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Five Fast Ways to Blow a Windfall

Jeffrey Strain

Retired iron worker Robert Harris and his wife, Toyna, made the news this week when they won $275 million (if they take the money over the next 26 years or $167 million if they take it all right now) in the Georgia Lottery's megamillions jackpot.

The jackpot's sheer size will probably ensure they will be financially set for at least the next few years. But history shows that not all multimillion-dollar lottery winners go the rest of their lives without another financial worry.

In fact, some have quickly squandered their fortunes and ended up in worse financial shape than they were before getting the windfall.

Take Janite Lee, who won $18 million in 1993 playing the Missouri lottery. She plowed through it all in less than a decade by being too generous and giving it to various organizations and causes.

Or look at William "Bud" Post, who hit a $16.2 million jackpot in the Pennsylvania lottery in 1988. Through bad investments, lawsuits and general mismanagement, he found himself in debt in less than a year.

When Robert Harris was asked what he planned to do with his sudden fortune, he replied simply "live happy."

It's great advice.

Problem is, if you don't know your financial goals before you have the money, you aren't going to know how to live happy when you have all that dough.

Sure, most people aren't going to win the lottery to become a millionaire. But you might receive a pile of cash through an inheritance or some other unexpected circumstances during your lifetime.

Whether it's $10,000 or half a million dollars, there are five pitfalls that come with unexpected money to be careful to avoid:

1. Making Unneeded Large Purchases

Many people change their way of thinking when it comes to money that arrives unexpectedly. Since it wasn't expected, they feel that it's "play money" and they can use it however they please.

They see the money not as part of their original financial plan and feel it's OK to be less responsible with this money and spend it on the perceived finer things in life such as a high-end car.

That sexy sports car may look good, but it's usually not practical. In addition to the cost of the car itself, it will also will mean increased insurance costs and higher repair bills.

When the money runs out, you are left with the same salary that you had before, but the maintenance for all the toys purchased is a lot more expensive.

2. Lifestyle Creep

Along with making large unneeded purchases, some people also start splurging on a daily basis. Much like how people match their lifestyle to their salary as they get raises, unexpected money can also result in an upward lifestyle creep.

This may not include huge purchases. Instead it may mean not watching their spending as closely has they have. The problem is that unlike a salary increase, unexpected money is usually a one-time event. When the money runs out, there is a lifestyle that is too costly for the money coming in.

3. Risky Investments

Some people see unexpected money as a way to try to "strike it rich" by taking more chances with riskier investments. They justify this by saying that if they lose the money it doesn't really matter because it was an unexpected windfall in the first place.

Just because it came unexpectedly, however, doesn't mean you want it to leave just as quickly.

While all investments come with risks, making riskier investments than you would normally make just because it is money that was not expected is not the way to go. Expanding and diversifying your current investments, while maybe not quite as sexy, is a much smarter course of action to take.

4. Those Looking for Handouts

Another issue that can arise when receiving a large amount of money is that relatives and others will want to share in your good fortune.

While there may be good reasons to help these people out, you also need to be careful as they will try to play on your sympathies and good nature to take a piece of the pie.

Those seeking financial gifts and loans can quickly drain any windfall received and you should look with a wary eye at anyone who appears in your life looking for help after you have received unexpected money.

5. Forgetting to Manage Your Money

In the end, your best course of action is to stick to your original savings and investing goals before you received the unexpected windfall.

Just because you have received an unexpected amount of money doesn't mean that you should throw your previous plans into the trash and make entirely new ones.

It's still vitally important to manage your money because no matter how much you have, you'll still wind up in financial trouble if you don't manage it correctly.

The financial goals that you made should still be worth striving toward even with an influx of money and this money will allow you to reach them that much faster. If they are suddenly not good goals when you get extra money, then you didn't create your financial goals well initially.

All of the above doesn't mean that you can't spend any of the money. It's always important to remember to enjoy life along the way and take advantage of opportunities.

The reason that you set financial goals and save is so you can do all the things you want to do. If some unexpected money puts you ahead in your financial savings, use the extra money to splurge a bit on what you truly enjoy.

There is no guarantee, of course, that you or your loved ones are going to be around tomorrow. This isn't an excuse to ignore the future, but it does mean you can enjoy yourself along the way once you have your finances under control.