When you live from paycheck to paycheck, winning the lottery can be a welcome relief. You will no longer worry about paying for necessities like gas, groceries, utilities, and saving for your children’s education.
So goes the theory! Is this really what happens when people win the lottery? Statistics say that almost 70% of lottery winners join the poor house within three to five years. Why?
They fail to take heed of the strategies below. If you take these strategies seriously, the world will be your oyster once you win the lottery.
Hit the Brakes!
A flood of emotions runs high as soon as you win the lottery. On the one hand, you’ll be excited that your money worries are over. And on the other, you’ll be confused and overwhelmed.
That’s normal. For this reason, this isn’t a good time to make financial decisions. Finance is an intellectual game. Emotional decision-making can’t help but will often lead to wrong decisions.
Your best bet is to hit the brakes as soon as you win the lottery. Give yourself time—a week would do—to calm your emotions down. It’s a good idea to claim your winning when you’re calmer.
Consider taking leave from your job during this period.
Hire a Financial Advisor
Once you’ve shut down emotions of thrill, awe, and confusion, your key next move is to hire a professional financial advisor. The top reason for this is to avoid misusing your newly found fortune.
Your financial advisor will help you determine a strategy to live off the money for years. They’ll get you to think about your financial goals.
Most importantly, your advisor will work with you to develop your personalized financial plan.
Determine Your New Budget
You'll have a sound financial plan if you follow the above two strategies. Your plan will reflect your new aspirations, including vacations and to ensure you hit the goals in your financial plan, you need to create a monthly budget that aligns with them. Again, your financial advisor will come in handy when developing your budget.
Your monthly budget will guide you on what to spend your money on and how much.
Factor in Taxes
Albert Einstein once noted, “The hardest thing in the world to understand is the income tax.” Even if this is so, you still have to pay income tax. And paying taxes hurts. However, it may hurt even more if you don’t pay them.
Income from gambling, such as lottery winnings, is subject to income tax. The payer is required to withhold 24% of your winnings as federal income tax and issue you with form W-2G. That’s not all.
You may also be required to pay state lottery taxes. Your overall tax bill could be substantial. Quickly spending your winnings without factoring in taxes could land you in trouble.
Fortunately, you could tap the brains of your financial advisor to optimize your taxes while paying what's due.
Don't Give Handouts Willy-Nilly
Human beings have the natural desire to help others. When you land on a financial windfall like the lottery, you instinctively want to share it with others. That’s okay since working against your nature will hurt you.
This can be a double-edged sword, though. If you give willy-nilly, soon you’ll run out of money.
What you need is to share your windfall with a plan. Giving out money doesn’t necessarily help the recipients in the long term.
Hand out the money in ways that’ll make the most good. For example, you can help your family or friends fund businesses or purchase investments.
The Bottom Line
If you beat the odds and win the lottery, hold your horses and calm down before you splash on fancy toys such as mansions, cars, boats, and the like. Get yourself a professional financial advisor and put a financial plan in place.
Figure out what taxes to pay and don’t give without a plan.
Doing this will help you avoid being part of the lottery winners’ unfortunate bankruptcy statistics.
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