There's a dark side to having a pile of money land in your lap.
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 thenext 26 years or $167 million if they take it all right now) inthe Georgia Lottery's megamillions jackpot.
The jackpot's sheer size will probably ensure they will be financially set for atleast the next few years. But history shows that not all multimillion-dollar lotterywinners go the rest of their lives without another financial worry.
In fact, some have quickly squandered their fortunes and ended upin worse financial shape than they were before getting the windfall.
Take Janite Lee, who won $18 million in 1993 playing theMissouri lottery. She plowed through it all in less than a decadeby being too generous and giving it to various organizations andcauses.
Or look at William "Bud" Post, who hit a $16.2 million jackpot in thePennsylvania lottery in 1988. Through bad investments, lawsuits andgeneral 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 winthe 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 comewith 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 originalfinancial plan and feel it's OK to be less responsible with this moneyand 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 notpractical. In addition to the cost of the caritself, it will also will mean increased insurance costs and higherrepair bills.
When the money runs out, you are leftwith the same salary that you had before, but the maintenance for allthe toys purchased is a lot more expensive.
2. Lifestyle Creep
Along with making large unneeded purchases, somepeople also start splurging on a daily basis. Much likehow 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 thatis too costly for the money coming in.
3. Risky Investments
Some people see unexpected money as a way to tryto "strike it rich" by taking more chances with riskierinvestments. They justify this by sayingthat if they lose the money it doesn'treally matter because it was an unexpected windfall in the first place.
Just because it came unexpectedly, however, doesn'tmean you want it to leave just as quickly.
While all investments comewith risks, making riskier investments than you would normally makejust because it is money that was not expected is not the way to go.Expanding and diversifying your current investments, while maybe notquite as sexy, is a much smarter course of action to take.
4. Those Looking for Handouts
Another issue that can arise whenreceiving a large amount of money is that relatives and others willwant to share in your good fortune.
While there may be good reasons tohelp these people out, you also need to be careful as they will try toplay on your sympathies and good nature to take a piece of the pie.
Those seeking financial gifts and loans can quickly drain any windfallreceived and you should look with a wary eye at anyone who appearsin your life looking for help after you have received unexpectedmoney.
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 youhave, you'll still wind up in financial trouble if you
don't manage itcorrectly.
The financial goals that you made should still be worth strivingtoward even with an influx of money and this money will allow you toreach them that much faster. If they are suddenly not good goals whenyou 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 takeadvantage 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 financialsavings, 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 bearound tomorrow. This isn't an excuse to ignore thefuture, but it does mean you can enjoy yourself along the way once you have your finances under control.
Jeffrey Strain owns and runs SavingAdvice.com.