheme of things.

As for the overall estate planning, I should give some details on how I managed it. First, I opted to take the money as a lump sum payment and of course significant taxes were taken from it. The rest of it was divided up in the following ways:

  • Spending Spree – 5% – Earlier this week I had a problem of not being able to figure what I wanted for my birthday. This is a direct result of that spree. Once I got a new computer and a few other toys it was time to be a little more responsible.
  • Speculative Investing – 5% – This is the money that I put into speculative investments. For instance, some of that money went to Lending Club and some of that money will be used for me to expand this website and expand my web presence elsewhere.
  • Annuity – 30% – Putting 30% of the money in an annuity gives us a guaranteed stream of income which will help us live our lifestyle. Think of it as an emergency fund on steroids
  • Domestic Stocks – 20% – A simple purchase of Vanguard’s Total Market Index ETF (VTI) filled this easily
  • International Stocks – 20% – A simple purchase of Vanguard’s All-World ex-US ETF (VEU) covered this well with no duplication of the above
  • Various Bonds – 20% – The Vanguard investing tripod stands strong with the purchase of Vanguard Total Bond Market ETF (BND).

One of the more challenging issues was making sure that I didn’t put too much money in one banking institution. The reason I wanted to spread it around was in the rare circumstance of bank failure, I could still count on FDIC insurance to help out.

How would you have handled a sudden windfall like winning the lottery?