Here are the top reasons why lottery winners go broke!
8 - Family and Money It’s overwhelming to suddenly stumble on
an amount of money that’s more money than 99.9% of what the population would make in
a lifetime.
The smart thing to do is to consult with actual legal and financial experts who’re experienced
in dealing with unexpected windfalls, such as inheritances, or in this case, lottery
winnings.
It’s not just lottery winners that can’t deal with a big sum of money that they aren’t
used to.
Just think of how many professional athletes go broke!
The vast majority of people just don’t know how to react to such a large amount of money.
Especially money that they didn’t have to work for.
There are lawyers who specialize in the niche field of advising instant millionaires on
how NOT to blow their money.
Or you can go with a fiduciary advisor.
What lottery winners DON’T want to do is to follow the advice of family members!
Listening to the advice of friends and family is one of the best ways to lose a lot of money.
Managing a large sum of money is a complicated business.
If someone has never dealt with a lot of money before, they most likely need professional
help.
Unless a family member is actually a professional in the finance industry, they’re not who
lottery winners should turn to!
7 - Always Protect Yourself We’ve already gone over Abraham Shakespeare
before in one of our previous videos, but we’re gonna go over Mr. Shakespeare really
quick again.
Abraham won a thirty million dollar lottery jackpot in Florida, and received a lump sum
of $17 million in 2006.
He moved out of his working-class neighborhood in Lakeland, Florida into a gated community.
Several months after his lottery win, apart from buying a million dollar home, his only
other major purchases included a Nissan Altima and a second-hand Rolex watch.
His relatively modest purchases didn’t do him in.
It was the people that he kept around him.
Shortly after his win, Abraham went missing, and in January 2010 his body was found in
the backyard of an acquaintance.
Dorice "Dee Dee" Moore was found responsible, and is now serving life in prison without
the possibility of parole.
Abraham, however, isn’t the only winner who had other people plotting on their money.
Urooj Khan won a million dollars in the Illinois lottery back in 2012.
He planned on using the money to expand his dry-cleaning business.
Sadly, Khan never got to carry out what he planned, as he unexpectedly passed away.
While his passing was ruled natural at first, tests later revealed that he had a high amount
cyanide in his system.
To this day, the police haven’t even named a suspect, much less solve the mystery.
Anyone that wins the lottery should try to stay anonymous, and be extremely careful with
new people in their lives!
6 - Money Management This is probably the most obvious reason of
how people lose their money real quickly.
They blow it!
Many people think millions of dollars can last a long time, but there are so many ways
to quickly spend millions of dollars.
For example, William "Bud" Post won $16.2 million in the Pennsylvania lottery in 1988,
but he soon was $1 million IN DEBT within just a year!
On top of that, his ex-girlfriend successfully sued him for a share of his winnings.
Annnnd his own brother was arrested for plotting a scheme to get a share of his winnings.
Unfortunately, Post now lives quietly on a low income and has been on food stamps.
Another unfortunate example is Sharon Tirabassi, a single mother who had previously been on
welfare.
She was fortunate enough to win $10 and a half million in the lottery.
However, she spent her winnings on a big house, fancy cars, designer clothes, and lavish parties.
She also went on vacation all over the place and gave handouts to family and friends.
Sadly for her, in less than ten years she was back to riding the bus, working part-time,
and living in a rented house.
Money won’t last forever if it’s not properly managed!
5 - Not doing the Math Dealing with money is really doing a bunch
of math problems and having discipline.
Once someone figures out their cash flow, all they need to do is just be disciplined
enough to stick to the budget they created.
This theoretically should be super easy when people have a bunch of money, but of course,
people want to upgrade their lifestyle when they get more money.
Of course, not ALL people go crazy after a lottery win.
Some lottery winners are capable of making rational, measured decisions.
If lottery winners properly planned and executed, they’re able to continue to reap the benefits
of a massive financial boost for the rest of their life!
One example is couple Denise and Paul Hardware.
Their lives completely changed in 2007 when they won £5 million pounds in the UK lottery.
They celebrated modestly by just going on a luxury cruise.
After returning from their cruise, they paid off their mortgage, bought their dream home
in Somerset, and then invested in three more properties.
Their winnings also allowed them to fund their son's college degree.
Letting money work for us instead of the other way around is the beauty of owning a big amount
of money.
Once someone has a large enough principle to where the return on the principle covers
their lifestyle, then theoretically they’re set for life and they don’t ever have to
work again!
As long as they don’t ever lose their principle that is!
4 - Taxes Winning a large sum of money immediately puts
most people in a whole new tax bracket.
Many winners forget about taxes and are in for a big surprise when a lot of the cash
is spent and the first tax bill arrives.
Let’s use the example of the $1.5 billion Powerball.
The first hit comes even before taxes kick in.
The advertised amount is given only if the winner opts for the annuity.
The government essentially takes that money and invests it in bonds for the winner tax
free.
If the winner opts for the lump sum, the jackpot goes down to $930 million!
Next up is the federal tax bill.
Lottery winnings are taxed as ordinary income.
A lottery winner isn’t exactly the type of person the government is eager to give
a tax break to.
It makes sense if you think about it, since the typical lottery winner isn’t exactly
a high cash flow generating individual.
The U.S. government automatically withholds 25 percent of a lottery win if the winner
has a Social Security number.
For someone choosing the lump sum, they’ll be taking home that prize MINUS $232.5 million
right off the bat.
Residents who don't have a Social Security number, or fail to provide one, will have
28 percent withheld and for foreigners, it’s 30 percent!
Winners then have to come up with the rest when it’s tax time.
For our example, that's a tax bill of roughly $136 million dollars!
After federal taxes, the winner would be left with about $562 million dollars.
Which, is still a LOT of money.
But wait, there’s more taxes!
Depending on where the winner lives, state and local income taxes further reduce the
winnings.
In New York City, for example, the winner would pay federal, state, county AND city
taxes.
Tallied up, a state and local tax bill could shave as much as another 15 percent, or roughly
$140 million bucks in our example, off the lump sum.
That would reduce the net winning to roughly $422 million!
Too many lottery winners forget about taxes, and it’s a big factor in their overspending.
3 - Earned not Given People who are self-made have a kind of, let’s
just call it, “training” that overnight millionaires just don’t.
This explains a lot of the financial mistakes that many new millionaires make, such as overnight
celebrities, or as we said before, professional athletes.
If someone is inexperienced with money, they should visit a financial professional who
hopefully can pull in the reins on the spending and bad investing.
A good advisor would have probably been helpful to Jonathan Vargas.
Back in 2008, he took home a $35.3 million Powerball jackpot.
Vargas used his money to start a business.
But not just any business.
He started a pro wrestling business.
He called it “Wrestlicious”.
Wrestlicious featured female wrestlers wrestling each other in bikinis.
He wanted to combine his love of wrestling and hot girls.
Yeah, not all of us were geniuses at age 19! Wrestlicious lasted just one year.
And unfortunately Vargas ultimately went broke.
Not having business acumen isn’t the fault of a lottery winner.
But a lottery winner has to understand where their talents fall short.
Sometimes, recognizing what we’re not good at is more important than being actually good
at something.
2 - Controlling Emotions If you couldn’t figure it out by now with
what we’ve been saying throughout this video, we’ll just come out and say it.
Managing money is waaaay more difficult than most people realize or like to admit.
It’s NOT the math associated with investing that’s the tough part.
C’mon, let’s be for real, any random person with a bit of knowledge and an excel spreadsheet
can easily do discounted cash flows to figure out a budget to make their money last.
The math is actually the easy part!
The hard part is dealing with emotions.
Executing the financial plan is where most lottery winners go off the rails.
Think of it like a diet.
Everyone knows that to lose weight, just stop eating.
It’s that easy.
But why are there so many outta shape people around?
It’s the same exact thing with money.
Let’s take Jane Park as another example.
She won a million pounds at age 17.
She said she was too young to cope with the sudden flood of wealth.
Before she won the lottery in 2013, she worked as an administrative assistant for $10 an
hour and lived with her mom.
But she blew through her winnings by doing things such as buying a purple Range Rover,
traveling the world, and getting plastic surgery.
Does this sound typical yet?
However, she wanted to sue lottery officials who made her wealthy because the money “ruined
her life,” according to her.
Let’s think through the logic on this one.
She’s blamed her problems on having money, but she wanted to sue for more money.
How does THAT even make sense?!
Unsurprisingly, she didn’t go through with that one.
Most lottery winners just aren’t able to control their emotions that ultimately leave
them broke.
1 - Setting Up for Failure Some winners take the annuity, meaning they
get their money in installments over a period of 29 years.
The annuity is the best option for most winners, because it protects themselves from themselves!
Lottery winners need to be honest with themselves when on the question of are they actually
good at money management.
For example, most people think that they’re an above average driver.
See how THAT math doesn’t work out?
Of course, the math says it makes more sense to take the lump sum.
However, that’s assuming good decision making.
If most lottery winners decided to take the annuity, they wouldn’t be broke.
People need time to psychologically get used to having money beyond what they’re used
to.
The best part about the annuity is that the government doesn’t pay tax on investment
income.
But if a winner chooses the lump-sum, they’ll pay tax twice.
On the prize when they win, and again on the income from investing it.
If someone is actually really good with money management, have built businesses before,
and have handled more than a million year in net cash flow….well, congrats on getting
to God-mode in life!
By all means, take the lump sum!
But if not, by taking the annuity and accepting the lower rate of return, it protects winners
from poor financial decisions.
It’s worth it to make sure they’re not broke in 2 years.
Let’s not forget the tax savings too!
The only real downside with the annuity is not living until the last payment.
Winners can leave future payments to their heirs, but the I.R.S. will want to collect
estate tax right away on those payments’ future value.
Here's what’s next!