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Football season is here. It's a great time for some financial wisdom.
On any given fall Sunday, a 25-year-old can watch the early game from her couch and put $50 on a parlay from her phone before kickoff. While exciting entertainment in the short term, it comes at a potentially large long-term cost that is still underappreciated by many: compounded returns.
According to a survey of 1,000 U.S. retail investors that Betterment published in August, 52% of Gen Z investors this past year took money they had set aside for investing and put it toward sports betting instead. About a quarter said they now treat betting as part of their long-term financial strategy. Yet data from the Bank of America Institute shows just how that is going, with bettors getting back less than 75 cents on average for every dollar they sent in this year, and Gen Z, the best gambling performers of any generation, still getting back only about 80 cents in July.
It's easy to understand the appeal, since a winning bet can look like a shortcut when rent is high and a first home feels out of reach. Plenty of people bet for fun, and betting out of an entertainment budget is a personal choice. The trouble comes when the money is taken from savings or money set aside to invest. A recent National Bureau of Economic Research study found that in states that legalized sports betting, household savings fell, as bets that lose money on average crowded out investments that grow, and the hit was biggest for households that could least afford it.
Most young bettors don't realize that the $50 they lose on an app is the smallest part of the cost, because that $50 never gets the chance to compound, and invested at 7% a year from age 25, it would be worth about $750 at 65.
Every bet made with investment money takes from her future, and that cost never shows up on the app.
That hidden cost is compounding, probably the most important idea in investing, and the one most people never learn. Compounding simply means your investment returns get reinvested and start earning returns of their own, and over time compounding is the force that turns small, regular sums into real wealth.
In our new book, "Investment Wisdom for Our Friends and Loved Ones," my co-author, Jenny Harrington, provided a simple example. A house worth $100,000 increases in value over a year by 10%, to $110,000. Then that house value, now at $110,000, rises another 10% to $121,000. That means that second year adds $11,000 rather than $10,000 because the gain was earned on a bigger base. Over decades, those returns on past returns become the largest source of growth in a portfolio, which is why the 25 women co-authors for this book, who spent their careers in finance, kept coming back to compounding as key.
Start early
Let's go back to our young sports fan. Say she bets $50 every week, or about $2,600 a year. If she put that money into a low-cost stock index fund earning 7% a year, she would have roughly $519,000 by age 65 on contributions of about $104,000. In her last year alone, the account would have grown by around $34,000 on its own. If she did as well as the average Gen Z sports bettor instead, she would lose roughly $500 a year and have nothing working for her at 65.
This brings us to the second most important part of compounding, which is that starting early matters even more than the amount. If she invested $50 a week for only ten years and then stopped, she would still have about $273,000 at 65, more than a friend who started at 35 and invested every week for 30 years, ending with about $246,000 despite putting in three times as much.
Source: Author calculations. $50 a week ($2,600 a year) added at the end of each year, 7% annual return, before fees and taxes.
The first years of a working life are an investor's most valuable, and they are the years the betting apps compete for the hardest.
Skipping the betting apps, or at least thoughtfully budgeting for them as entertainment, is only part of it, because money left sitting in savings accounts also misses out on compounding. Spending most of my career in bond and money markets, one learns how large that gap is. Since 1900, U.S. Treasury bills, the closest thing to cash in the bank, have returned about 3.4% a year, compared with about 9.8% for U.S. stocks, according to the UBS Global Investment Returns Yearbook. After inflation, that works out to be about 0.5% a year for bills and 6.6% for stocks.
An emergency fund is essential and bonds have an important place in a portfolio, but money meant for the long run belongs in investments, which is why our book encourages parents to help teenagers open a Roth IRA with their first paychecks and invest it, so a few hundred dollars from a summer job can compound tax-free for decades.
Investing strategy
Costs compound too. Sara Devereux, global head of Vanguard's Fixed Income Group, shows in her chapter that on $100,000 earning 7% a year for 30 years, a fund charging 1.5% in annual fees leaves about $499,000, while one charging 0.05% leaves about $752,000. Betting is the extreme version of the same problem, since the house takes a cut on every wager and the more often you play, the more reliably the math works against you.
The hardest part is leaving the money alone, because markets do fall, and the S&P 500 has lost money in roughly one of every four years since 1928. I was at the U.S. Treasury Department in 2008, when the S&P 500 Index fell 37% and the financial system came close to breaking. While the index did not get back to its 2007 peak until March 2013 , an investor who held an S&P 500 index fund from the start of 2008 through 2025, with dividends reinvested, still ended up with more than six times her money.
None of this requires expertise or a lot of money. Set up an automatic contribution from each paycheck, even $50 a week, choose a low-cost index fund, reinvest the dividends and leave it alone, and if you have young people in your life, talk to them about this before the betting apps do.
Football season is great – enjoy it while you let your money work for you, instead of against you.
Jamie Franco is a global macro and cross-asset strategist who spent over a decade at TCW Group. "Investment Wisdom for our Friends and Loved Ones" publishes Nov. 17
— With Rebecca Patterson.