Game shows are big business on network television and I admit that I might watch one from time to time while eating dinner or reading discussion threads in the evenings. Of course, what constitutes a game show these days is really just a variation of flipping a coin – pure random chance. The point of these games really comes down to the same question: When should I stop? When does the risk of losing everything outweigh the reward of the next money level? The game show Set for Life is one of these shows, but they have an interesting twist.
Set for Life gives you the chance to win a set amount per month for a number of years. Each random choice can add or subtract how many years you receive your "paycheck" per month. While watching a contestant struggle with whether he should risk 20 years of $2800 payments in order to get 25 years, it occurred to me that the time value of money rendered the decision meaningless. I also came to the conclusion that I was watching one of the easiest games shows around – at least when it comes to the question of when to stop.
If you consider inflation, the present value difference between 20 years and 25 years of $2800 payments is insignificant. Figure A shows you how much inflation diminishes returns over the years.
Time Value Strategy
There is really no reason to go past 25 years when you consider how much inflation will reduce the value of those payments over time.
But perhaps the more interesting calculation is what would happen if you saved those payments of $2800 and invested them. At an investment rate of 5 percent, over 25 years you would end up with a future value of almost two million dollars (Figure A). And, yes, I did discount those future amounts by the present value of the payments at the 3 percent inflation rate.
The moral of the story, lump sum paying game shows are better, but if you do get an annuity, which is what Set for Life is awarding, it is better to save it, putting the time value of money to work for you, then to spend it.
Mark W. Kaelin has been writing and editing stories about the IT industry, gadgets, finance, accounting, and tech-life for more than 25 years. Most recently, he has been a regular contributor to BreakingModern.com, aNewDomain.net, and TechRepublic.