Introduction
If you had to win the lotto today, what would you do with the money? This subject has probably come up at some point in your life, whether casually joking with friends around a braai or seriously debating the idea with family. The fantasy of being able to buy anything your heart desires is an alluring one, but did you know, that studies done in the UK show that more than half of lottery winners end up going broke within the first 5 years of winning? While it’s nice to think about the things this kind of money can give us, if you had to win, do you think you would be able to responsibly manage your finances, or would you just end up being another statistic? How you would spend your winnings, theoretical or not, reveals a lot about your views on money and your financial literacy. The potential problem areas are identified below.
No 1. Expensive Cars
To many people, cars represent more than just a means of getting from A to B, they are a status symbol, outwardly communicating to the world your level of wealth. Along with designer clothes and jewelry, fancy cars are generally the first thing people seem to associate with wealth as demonstrated by the influencers and celebrities flaunting their Ferraris and Lambos on social media. However, from a financial point of view, a car is a depreciating asset which means it loses value over time. Not only this, but it also has a relatively short life span, due to maintenance issues that start to occur with age. Owning an expensive car also means forking out for a higher insurance premium, tyres and repairs when it starts coming out of warranty. Spending in excess in this area, without considering sustainability seems to be the quickest way lottery winners lose their money.
Example
Patrick Dladla of Melmoth, won R1,4-million in 2002. Dladla, 49, spent his winnings on luxury cars. Once the proud owner of two Mercedes-Benzes, a BMW and an Isuzu 4×4, he now can’t afford to own one.
No 2. Holidays & Consumables
Being able to afford things that previously have seemed out of your grasp may be tempting, but it is the quickest way to fall from grace. If your first instinct is to buy an array of expensive things that don’t generate wealth, then you need to reassess your values and views on money. This type of thinking says that you value short-term gratification over long-term sustainability. Generally, people who have not accumulated their wealth from years of hard work and sacrifice, or seemingly have wealth in ‘abundance’ tend to lose perspective. They no longer understand the value of money which can result in reckless spending.
Example
Vivian Nicholson, of Castleford, England, won £152,300 in 1961, the equivalent of about £3 million today ($3.5 million). She famously vowed to “spend, spend, spend!” She bought expensive designer dresses, vacations, and a new car every six months. By the 1970s, Nicholson was broke.
No 3. Your own Business
While starting a business can be a great idea, having just an idea, no experience and too much capital can be a recipe for disaster. If you study and read about the world’s most successful businessmen and entrepreneurs who have built their businesses from the ground up, they all speak about the value in the lessons they learned along the way. Such lessons include how to prioritise time and resources, how to work hard, and how to be creative and innovative. Without the correct mindset or poor planning, having too much capital, too early, can lead people to become complacent, resulting in bad financial decisions.
Example
Lisa Arcand won $1 million in the Massachusetts lottery in 2004. Of course, a million dollars isn’t much after taxes, so she also opened a restaurant to make some additional income. Sadly, within a few years, she ran out of money and closed the failing restaurant.
No 4. Property
While buying property is essentially purchasing an asset and is not necessarily a bad financial move, the lifestyle that accompanies that purchase is generally the main culprit. What people don’t always take into account when purchasing residential real estate is the cost of living that comes with it. Expansive homes with all the bells and whistles require a lot of upkeep and maintenance which can be expensive. On top of that, furnishing each room in the house can also be a costly exercise.
Example
Michael Carroll was a garbage man in England when, at age 19, he won £9.7 million (about $14.4 million at the time) in the lottery in 2002. A mansion, drugs and gold jewelry ate up the money quickly. By 2012, Carroll was broke and living off unemployment checks. Now he works in a slaughterhouse, making £400 (about $511) per week.
No 5. Being Charitable
This one may be a little surprising but it’s a real issue. Winning or having a substantial amount of money may result in you being surrounded by people who now expect you to give them money for doing nothing. Although, you may want to help these people, giving things away to people who don’t deserve it or haven’t done anything to earn it, means you are giving it to people who won’t appreciate it. While it can seem noble to donate and loan money to family and friends, doing so irresponsibly will lead to your downfall. Donations or loans should be done carefully and only done so if they add true value. It should never be done to the detriment of your own financial freedom because how can you continue to enrich the lives of those around you if you yourself go broke?
Example
Sharon Tirabassi, of Hamilton, Ontario, won $10.5 million in 2004. She treated friends to vacations in Cancun, Las Vegas, California, Florida, and the Caribbean. She got married and bought a house for $515,000 — and got a $360,000 mortgage loan rather than paying all cash. She bought numerous cars, including one that cost more than $200,000, and gave millions of dollars to family and friends. By 2007, half of her money was gone. By 2008, with her husband in jail for a DUI, Tiribassi lost their home. Now, to pay the rent and support her kids, she takes the bus to her part-time job.
Conclusion
Getting a large sum of money can secure your financial freedom but only if you make the correct decisions. Whether you win the lotto or come into a large sum of money, first and foremost your primary focus should always be on the long-term sustainability of your wealth. Why? Because it can be emotionally devastating to lose everything due to your own short-sightedness. It’s scary but some lotto winners have committed suicide after their bad financial decisions left them broke and in debt. You can live the lifestyle you want by doing things like drawing up a financial plan, determining the monthly ‘salary’ you would need to sustain the lifestyle you want and making your investment decisions accordingly e.g. earning interest on your winnings until you have enough. These types of decisions may require you to hold off on any large expenditure until you are in a decent financial position but after that, you are set. So, I ask again, if you won the lotto, what would you do with your money?