Smart Spending

How to Win the Lottery…Responsibly

Who among us doesn’t dream of winning the lottery?

As dreamy as it sounds, for many lottery winners in the past, it ends up turning into a nightmare.

One man from Georgia was recently sentenced to prison after investing his lottery winnings in a crystal meth ring. From bankruptcy to prison sentences, it happens more than you’d think. In fact, lottery winners are more likely to declare bankruptcy within three to five years than the average American. Studies show that many lottery winners struggle with depression and suicide as well.

So, aside from paying off all your debts and not spending it all at once, what else should you do to make sure you’re a responsible lottery winner?

Don’t take the lump sum

This is the most frequently given pieces of advice for lottery winners, and it really depends on your winnings and your personality. The lump sum takes a bigger tax hit, and perhaps more importantly, it also leaves you with no backup if you make a mistake and blow it all. Choosing annuity means that if you accidentally go into debt the first year because you didn’t understand your taxes, you’ll get another payment next year to cover it.

However, if you are sure you’re financially savvy and responsible and plan on hiring a very wise investment advisor. Taking the lump sum payment up front means you can invest it earlier and get your money working for you more quickly. If your winnings are under $10 million, taking it up front with a huge tax hit might not be worth the money you could make off of investing it all at once.

Get an investment advisor

Speaking of investments, while it may seem unnecessary to make even more money after you’ve just won the lottery, letting large sums of cash sit around instead of investing them is never a wise idea. Start reading everything you can about investing, and considering hiring a good investment advisor. Keep some of your winnings liquid, and never invest them all in one place.

Don’t speak with the press

While most states do require you to claim your winnings publicly, keep it as anonymous as possible. Don’t say yes to interviews and TV specials, and avoid telling all your friends and family the news, no matter how hard it is to hold back. It’s actually a good idea to speak with a spokesperson or media professional to get advice on protecting your privacy before cashing your winnings. You’ll thank yourself later for keeping it on the down low.

Stop gambling

The lottery is actually one of the worst things to spend your money on. One woman won a 7-figure lottery prize not once, but twice in her lifetime…and she still managed to lose it all. The New Jersey convenience store employee continued to gamble after her first win, but it paid off when she won a second time. Still, that wasn’t enough for her. She went on to blow a large portion of her winnings at casinos in Atlantic City. She’s broke now, and her advice to lottery winners? “Go to your lawyer and accountant first.”

Get an accountant…and a lawyer

Gift and estate planning tax will be the most crucial to navigate, and it’s not simple. For example, if you give your friend a few million, you’ve got to pay taxes on that. If you die, a large portion of your winnings may be owed as taxes if you haven’t properly set up your estate. Many lottery winners overspend and then realize, come tax time, that they owe more than they have.

This happened to a couple from Florida who won $13 million and opted to take annual payments of over $600,000 for two decades. Several years later, they ended up committing and being charged with tax fraud. The wife spent 2 years in prison. One of the most important things a lottery winner must do is educate themselves on tax law and get advice from a licensed, experienced accountant and tax lawyer.

Appoint someone as your buffer

Make a list of people, friends and family, you know that you can trust immediately after winning the lottery. Keep that list in mind. You should also pick someone to act as a buffer for you when people inevitably start coming out of the woodwork to ask you for money. This can be one of those friends or family members, or you could hire a financial advisor to distribute your money. The bonus there is that they’re already familiar with the tax laws that go along with giving gifts. Then, when someone comes to you asking for money, just tell them to call your advisor.

Budget, even more than you did before

Developing smart financial habits is more important now than ever. While $300 million is a lot of money, it’s a lot less to a lottery winner. After all the various taxes you have to pay, not only upon winning, but even years after winning, and all the legal fees associated with handling a large windfall, that number gets a lot smaller. Most people have never come close to seeing even a million dollars, so it’s impossible for them to imagine that $100 million could be spent quickly. But it can.

Instead of assuming that winning a large sum of money means you don’t have to budget anymore, double down on your budget. Read up on finance and budgeting, how to deal with a large windfall, and work with your financial advisor to create a budget. If you stop tracking your spending altogether, like so many lottery winners do, you can end up in bankruptcy very easily.

Avoid lavish purchases

One notorious story of a lottery winner who filed for bankruptcy after just a few short years. This Pennsylvania lottery winner blew thousands after thousands on luxury items and stuff he didn’t need, the most ridiculous of which was probably a twin-engine airplane (he was not a pilot) that caused him to go $500,000 in debt after just a few short months.

Keep it simple. Sure, splurge on fancy restaurants now and then and buy yourself a new car, but don’t go throwing money around like it’s not real or you’re find out very quickly that it is.

If you win the lottery, congratulations! But don’t expect it to fix all of your life’s problems. If you’re not careful, it will only cause more.

About the author

Elizabeth Aldrich

Elizabeth is a freelance writer and “digital nomad” specializing in small business, entrepreneurship, career advice, real estate, travel, arts, and culture. She’s written for outlets as varied as Rawckus Music and Arts Magazine, Itcher Entertainment, Sweden Tips, Houzz, Hometalk, JobHero, Tico Times, and Eugene Weekly. Thanks to a three-year stint in a travel job, a knack for mining great deals, and credit card churning, she has not paid for a single flight since 2012, despite her constant travels. You can find her on Twitter @LizzieAldrich or her website, www.elizabethaldrich.com.

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