Earn More MoneyOctober 4, 2021December 11, 2021

Why Do Lottery Winners Go Broke?

The dream for many people is to win the lottery. However, the chances are extremely slim. Of course, depending on the population of your country, the biggest lottery will have the slimmest chances. For example, if you’re in the United States, your odds of winning the Mega Millions lottery is 1 in 302,000,000. As you can see there is an extremely slim chance. However, in Canada, our biggest lottery is the Lotto Max. Here, your odds of winning are 1 in over 33,000,000. However, since the population is smaller, our lottery pot is seventy million dollars. Whereas the Mega Millions is over three hundred million dollars.

Even with the odds being so small, people still spend their hard-earned dollars on the chance to win. However, what happens to people after they win the lottery? Do they suddenly become happier and gain generational wealth? Well, the answer is quite difficult. Many of them go on to live regular lives with their newfound wealth. Some even extend their wealth by investing or creating their own business. However, many do, unfortunately, lose all the wealth they acquired overnight. There are many reasons for this. However, it is known that the average lottery winner is up to 5 times more likely to declare bankruptcy. This is in contrast to the average person who has not won the lottery. Therefore, we will take a look at the average winnings, what makes the winners lose their money, and some preventative measures they could’ve taken.

How Do They Lose Their Money?

There are many ways that people lose their money. However, the main factor that lottery winners struggle with is discipline. That is the discipline in their spending. Think of it like this, you are $30,000 in debt. However, you pull yourself together and create a plan with your current income to pay off your debt. When you eventually do this, you’ll become a seasoned veteran in budgeting. This means that you’ve developed financially critical habits that help you retain more of your income.

The biggest problem that many people have is that they’re coming into this huge sum of money right off the bat without understanding how to manage it. First, when people win the lottery, they change their spending habits immensely. This means giving money away, purchasing luxury items, and taking on large forms of debt. While purchasing a large house may not seem too expensive when you win 70 million dollars, the expenses add up. Furthermore, the ongoing expenses to maintain the new lifestyle will quickly drain your funds.

Most wealthy people will say for every liability, you should have an asset that provides value or income. Many people who change their lifestyles don’t add any investments or assets to their portfolios. Therefore, aside from the large lump sum of money they have, they’re still earning the same amount of money, and that’s if they didn’t quit their job. Due to taking on this massive amount of debt, many lottery winners end up filing for bankruptcy. The hole they dig themselves into becomes too deep to get out of. Therefore, bankruptcy is the only option. The fact that many people do not have the financial literacy to know how to manage their money. This means that oftentimes, if someone is in financial distress, giving them a lump sum of money will most likely postpone their bankruptcy.

Above is a picture that displays a survey that was taken. This survey outlines a few key components. First is how much money individuals won. Next is how many people avoided bankruptcy. After that is how many people fell into bankruptcy. Lastly, it displays the percentages comparing both of these statistics. The good news is that, on average, most people do not fall into bankruptcy. As a matter of fact, the percentages from this sample size indicate that under 7% of people do not fall into bankruptcy. However, it is important to note that this sample size consists of people receiving a maximum of $150,000. Whereas Lotto Max and Mega Million winners acquire tens of millions. Therefore, the results may vary.

Lastly, many people lose their money from bad investments. Many people will create a business without knowing how to make it operate successfully. Therefore, they will invest all their money and time into a business that unfortunately fails. Other investments can be real estate. Even though purchasing real estate can be an extremely good investment, it is completely possible to lose money. For example, in an interview, T-Pain said that at one point he was broke. When asked how it happened he said he lost a bulk of his money in pool real estate investments. Therefore, if you were to ever win the lottery, it’ll be in your best interest to study financial literacy in order to make your money last.

Preventative Measures

There are many preventative measures that can be taken in order to sustain your wealth. The first is something that we already spoke about. That is gaining financial literacy. This means learning about taxes, how to budget and invest, at least in a smaller sense. All of this information will be critical because once you learn these skills, you can develop better spending habits. Every single person who is wealthy agrees that learning how to budget is a staple in sustaining wealth.

Next is hiring help. That means an accountant. An accountant can be a life-changer for those who hit it big in the lottery. Accountants can help you with any spending habits you have. Furthermore, they can help you balance your boots and maintain your assets/liabilities. Many people have an accountant as they can take a copious amount of stress off you when managing large sums of money.

Next, you can hire a financial advisor. A financial advisor can help take that money you’ve recently acquired and make it work for you. Essentially, you tell them all your financials including how much money you have and earn annually. From there, you two work together to develop a risk portfolio. This means how much risk vs. reward you want in your investments.

If you’re not looking to risk too much of your money, you can opt-in for a low-risk/low reward portfolio. This portfolio will consist of ETFs, Bonds, Cash, and many other low-risk investments. Of course, if you increase your risk profile, you will obtain the possibility of a greater return. Financial advisors also have the ability to plan out how long your investments will last. They do this by taking your monthly expenses and put them against your assets/income. From there, they’ll see how much money you have left once you retire and how long it’ll last.

Lastly, you can self-manage your money. However, this would not be advised as most people do not fall into this amount of money. However, it is doable. You can take all of that money, invest some into the S&P, and put the rest into a high-interest savings account. Even for an amount like $10,000,000, 2.5% per year is approximately $250,000. Of course, this amount is taxed. However, that’s where learning about taxes and other financial skills comes into play.

To Conclude

It can be quite overwhelming to win the lottery and fall into a lot of money. However, learning to budget and hiring people to help you manage your newfound wealth can help ensure you’re financially stable for the rest of your life.

Shameed Chris Khan

Shameed is just a man on a mission to help those around him gain financial success. Obsessed with writing about all things finance, this GTA native is constantly learning and sharing his experiences with others.