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***GambLux EDITOR ARTICLES*** |
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Sudden money: get a reality check before the money check
[Thursday, January 18, 2007]
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If you suddenly won several million dollars/pounds/euros in a lottery, how long would it take before you blew it all? Would all that money, all of a sudden, spin your head and your sense of proportion? That is certainly a risk, if you take note of lottery winners in the States who won big-time and then crashed, remaining with almost nothing. A few sad stories to start with.
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Evelyn Adams had the good fortune to win the New Jersey Lottery twice in a row (in 1985 and 1986). She netted $5.4 million in total. Today all the money is gone and she lives in a trailer. She handed her money out to others and also gambled heavily. She did not say 'No' to anyone and employed no financial consultants.
Even though William 'Bud' Post won $16.2 million in the Pennsylvania lottery in 1988, he is now back to living on what Social Security pays him, plus food stamps. He was sued by a former girlfriend for part of the winnings and paid a lot of money for unwise family investments. Again, no advisors were ever hired.
Nobody was happier than Suzanne Mullins when she won $4.2 million in the Virginia lottery in 1993. Now nobody is unhappier. She has heavy debts to a company that lent her money using the winnings as collateral. She also paid $1 million for medical bills for her uninsured son-in-law, who had a lengthy illness. But that still left $3.2 million. Why did she need to borrow money when she had so much of her own? Evidently, it was due to lack of forward planning!
There are many more horror stories like this for people who are looking for the high drama of misfortune, the rags-to-riches-to-rags story. But the Journal of Gambling Studies says that this is not a credible picture of the real situation. They conducted a study of 576 lottery winners from 12 USA states and published their findings in April 2005. Winners received sums from $50,000 up to millions.
According to the data, most winners did not deal with their new-found fortune rashly and irresponsibly. They were older than the general population and more often male (60% versus 40%). There was a significant association between the amount a person won and his or her work behavior.
People who were well rewarded and happy in their jobs continued to work, even after their windfall. However those with low paying semi-skilled and unskilled jobs were far more likely to quit the labor force.
The study showed that most winners were well-adjusted and secure. Apart from investments, they spend their money mostly on houses, automobiles and trips (wouldn't we all?). They did not engage in lavish spending sprees and instead gave large amounts of their winnings to their children and to social causes or charities.
So what guidelines should you follow if you find yourself with 'sudden money'? There are five main points, all of which focus on planning carefully and acting rationally.
1) Take some 'time out'. Don't take any major decisions with the money for at least three months. This is the time to get your bearings and make plans.
2) Organize yourself. List all the places where you owe money (house mortgage, bank overdraft) and get them off your back. Pay your tax obligation on your lottery win. Think about the total amount that remains and what you believe that your monthly expenses are (assuming that you are following roughly the same lifestyle as before your win). This will give you an idea of the money available for other purposes.
3) Appoint a financial consultant or adviser. This expert can be an accountant, a financial planner, an investment adviser or an estate attorney. It is important to put your financial plans into some kind of structure. They are skilled in building this structure, you are not.
4) Define your priorities. Do you want to change your house? How much do you want to support your immediate family? How much do you want to help your extended family? What proportion of your cash do you want to use for investment and what proportion for 'spending money'. How much (if any) do you want to give to charities, and when? All these questions highlight your priority set. Your financial advisors will help you define what they are and in which order they should be placed.
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