I’ve been reading up (and listening to podcasts) about personal finance. One thing that got mentioned a few times is that “you can’t solve money problems with money”*, with the example given that pro sports players who make millions tend to go bankrupt after their pro career and lotto winners also tend to go bankrupt.
I can understand this for the sports players as they get used to the income and spend it all, and scaling that back quickly enough after the income dries up isn’t easy.
But lotto winners are probably smart enough to realize that they’re not going to win again, so at some level they must plan to make the money last. Obviously that’s not easy with 100k or a million or such, but with 10M+ that should be quite doable.
So what are the stats on lotto winners? How many do lose it all? And why?
Which reminds me of episode 9 of my favorite sitcom, Ned and Stacy: “You think you can solve every problem by throwing money at it!” “Call me crazy, but in this case it may work!”
People who play lotteries often enough to win are not people with good financial sense; suddenly having 1 or 10 or 25 years’ salary in hand does not make them more financially wise.
Like pro sports athletes and new media stars and other young stupid people who come into money, in fact, it usually promotes a destructive spiral of overspending and waste.
A quick search doesn’t yield the actual research the ‘National Endowment for Financial Education’ says gives this figure, apparently not their own figure. The NEFE is the one quoted in numerous media articles with the 70%. It seems to mean ‘the lottery money is gone’, not necessarily that the person declared bankruptcy. But if you won $1,000, it wouldn’t be a big deal if it was gone in a few years.
Other media articles I’ve seen quote other research that doesn’t seem as extreme, like a British study specifically saying in 44% of cases ‘the money is gone in 5 yrs’ but again no lower cut off stated.
I guess the basic idea is pretty self evident though. Big sudden money windfalls are pretty likely to cause bad decisions and problems for people who’ve never had real money before, which is most people. How often it really makes somebody’s life worse than it was before I don’t know, but it’s certainly possible.
Of course you can solve money problems with money. What you can’t do is solve personality problems with money. Or family problems, which might be a bigger factor in some of these cases.
If you come from a poor family, all of your relatives likely have some degree of debt. They will reasonably assume that your money will help them pay down their debt. And any new debt. And they new car they need, because driving a rust-bucket bondo queen is both expensive and dangerous. And the medical bills. And you soon realize that, even if none of your relatives are grasping, conniving borderline cases with no sense of shame, supporting an extended family tree is really very expensive.
So that’s one reason someone who has more financial sense than a scallop will find themselves back down in debt after a sudden windfall.
Not to mention buying a big house, boat or anything else that requires continuous upkeep, bad investments, faulty tax planning and a lot of other financial moves that require more planning and/or knowledge than the average Joe may have.
I’d say people who make that statement have no people sense. I play $10 a week for fun. We have a great retirement(not relaying on the lottery) and a lot more disposable income than most folks. Have plenty of financial sense, and I took statistics in college so I understand that also. I waste less on the lotto then a whole lot of folks waste on things like Starbucks, beer, cigarettes or going to the movies. It is fun to think what if, doesn’t mean I have no financial sense.
The way I’ve heard it phrased is if you were bad at managing money before you won the lottery, you’re probably not going to do well with it. But if you were reasonably good at managing money, you might do OK.
I agree with you wholeheartedly, friend. When I was employed I participated in 2 pools at work, 5 bucks each, every week. We never hit big, occasionally a few bucks to buy extra tickets with, and a few times enough for a dinner out. 10 bucks a week for a cheap high, thinking about what we’d do if we hit it big? It amounted to a small rental on a lot of fun.
I’m a believer in the idea that most people, and governments, don’t have a income problem they have a spending problem. It’s always easier to spend money than it is to make it and having a lot of money doesn’t fix that. The rich didn’t get that way by writing a lot of checks.
Lottery winner’s names are part of the public record for the most part. Once scummy family and unethical financial “advisors” get their hooks in them, they don’t stand a chance.
Yeah but those aren’t the people hitting the big prize. According to this Cornell University study, which I’ll grant is pretty old, something like 80% of the tickets are purchased by only 10% to 15% of the players. Massachusetts had an annual per capita ticket purchase of $663. That’s for every man, woman, and child citizen of the state, and they’re disproportionately purchased by low income buyers.
I think we can agree that if 80% of the tickets are purchased by the least affluent 15% of the purchasers, they’re going to win 80% of the jackpots. We’ve got a local lady who hit the lottery for $188 million who has spent $21 million bailing her boyfriend out of jail. She wasn’t affluent before winning, and she likely won’t be affluent after, although the local paper says some friend of Oprah’s is going to fix her life, so she’s got that going for her.
These people aren’t doing it for fun, they’re doing it for the money, from the Cornell Study:
[QUOTE=Cornell University]
Survey respondents in California were about equally divided between whether they played the lottery for money or for fun (Los Angeles Times 1986).2 However, among those with less than $30,000 in income, 25% more respondents cited money rather than fun, while the reverse was true for those with higher incomes.
[/QUOTE]
I personally know three lottery winners – 1.2 mill, 2.7 mill, & 3.4 mill. The guy who won 1.2 mill kept working a relatively low-paying job, was careful with his money, and retired last year at age 62.
The other two, both scraping by when they won, blew through their money. They partied like rock stars, went on expensive vacations, went to Vegas frequently as if the money would never end. One is in late 40s and living with Mommy, while the other, also late 40s, is living at a friend’s house until he gets back on his feet. He hasn’t worked in 20 years and doesn’t seem too inclined to do so.
I saw a documentary on I think E! True Hollywood Stories, about ten years ago that profiled a dozen of so big jackpot lottery winners. With only one exception it ruined all of the winners’ lives.
One guy couldn’t say know to friends (and eventually anyone) in need. He took the annual payments instead of the lump sum, quickly went broke and had to sell the future payments at a significant loss for a lump sum, eventually went broke again and felt so guilty about everything that he shot himself.
Another kind of white trash guy bought a big mansion in Florida with his ‘girlfriend’, along with cars, boats, motorcycles etc. They showed an image of a police report to a domestic dispute there. I freeze-framed my TiVo and actually read it, it stated, “DEFENDANT STABBED GIRLFRIEND WITH BROKEN CRACK PIPE”! :eek: He eventually lost the mansion, not even to taxes but because he never stayed there and didn’t maintain the property so the gated community council seized it for numerous unpaid violations.
Another was an alcoholic before & after winning, crashed her fancy SUV and killed someone, fled the scene, wound up with a long prison sentence. Various others either gambled it away or OD’ed on drugs.
The one success story was a young couple who just lived sensibly. They bought a nice yet modest ranch house & property. The girl said, “We wanted a grotto in the back but then thought, nah”. They bought only one new car each, “You can only drive one at a time so what’s the point?” and the rest they invested and lived off the interest.
Granted these cases were hardly selected at random for the show, but still…
I saw an article about the NFL some years ago that talked about the financial difficulties of some of its players. The player’s association has a financial counselor (or possible each team does) whose job is to talk sense to new players. We always hear about big stars like Peyton Manning or Tom Brady who are earning tens of millions of dollars over a decade or more, but the average NFL player’s career is only 3-4 years, and they only earn a couple million dollars. Maybe a third of that goes to taxes, so they’re left with $1.3M, and weak job prospects after their NFL career ends, so they need to make the most of that $1.3M. Unfortunately many of these players come from poor backgrounds, and they suddenly feel flush with cash, and they’re trying to socialize with the likes of Manning/Brady who really can afford to light their cigars with Benjamins, so in spite of counseling, they tend to burn through their earnings in a hurry. On to of that, there are a number of true big earners who also manage to spend their way through massive earnings.
Not all lottery winners lose all their money. There are quite a few who are careful, I wouldn’t be surprised if most of the million dollar plus winners do not blow it all. For smaller payouts I’m sure plenty spend all the money, but if it’s on reasonable investments like a house they can afford to maintain then it’s not throwing the money away.
A lot of smaller ($1-5 million) lottery winners have problems because a> despite the appearance, the resulting money after tax isn’t enough to live the rest of your life on unless you’re very very frugal, and b> not being able to say no to friends and family.
Like the guy who ended up with something like $1.2 million after taxes, went into business with a relative who wanted to open an auto service company, went in big, blew through all the money and went bankrupt in a mere 6 months. Turned out that they liked blowing the money to build this business, but neither of them had Clue #1 how to RUN a business.
Heck, if I ended up with $1.2 million after taxes, I’d buy a new car (nothing super fancy), a $200k townhouse around here which would be fairly modest, and invest the rest - which would only be enough to live a modest lifestyle with and probably require me to do some part time or seasonal work to get by. More likely, I’d buy the car and a $300k house, then invest the rest and work for another 8 years to retire at 62.
Half the people are in the bottom 50% of money management.
My guess is that a majority of lottery tickets go to people in this bottom 50%.
So, it doesn’t surprise me that many winners end up back where they started or worse. It’s not about the lottery, but as Dewey Finn says, it’s about whether you have the skills to manage money successfully in the first place.
I’m sure I’ve made this comment before (which would imply that the question has come up before), but I am far too lazy to try to find it.
In addition to the temptation to pig out buying stuff there is also the problem of all your long-lost second cousins three times removed coming out of the woodwork and wanting a few grand (each of them) for this investment/project/store/whatever that they just know is guaranteed to take off and make them fabulously wealthy as well.