- Playing the lottery can be fun, but always play legally and responsibly…
Most of us have at least briefly fantasized about winning the lottery. With millions of dollars, most of us could afford to quit our jobs, move to an amazing house, and live out the rest of our days in a peaceful, luxurious environment.
Unfortunately, this picturesque vision of winning the lottery is rarely an accurate one. While some people successfully manage their winnings, most lottery winners end up losing most of the money they won – and in some cases, they end up completely destitute.
How is this possible? And is there any way to prevent it?
High-Profile Examples
There are many high-profile examples of people who won big in the lottery and then lost it all (or most of it). For example, in 1998, security guard James Hayes won $19 million in a California lottery – but after a divorce and a bad heroin habit, he lost almost everything and resorted to robbing banks to fill in the gaps.
In 2002, John Whittaker (a construction entrepreneur) won $315 in the Powerball. Trying to do good, he spent millions of dollars building churches and creating a nonprofit organization that paid miscellaneous bills on the behalf of others. After a few years, Whittaker’s company was overrun with legal issues – and most of the money was gone.
The Biggest Reason: They Don’t Make Good Financial Decisions
The chances of winning the jackpot in a Powerball drawing are roughly 1 in 292.2 million. Your chances of being struck by lightning in a given year are roughly 1 in 1,222,000. In other words, you’re hundreds of times more likely to be struck by lightning than to win a Powerball jackpot.
It’s objectively true that buying a lottery ticket is a bad investment. The types of people who buy lottery tickets are therefore either people who are willing to make bad investments or people who don’t recognize bad investments for what they are. It’s only natural that, once they win, they continue making financially unwise decisions, ultimately compromising the wealth they received.
But let’s dig into some of the more specific bad financial decisions that lead lottery winners to ruin.
They Don’t Invest (or Invest Poorly)
Some lottery winners don’t invest their money; instead, they’re only interested in spending it. Wise investments can ensure that your money is protected, while simultaneously generating more money for you.
For example, you can invest in rental properties. With the right property in the right neighborhood, you can collect more in rent than you spend in upkeep, resulting in positive monthly cash flow; on top of that, the property can appreciate, helping you build wealth even further.
You could also invest in stocks, bonds, or alternative investments – in fact, if your capital is significant enough, you should invest in all of them to minimize risk through portfolio diversification.
If you don’t invest anything, or if you invest unwisely, your starting principal will gradually disappear.
They Neglect the Tax Implications
Tax implications for winning the lottery can be exorbitant and complex. Initially, if you take a lump sum payment, you could end up with far less than the advertised winnings. You’ll owe both federal and state taxes on winnings beyond that, potentially eating up 40 percent or more of the money you received. In addition, certain financial gifts are taxed, and you’ll need to pay taxes on things like car purchases and properties. If you’re not careful, you could end up with enormous tax bills that you can’t afford to pay.
They Overshare
Some lottery winners end up losing everything because of their generosity. They give money to friends and family members. They donate to nonprofit organizations or start their own. They tip excessively generously. And before they know it, they have nothing left.
They Stop Thinking About Financial Decisions
To the average American worker, a $100,000 luxury sports car is a frivolous expense that could take half a lifetime to save for. To a lottery winner, it’s a drop in the bucket. Single frivolous purchases don’t have the potential to fully exhaust lottery winnings, but if you continue spending money recklessly, without thinking, it’s only a matter of time before you drain your accounts.
They Pick Up Bad Habits
Yet another reason why lottery winners often lose their winnings is because they pick up bad habits. Excessive drinking, drug abuse, gambling, and other problems can be very expensive.
As you can see, there are many strong reasons why lottery winners often end up losing everything. If you want to make financially smarter decisions, your best bet is to probably stop playing the lottery altogether.
But if you must continue, and you do win a major jackpot, make sure you consult with a professional financial advisor before making any major decisions with your winnings.
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