Everyone who has ever gambled, whether they are regular gamers or they just slipped a few coins into a machine at the pub one night, whether they go to the casinos and play poker or craps or roulette or whether they just like to play the pokies in the gaming room at their local pub, whether they like play online or prefer real life casinos – all of them, and that means every single one, has dreamed, maybe for a long time or maybe just for a second, of winning the jackpot. Now they may have lots of stories about just playing for a bit of excitement, or for the social aspect, or just for a bit of light relief, and probably these stories are all true. But that doesn’t mean that they haven’t thought, even just for a second, of what it would be like to win big. What they would do with their money. Paying off mortgages, going travelling, taking their friends on shopping sprees, paying for their kids’ university – the options are endless. But you have also heard the stories we’re sure, of people who won the jackpot or the lottery and suddenly changed and became a different person, or got depressed, or blew it all and were back on the dole within a year. No one wants to be the starring character in one of those stories. Everyone wants to win the jackpot, and they want it to be just as magical as they imagine. So what is the best thing to do with your money if you do end up winning big?
Okay so now let’s look at what one lucky person did with his winnings, and see what the financial experts have to say about his choices.
Jim Gavins (not his real name), an American citizen, won 15 million dollars back in 1997. First off, he went to Las Vegas. Now, although this sounds like the start of a tragic story, you can relax – Gavins behaved responsibly and sensibly with his winnings and returned home from his Las Vegas trip with his fortune intact, even if it wasn’t greatly increased. In fact, experts say that the way Gavins handled his winning such a huge jackpot was almost straight from the textbook the correct way of dealing with massive winnings. Gavins was 54 when he won the jackpot, and after returning from Las Vegas, he took an early retirement. And not just any retirement. In addition to his winnings, which will give him an annual sum of $400,000 after taxes for the twenty years, he also has a pension fro, the job he held for nearly twenty years and as of his 62nd birthday, he is collecting social security benefits.
All these funds combine to make Gavins very comfortable indeed. Here’s what he did after winning the jackpot:
Gavins, a former truck driver, had his eye on the big picture from the outset. Straight away, he took a thirty day leave of absence from his work and used this time to get himself sorted, get his options clear, and get his plan formulated. This meant that by the time Gavins handed in his letter of resignation at work, he had spoken with a number of lawyers and hired his preferred one, bought himself a new house in his neighbourhood of choice, and set up a trust fund to receive his prize money and then invest it. When asked if he made any mistakes, he laughs. “Well, yeah, I spent too much money.” He grins sheepishly. This is fairly understandable, and a spending spree is pretty much to be expected in the days, weeks and months following a major win like Gavins’. When money starts falling from the sky – or seems to do that – keeping your head straight can be difficult. The trick is to deal with the windfall well – go on a spending spree by all means, even go a little bit crazy. “A little bit” being the operative words. You shouldn’t lose your grip and blow all the money quickly, but neither should you feel guilty for having some fun and spending some money. Rob Sanford, a certified financial planner and the author of a book of financial advice called Infinite Financial Freedom, provides a lot of advice to winners of lottery and other big paying competitions. He says that you should feel comfortable to go ahead and blow 10 per cent of the payout in an initial splurge. We agree with Sanford and think 10 per cent
Gavins, whether deliberately or by accident, followed the rules suggested by many experts who frequently advise people who come into large sums of money (whether by winning the lottery or other jackpots, inheritance, divorce, bonuses, lawsuit settlements or severance packages), and he is definitely well off for doing so. This advice is summarised as follows:
- Don’t do anything rash. For about around a month at least, keep your job, keep your house, keep in touch with all of your close friends and family. Also keep contact with advisors – both financial advisors and spiritual advisors. Don’t make any promises.
- Make an immediate appointment to meet with an accountant AND a tax lawyers. Depending on how and where you won the jackpot, the amount you keep after taxes will vary. The tax lawyer will be able to tell you how much you will end up with, and the accountant will be able to tell you, or at least advise you, on what to do with the money you have left after taxes. Experts are very clear on this – speak to your tax lawyer/advisor BEFORE you speak to your accountant/investment analyst. Your accountant will need to know how much money you have in order to make sound recommendations about what to do with it. In order to know how much money you will have, you need to talk to your tax lawyer.
- Make sure you talk to your tax advisor about your payment options, and to discuss those options in depth before making your decision. It’s possible that you won’t get payment options, and will simply be provided with a cheque for the amount you won. However, depending on exactly how you won the money, you may be presented with options such as lump sum payment vs. receiving annual cheques for a certain period of time, or various other options. Read our Frequently Asked Question “If I am given a choice between accepting a lump sum payment of an annuity payment, which should I take?” and make sure you talk with your tax advisor.
Well Jim Gavins may have followed all the rules and done everything exactly right, but what about other people? What are the mistakes that people typically make after they win a big jackpot? Even when people get good advice and have a good head on their shoulders, bad decisions get made.
The number one mistake that people make is that they think too much in the short term. For example, people should ask themselves, when do I really need this money? Possibly the answer is now, or in retirement, or somewhere in between like when your children go to university, or when you would like to take a holiday for your fiftieth birthday.
Rob Sanford, the expert who recommends spending the first 10 per cent of the jackpot win, also offers a warning. He explains that people who come into large and unexpected fortunes have a tendency of being lulled into complacency. For example, imagine that someone wins a jackpot paying $50,000 per annum for twenty years. Instead of investing the money, he takes a very extended holiday and basically retires for twenty years. However, twenty years passes and where does the winner find himself? Twenty years older with no training, no work experience for twenty years, and no money. This is a disaster situation and you do not want to find yourself here. Think carefully, and think long term. It might be better to, after making some initial purchases like a new house or paying off debts, and perhaps increasing your standard of living moderately, to by and large live like you didn’t win a huge sum of money, at least for a number of years.
Another common mistake made by winners of big jackpots is carelessness. Because the money is a huge windfall – not worked for or earned, and not expected (at least not seriously expected), it is more like “found money” and for some reason, people care less about paying penalties or higher taxes than they have to. For example, a winner of a jackpot might lose 30% of his or her investment and not really mind, whereas if you lost 30% of an investment made with money your worked hard for and earned, you would care a great deal. It’s a good idea to get into the habit straight away of treating and thinking about the money you won the same way you treat and think of the money you earn.
Generally speaking, older people, that is people over forty, tend to be wiser and more prudent in their actions following the receipt of a windfall. Often younger people want to “live large”, and frequently spend their winnings on big boats, glamorous houses and flashy cars. When the bills come in it can be difficult for them to pay. If you’re young and win a big jackpot, talk to your parents and, while it’s your money and you should do some of what you want to do, it’s a good idea to follow at least 50% of their advice. It is very likely that any accountant or investment analyst you speak to will have very similar advice to your parents.
And what about donations to charities? Now, this isn’t really a matter for financial advice (although there are some distinct financial advantages to making donations, such as tax deductibility). This is more of a personal decision, but we feel that if you’re lucky enough to win big at the pokies or by buying a lottery ticket, or by any other means, it’s a pretty good idea to spread a little bit of that luck and that wealth around. There are a lot of worthy causes out there, from local groups like sporting teams, to regional organizations supporting needy people or researching disease cures or saving the environment, to national and international organisations vaccinating against preventable diseases or feeding thousands of hungry people or promoting democracy and freedom –and these are just a few ideas. There are literally thousands of different causes, and we’re sure you can find one or two that interest or move you. As we said, this is more advice for “being a good person” rather than financial advice, but we think you should give some serious thought to making a donation to a worthy cause with a part of your winnings.
In short, we can summarise the best practice for what to do with your money if you’re lucky enough to win the jackpot: Spend Some. Save Some. Give Some Away.
Now, in addition to advice on what to do with your money, there’s some other tips and suggestions from previous winners and from experts. These are not about how to best deal with your winnings and more about sidestepping the various pitfalls that can come with winning a large amount of money at once.
First of all, here are some suggestions from some people who have won large sums of money about ways to deal with the win in social and personal terms:
- Change your phone number to a private number. If you already have a private number, change it. You’d be surprised how little privacy you will get — even people you know and trust might not be who you thought they were. Better to err on the side of caution
- It’s important that you learn how to say no! Beware of fair-weather friends, alleged “investment experts” pedaling shams and boguses, as well as questionable charities. Do your research on anyone that just “appears” and that you haven’t heard of before.
- Plan your estate. Now, this is pretty solid advice for everyone of a certain age and with any kind of wealth or assets. But if you’ve just experienced a major increase in wealth, this should make planning your estate a priority. See an estate lawyer and draft your will. It doesn’t cost very much money and is the smart and responsible thing to do. You can even download “Make your own will” programmes from the internet, making it cheap and easy.
- You might want to consider hiring a bodyguard to protect you from people wanting money. Now this might seem a bit extreme, and obviously it depends on just how much money you have won and how much publicity you have received, but we’ve heard stories suggesting that depending on circumstances, it can be necessary.
- Don’t change yourself. This can be more difficult than it seems, so make sure that you take steps to guard against change. Your priorities and values are important in your life, and shouldn’t change according to how much money you have. Moreover, among other reasons, they are why your friends like you – and having a lot of money and no friends is not much fun at all.
- Enjoy the moment, the day, the month, the year. Do not move or try to live outside your comfort zone.
We also spoke to some experts and got their advice on the same subject. Here’s what they said:
- Get out of your house and stay with a friend or in a hotel. If you live in a smaller town, even better – get out of town. This is an even better idea if you have been subject to news coverage or received other publicity.
- Get an unlisted phone number, and change your number if your number is already unlisted. It’s a good idea to change your number either way actually, though you may decide this is too much hassle. You can always wait and see, if you feel it’s necessary then arrange for a change and if not, then you can just leave it as it is and not have the bother.
- Take a leave of absence from your work. Treat your time off not as a holiday (it is likely you’ll be having one of those very shortly anyway), but as a working holiday and use the time to consult various tax lawyers, financial planners and investment analysts and decide what you’re going to do.
- Don’t rely on the agency of company from whom you won the money, that is the online gaming site, or the casino, or the lottery agency, for advice on what to do with your winnings. This may seem very obvious but many people turn to the agency or company for financial advice. This is not what they do.
- If you have the option of collecting your money in a lump sum, do so (see our Frequently Asked Question “If I am given a choice between accepting a lump sum payment of an annuity payment, which should I take?”
- Keep in mind that there are taxes you may have to pay on your winnings, and that these taxes can fairly drastically reduce the amount you are finally left with. This is important to remember when you’re mentally (or actually) spending your winnings.
Remember Jim Gavins? He followed these rules as well. The first thing he did was take a leave of absence from work, informing them of his winnings. He got out of town to have some fun as well as taking some time out to think. He hired a financial advisor and a tax lawyers. He stayed, and remains, on good terms with his friends and family. He moved house, and his phone number is private. His life is made immeasurably better not just due to the large jackpot he won, but also due to his level headed way of dealing with it. He bought a new house on a large block of land, something he has wanted for a long time. He and his wife both drive nice, comfortable cars that are practical and not overly flashy. He helps his elderly mother, his brothers and sisters, and his now adult children. And he has some fun, still going to Vegas a few times every year and enjoying himself.