Winning the lottery – a dream for all; a nightmare for some

I was given a lottery ticket as birthday gift at a dinner with friends on the weekend. The condition was that we would all share the pot. It was great value to dream for even a few hours of how life could change with $41 million.

Sudden wealth via the lottery, inheritance or selling a business can be life changing. In our business we see this first hand nearly every day. Unfortunately, for some people, the dream of financial freedom can actually turn into a nightmare.

Search the internet and you’ll find story after story of cash windfalls turning into personal downfalls, with some estimates that one third of all lottery winners are in serious financial difficulty or bankruptcy within just five years of winning!

Sadly, I watched this happen earlier in my career when one of my clients won several million at the age of 18. He promptly quit school and despite my and others’ urging, went on a wreckless spree of unbridled spending. Gambling trips to Las Vegas for all his friends. Undisciplined investments in every new idea that came along. In an attempt to curb his spending, we even took the step of setting up a trust that made it more difficult for him to get at his own money, but ultimately his money ran out within five years.

The reality is the amount of money you have is somewhat irrelevant, if you have bad financial habits you’re likely not going to do well.

So what should you do should you find yourself the beneficiary of a jackpot?

Clean up your balance sheet – This recession was a costly lesson for those who lived beyond their means and accumulated debts beyond a manageable level. Sudden wealth can be a “get out of jail free” card allowing them to eliminate debts, catch up on retirement savings and, in the case of an inheritance, thank their parents for bailing them out, once again.

Take time to develop a plan – Pause and allow it all to sink in. Define new objectives: early retirement; recreational properties; renovations; philanthropy travel, etc. Then get help from a financial advisor that can do detailed financial projections to “crash test” the plan.

Understand the relationship between the capital and income – The value of an asset is in its ability to generate income. Impairment of capital results is an erosion of the future income. Avoid extravagant or unnecessary purchases that have no permanent value as it impairs future income. What seem like a large amount of money may only be able to generate a modest amount of annual income, especially in today’s low interest environment.

Big money means more sophisticated planning – Significant wealth opens the door to many planning ideas; an estate freeze, private charitable foundation, income splitting with family members, an individual pension plan for a business owner all come to mind. Professional help is needed to wade through the possibilities.

It’s Monday morning, and I’ve awakened from the dream and, no, I didn’t win the jackpot.