If You Win the Lottery, Here's How Not to Blow Your Money
Windfalls come in many forms: inheritance, bonus, legal settlement...or maybe you just won the lottery. When you receive a financial windfall, you need to decide what to do with the money.
People are often confused about how to handle new-found riches. Family and friends will inundate you with unsolicited advice; taking their suggestions to heart typically is a bad idea. Money has a way of clouding the judgment of those around you.
Lottery winners often provide the starkest examples of poor financial management. Consider these real-life stories of rags-to-riches-to-rags:
- New Jersey resident Evelyn Adams won the lottery twice, once in 1985 and again in 1986. The odds of winning the lottery even once are daunting; twice is truly remarkable.
Adams won a total of $5.4 million but she gambled all of it away at Atlantic City. Today, she's broke and lives in a trailer park.
- Lara and Roger Griffiths won £1.8 million ($2.76 million) in the lottery in 2005. The British couple promptly bought a million-dollar mansion, a Porsche and a host of luxury items. Lara had a special weakness for designer handbags.
Before their "good luck," the Griffiths never quarreled and got along well. Six years following their lottery windfall, Roger vamoosed in the Porsche after Lara confronted him about an affair with another woman. Their 14-year marriage ended in divorce, a fire destroyed their mansion, and every cent of their fortune was dissipated from spending sprees.
- William "Bud" Post won $16.2 million in the Pennsylvania lottery in 1988; within a year he was $1 million in debt. An erstwhile girlfriend successfully sued him for a share of his winnings and he lost the rest of the money in various family businesses that failed. The nadir: Bud's brother was arrested for hiring a hit man to murder him, with the goal of inheriting a share of the winnings.
Bud eventually spent time in jail for firing a pistol at a bill collector. He now lives on $450 a month and food stamps.
Six Tips for Handling a Big Score
Lurid stories of lottery winners frittering away their fortunes are legion; the above are just a few examples, to scare you straight. Now, here's some advice to help you keep a cool head before the fresh dough burns a hole in your pocket:
1. Pay off your credit cards! Now!
Seems obvious, right? Unfortunately, getting rid of high-interest debt often is an individual's last choice with a windfall. Instead, they start ogling shiny new cars in the dealer showroom. Reducing the balance on your Visa, MasterCard and Discover card to zero should be your No. 1 priority. Also pay off any consumer loans.
Avoid the common trap of paying off credit cards and consumer loans only to run-up fresh balances. It's a vicious circle that will empty your pockets. Put your money in steady income-generating investments instead.
2. Seek a temporary safe haven in short-term investments.
After you've eliminated credit card and other high-interest debt, park what's left in a safe haven. Don't feel pressured to immediately put the money into riskier investments. Take your time. Put it into a Certificate of Deposit (CD) or Treasury bill. Before you make a specific decision among the three alternatives, compare interest rates and term lengths so that you can get the biggest bang for you buck over a time period you're comfortable with.
If you're looking for a CD, be sure to shop around. Compare products from local banks and credit unions, which compete to offer the most attractive CDs. Also check with your broker and do some homework on the Internet, where you can easily find lists of high-yielding CDs.
As for Treasury bills, here's a tip that many people don't know: You can save money by acquiring T-bills directly at no cost from the U.S. Treasury, thereby circumventing intermediaries such as a brokerage firm or bank that would charge you a fee.
3. Maximize your retirement plan contributions.
If you haven't been able to invest fully every year into your Individual Retirement Account (IRA) or 401(k) plan, now is your opportunity to do so. It's important for your long-term financial health that you invest in your future security (while you simultaneously enjoy tax deferrals and savings).
4. Pay down your mortgage.
Consider making extra payments against your home mortgage, which would greatly enhance your retirement situation. If you have a home equity loan, consider paying it down -- or paying it off. Regardless, a sure route to bankruptcy is buying a second home that you can't afford.
5. Make sensible home improvements.
Consider applying some of the money to long-deferred fixes and improvements to your home. However, be sure to make the right kind of home improvements. Not all building projects reap an investment return; homeowners tend to subscribe to many myths about how to increase their home value. Consult a contractor.
6. Buy yourself a toy!
Yes, you read it right: If you've followed all of the steps above and you still have some money leftover, splurge and treat yourself to something nice (within reason). Maybe you need a new suit, flatscreen TV or stereo speakers.
You'll make better decisions in the future if you're able to enjoy at least some of your money today. You want to be prudent, not Puritanical. But whatever you do with the money, just don't spend it like a jackass.
A wise investor is a happy investor. Another wise idea is to consult a broker or financial planner for advice, at such major brokerage firms as Charles Schwab, T. Rowe Price or T.D. Ameritrade.
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John Persinos is editorial director at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.