At one point or another, we’ve all wondered what we’d do if we won the lottery. National Lottery Day is July 17, which makes for a fun day to buy a ticket in the hopes of an unexpected windfall. According to NationalToday.com, the biggest jackpot to date is $1.59 billion.
What would you do if you won that much money? Would you quit your job? Buy your dream house? Go on a luxury vacation? There’s no right or wrong way to spend your lottery winnings; it’s all a highly personal decision. However, there are smarter ways for you to stretch your dollars. In this guide, we’ve compiled 9 smart ways to spend your lottery winnings and make sure you never run out.
9 Smart Ways To Spend Your Lottery Winnings
Winning the lottery is a double-edged sword. On one hand, receiving a lump sum of cash could solve all of your financial woes in one fell swoop. On the other, it could attract brand new problems that leave you worse for wear.
If you don’t believe us, take the case of Janite Lee for example. In 1993, she won $18 million through the lottery. 8 years later, she ended up filing for bankruptcy and picked up credit card debt and a gambling problem along the way. Business Insider shares her story along with 19 other cautionary tales from lottery winners who lost it all.
Most people swear that they’d be able to spend their lottery winnings responsibly. However, there are too many examples to show that it’s easy to fall victim to financial and social pressures. If you do ever win the lottery, it’s best to follow guidelines that come from financial experts. That way, you can make sure to spend your winnings in the smartest way possible.
Wait to Share the Good News
It might be tempting to tell your friends and family right away after winning the lottery. After all, it’s exciting news and it’s only human nature to want to share. However, you might be surprised by how many people will be audacious enough to ask you for a loan, or even a gift. You might even feel guilty or get guilt-tripped, making it hard to say “no.”
It’s okay to make loans and gifts to loved ones, but you don’t want to do so without coming up with a game plan first. It could be easy to give too much of your winnings away without prioritizing your own needs first.
Take Time to Reflect
Most lottery winners have several months to claim their prizes. You might consider waiting for two reasons: to take time to reflect, and to avoid a media frenzy. When a winning lottery ticket is announced, the media is ready and poised to create headlines when a winner comes forward. This often results in unwanted attention, unsolicited advice, and friends and family asking you for money. It can be difficult to cut through the noise and decide what’s best for you.
By waiting a few months to claim your prize, you can come up with a financial game plan while still basking in the glory of your tremendous luck. Hopefully the media frenzy will die down, and you can stay under cover from your social circle. Use this quiet time to get clear on your personal and financial goals, and how you plan to use this money wisely. Just make sure you know the deadline for claiming your prize.
Hire Legal & Financial Consultants
One of the best investments you can make at this time is to add legal and financial professionals to your team. A certified financial planner can help you come up with the most effective plan for using your lottery winnings. They can inform you of certain tax thresholds, and help you decide if it’s best to take the lump sum or annuity payments. They’re also going to give you advice on how to create an enjoyable lifestyle while still investing in your future. It’s also a good idea to have an attorney on your team in case anyone tries to file a suit or make claims against you.
Pay off your Debt
Before you allow yourself to have fun and live a little, pay off your debt first and foremost. Not only will debt not disappear, it will continue accruing interest until you actually pay it off. Start with your high-interest debt first, since it grows the quickest. Then, pay off the rest of your debt. Think of your interest rate as the rate of return in which you’re paying yourself back. Don’t forget that car payments, mortgages, and school loans are included in this category.
It might not seem fun at first, but imagine how amazing it would feel not to have any debt hanging over your head, and own all of your assets free-and-clear? The key here is to not create any new debt with your lottery winnings.
Start an Emergency Fund
Having an emergency fund set aside when you’re swimming in money might not feel like a priority. However, it’s crucial nonetheless. No matter how carefully you spend, you’re still prone to unforeseen circumstances or disasters that could wipe out your golden goose egg. By tucking away an emergency fund, you’ll have peace of mind knowing that you have a safety net protecting you in case things go awry.
Consider setting aside at least 6 months’ worth of living costs into a high-yield savings account. This type of account helps grow your savings at a slightly faster rate than a traditional savings account, but still gives you quick access in the case of an emergency.
Set Aside Money for Retirement
If you just won the lottery, retirement might start today. Nonetheless, it’s still important for you to set aside money for your later years. The younger you are, the more you’ll need to save. From this perspective, spending your lottery winnings should be thought of as a marathon, and not a sprint.
Work with your financial advisor to calculate exactly how much money you need to set aside for retirement. The amount will in part be determined by the lifestyle you want to keep. Other factors include medical bills, number of family members you support, and inflation. They will also help you determine the best place to put your retirement savings, such as an Individual Retirement Account (IRA), mutual fund, or other type of low-risk portfolio.
Choose Low-risk Investments
Once you’ve paid off your debts, set up an emergency fund, and set aside money for retirement, it’s time to enjoy some flexibility. This is the part where you might have a little fun. You deserve to buy that dream house or take that vacation. Your financial advisor can help you come up with a reasonable budget for “fun.”
After that, it’s time to decide what to do with the rest of your money. One option is to grow your money in the form of low-risk investments. Volatile stocks are risky, and could cause you to lose your money if you make the wrong choices. Instead, go for safe investments, including portfolios that represent a mix of stocks and bonds. Don’t forget that real estate is also a great investment that stands the test of time.
Make a Social Impact
Attaining financial freedom also means that you have the means to pay it forward. Many lottery winners have given to charity and other organizations. Make a positive social impact by donating to a cause that you’re passionate about, such as your local church, a humane animal shelter, or other nonprofit. Philanthropy has its own benefits. Aside from the good vibes, charitable giving comes with tax benefits. According to SmartAsset, you can gift up to $15,000 per individual recipient, or a lifetime total of $11.58 million, in order to qualify.
Review your Estate Plan
In an ideal world, everyone should already have an estate plan that they’re reviewing and updating on a regular basis. It’s especially critical to do so when triggered by certain life events. Winning the lottery is absolutely one of those triggers.
An event as large as winning the lottery might be cause to rethink your estate plan in its entirety. That’s because the size and complexity of your assets will likely change drastically. You’ll also likely want to set up trust accounts to better protect your assets, and to coordinate the eventual distribution of inheritances to loved ones.
If you feel overwhelmed, don’t worry! At Trust & Will, we’re here to help you keep things simple. You can create a fully customizable, state-specific Estate Plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning options today!
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