There is a simple and unavoidable problem with using a lottery jackpot as income. It is a one-time paycheck. Most people live on some form of regular income. Whether you work a salary job, an hourly rate, or get a pension, if you make a financial mistake or experience a hardship, you can dig your way out over time because you keep earning money.
But when you win a lottery, you will only get that giant check once. Any mistakes you make can’t simply be fixed by winning another lottery. So it is a good idea to prioritize your money so that it protects you over the long term.
Pay off “bad” debts
Paying off debts is almost always the best place to start. Focus on high interest rate debts like credit card bills or signature loans. When you’re no longer paying these interest fees you have a better chance to stay out of debt.
Even if you don’t fully commit to staying out of the debt, avoid incurring new debts. Once you win millions of dollars, you may be offered loans that are too large to repay pay simply from income. Be careful that you don’t run your debt back up in a few years because this can lead to bankruptcy. If you want to have a great financial plan, your first step has to be to get out of debt. Once you’re out of debt, you will have better investment opportunities.
Start an Emergency Fund
Starting an emergency fund can protect you from unexpected expenses. When lottery winnings change your life, you may face expenses that you never had to deal with before. Keep your emergency fund equal to the amount you spend on expenses over 12 to 24 months. This extra cash will protect you from falling into sudden poverty. Keeping this money in a traditional bank account will provide security and let you earn a bit of interest.
Make sure that this money is used only for true emergencies such as a job loss or medical emergency. If you are forced to take some money out of your emergency funds, replenish it with your monthly income. You should plan and save for all expenses and try to avoid taking money from the emergency funds.
Take Care of Your Financial Responsibilities
With your lottery cash, you can set funds for your children to make their lives easier. One major way to do this is by setting up college accounts. There are various programs for tax-deferred education funds. This kind of decision can shape the future of your family and protect your money at the same time.
The government generally ignores the assets of “regular people” when they die, but charges taxes if your net worth is high enough (yes, the government actually charges you for dying). Additionally, your family members will have a natural interest in how your will distributes your wealth. Therefore, it is important to have an estate plan in place to ensure that your money is distributed exactly according to your wishes upon your death. If you already have one, update it and revisit it periodically. By doing so, you might identify some significant opportunities you can make after receiving a windfall. It is important to have a detailed estate plan so that the wealth distribution process becomes much less upsetting for your grieving beneficiaries.
If you have financial responsibilities for another person, you need to plan ahead for them. For instance, your parents may have passed away and you have become the guardian of your siblings. You need to ensure that your financial plans are meeting their needs and expenses as well. If your windfall is changing your long-term employment and education plans, you need to consult a lawyer and set up a trust for their needs. It will help you cover future expenses for the people who depend on you. A firmly structured trust can help protect the money in a variety of ways, especially if the people you are responsible for are young and not able to make choices about their future.
Taking a little off the top of your windfall to treat yourself is fine. Treat yourself in an expensive restaurant, a vacation, go to a spa or whatever suits you! So long as you don’t get so carried away with spending that you don’t give it a second thought, you are safe. Don’t make splurging a habit and know when pampering isn’t reasonable anymore!
The legendary basketball player, Shaquille O’Neal, claims that he blew through his first million dollar paycheck in an hour. He reports that he “had no knowledge about FICA, state tax and income tax.” But when he signed with the Los Angeles Lakers in 1996, he got the best advice ever from teammate Magic Johnson. According to Shaq, Johnson said “It's okay to be famous and all that, but at some point, you want to start owning things.”
Once your debt is under control, you’ve established an emergency account, and your financial responsibilities are met, consider investing the rest of the money. You may invest money in mutual funds with good earning track records and lower fees. Such investments can be selected to match your risk tolerance and investment objectives. Work with your financial adviser to spread your risks over several stocks. Financial advisers can be helpful in diversifying your investments in order to balance your risks.