Winning the lottery is a huge event, but despite coming into millions, 44% of lotto winners end up losing their entire fortune. Let’s look at what you should and shouldn’t do if you’ve won the lottery to make sure you don’t add to this statistic.
Table of Contents
- 1 Before You Claim Your Winnings
- 2 Claiming Your Lottery Winnings
- 3 After Claiming Your Winnings
Before You Claim Your Winnings
Imagine — the Powerball numbers have just come out, and you are shocked and in disbelief as your ticket matches exactly. You probably have plenty of questions running around in your head. Should you buy a house? A car? Should you move to the Caribbean Isles?
Before you start thinking about these things, and even before you go to claim your money, lottery winners should keep the following in mind.
Secure Your Ticket
It would be devastating to win the lottery only to lose your ticket or have it stolen. It is a good idea to make copies of your ticket — front and back — and hide them away in a secure place.
Additionally, you should sign your original ticket, but you may want to look over the rules first. Some tickets, once signed, might have you enter a contract that can be contradictory to your best interests. It may be a good idea to have a lawyer look over the awarding agency’s rules on your ticket before signing.
Hold on to Your Job
It is wise not to quit your day job in haste when you win the lottery. If you aren’t careful, you can lose your fortune.
Even if you don’t lose your fortune, maintaining your job can keep you occupied and give you something to do instead of just sitting in your mansion “living the life.” If you really don’t like your job, consider another profession that aligns more with your passions and hobbies to maximize your time.
Hire a Financial Advisor
Financial advisors can help you navigate the murky waters of surprising challenges the suddenly wealthy face. There are new tax problems you might never have considered. Think of it this way: the person who wins a car on “The Price Is Right” will have to pay taxes on that car, which they might not expect in the excitement of winning the car. Winning the lottery is very similar. You are now in a totally new tax bracket. A financial advisor knows this, and will help you with the unexpected.
Someone with financial experience (as well as a lawyer) can help you with unexpected occurrences. Keep your financial advisor, and later on a team of financial advisors, to help make sound financial decisions with your new sum of money.
Protect Your Privacy
Many people choose to accept their winnings anonymously. The reason is that once this information becomes public, people you don’t even know — including scammers — might come around looking to get in on the money.
Keeping your lotto winnings a secret can make it much more difficult for these people to find you — and some people go as far as to change their phone number and set up a new P.O. box to throw them off.
Map Out a Plan for the Future
Typically, winners can claim their money anywhere from 180 to 365 days after the numbers are drawn. Although you may want to rush to get this money in your bank, it is important to take a step back to have a game plan of what you are going to do with it.
You may not need to take a year, but take some time to speak with financial advisors, and/or think about how you can use it to further your financial, personal, and family goals.
Claiming Your Lottery Winnings
You hit the jackpot, you’ve laid the groundwork above, now what? When claiming your prize, you’ll have two options on how you receive your money: taking a lump sum payment or a long-term payout.
Lump Sum vs. Annuities
Consider this: when the Powerball was at more than $700 million in August 2017, taking a lump sum would result in only winning a gross of $443 million, but after taxes it’s only $308.8 million. Taxes differ by state, as well, so a Californian would receive more than a New Yorker, as California doesn’t tax lottery winnings while New York imposes a more than 8% tax.
Meanwhile, the annuity option would mean payments of more than $17 million per year. Note that this is an average — the annuity payments will go up over time to combat inflation.
While a lump sum can seem like a desirable option, despite losing money to taxes, it’s still millions of dollars suddenly in your bank account. How could you spend all that? An annuity pays out yearly for 30 years. This schedule will help you not spend it all suddenly, dropping thousands — or hundreds of thousands — of dollars on a whim.
Your current situation will influence your decision on whether to take a lump sum or annuity. Again, this is something you should discuss with a financial advisor based on your situation.
After Claiming Your Winnings
You’ve taken precautionary measures to keep your money, you’ve decided which payout you would like, but you are still not out of the woods just yet. It is mostly after a winner has collected their award that they make mistakes and lose their fortune. This may be due to frivolous spending and/or not knowing what to do with their money. If you have won the lottery, read on for some recommended ideas on what to do with your newfound wealth.
Keep a Budget
This may seem like an odd idea if you’ve just won millions of dollars, but you will want to stick to a budget. Remember, millionaires and billionaires didn’t get to where they are by wantonly spending money. Again, having a plan is key to keeping yourself in the black.
Winning the lottery gives you extra money, but not the willpower to spend it deliberately and responsibly. A lack of fiscal discipline is part of why wealthy individuals often have poor credit; sticking to a rational budget will help.
Pay Off Your Debt
Now that you acquired a hefty chunk of change, this is the perfect time to pay off your debts. Car and student loans, second mortgages, and any debt that has been hanging over your head can now be easily managed.
Especially when you’re paying high interest rates, winning the lottery is your chance to erase these deficits and not have to keep paying interest.
Set up an Emergency Fund
Having millions of dollars opens the door for an opportunity to start, or add to, your emergency fund. Just because you are a millionaire does not mean you are not prone to a crisis that will require funds. Setting aside money for an emergency fund is a smart idea whether you are an average citizen or a millionaire.
Give to Charity
Giving to a charitable organization is not only virtuous but you may also be able to write it off on your taxes. Additionally, forming a charity of your own is a way to help others who are in need, keep yourself busy, and feed your passions.
Before winning the lottery, you may not have thought about investing. However, if you want to keep your money — and see it continually grow — you should start investing. This can mean investing in mutual funds, bonds, stocks, retirement accounts, and even futures. If you have the money to spend (which you will once you win the lottery) it’s tough to go wrong with investing.
Leaving an Inheritance
Be it a trust fund or a full, one-time inheritance, leaving something for your spouse, children and other loved ones may be important to you. This requires long-term planning for your winnings, hence the need to invest. It also means keeping spending sprees in check. Again, careful planning with your windfall is the key to not going broke.
Set aside money for your children or family. It does not have to be strictly inheritance. You should consider opening college savings accounts — which is similar to investing. The goal here is to provide for future generations, to make a lasting impact on your family and loved ones.
Winning the lottery can do wonders for your life, but without careful spending, you could find yourself broke within just a few years — even if you made millions, more than you thought you could ever spend. Don’t fall into that trap. Instead, hire a professional, spend only a modest amount, invest, and save some for your children or other loved ones.
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