How Most Lottery Winners Lose Their Money
by: Donna Wright
edited by Doug Garfinkel
Several big lottery winners have lost their winnings and faced financial difficulties not too long after the big win. Their mistakes serve as a lesson for future lottery winners.
Winning the Lottery: the Good, Bad, and Ugly Truth
According to PowerBall.com, an Arkansas Lottery player just claimed a $250.8 million Powerball jackpot last week. And as of today, the Powerball estimated jackpot is now $217 Million. The question is whether the recent winner and tonight’s potential winner will follow the footsteps of previous winners that lost their fortunes.
The mere thought that winning the lottery can start out like a dream come true but quickly turn into a nightmare can deter some players from playing the lottery. The shocking truth is that a large number of lottery winners may lose it all within a few years. There are many reasons why this continues to happen. Understanding those reasons can help future winners avoid making the same financial mistakes with their winnings.
Lottery Wins Don’t Always Buy Happiness
Studies show that in the past, lottery winners have filed bankruptcy within a few years of winning. While researching, I was reminded of a story about Jack Whittaker, known as the largest lottery winner who went broke. In fact, Jack won $314.9 million in the Powerball lottery and lost it all within a few years. How? Failed investments, extravagant spending, theft, legal issues, and multiple, very sad personal tragedies. Should I ever win a lottery prize, I will always remember Jack’s story as a lesson on what not to do as a lottery winner.
Common Reasons Lottery Winners Go Broke
As much as I want to win a lottery, the sad reality is that the prize money can run out. On the flip side, there are many winners that do everything right and remain wealthy. The commonality is that most lottery winners come from average incomes without experience managing a huge winner bank account. Being thrust into the spotlight as a big winner can feel confusing and scary, the ideal environment to make money mistakes. Learning how to avoid those mistakes will help you hold onto your prize money, if and when you win a lottery jackpot.
Below I will review some of the reasons lottery winners lose their winnings. Like you, if I win a lottery jackpot, I want it to change my life for better not worse.
Facing Sudden Wealth Syndrome
Once the shock of winning a lottery jackpot sets in, the sad reality is that the sudden wealth may feel overwhelming. Officially known as “Sudden Wealth Syndrome” refers to a winner’s psychological and emotional challenges of a “rags to riches lifestyle.” Lottery jackpot winners may feel uncomfortable about their new status as millionaires and fear they lack the mental strength to handle the responsibilities that come with it.
Common symptoms of Sudden Wealth Syndrome include excessive spending, feeling isolated from friends and family, instant decision-making, feeling undeserving, and fear of losing their winnings. Confronting the emotional and mental struggles of sudden wealth syndrome right away can minimize the risk of going broke. Just contemplating a jackpot win, I would most likely feel that a lottery prize I won would be “undeserved” so I’d definitely have to face that issue.
Below I will review some of the reasons lottery winners lose their winnings. Like you, if I win a lottery jackpot, I want it to change my life for better not worse.
Facing Sudden Wealth Syndrome
Once the shock of winning a lottery jackpot sets in, the sad reality is that the sudden wealth may feel overwhelming. Officially known as “Sudden Wealth Syndrome” refers to a winner’s psychological and emotional challenges of a “rags to riches lifestyle.” Lottery jackpot winners may feel uncomfortable about their new status as millionaires and fear they lack the mental strength to handle the responsibilities that come with it.
Common symptoms of Sudden Wealth Syndrome include excessive spending, feeling isolated from friends and family, instant decision-making, feeling undeserving, and fear of losing their winnings. Confronting the emotional and mental struggles of sudden wealth syndrome right away can minimize the risk of going broke. Just contemplating a jackpot win, I would most likely feel that a lottery prize I won would be “undeserved” so I’d definitely have to face that issue.
Not Seeking Professional Financial Advice/Tax Issues
Without professional advice, anyone can suffer financially. So you can imagine how a lottery jackpot winner with newfound wealth can lose it all without understanding the basics of managing such wealth. A few wrong financial choices and the money is gone. Seeking help from a financial advisor, tax accountant, and lawyer should be done at the time the prize is being claimed. I have never won a big prize but I did make the mistake many years ago taking out a loan to pay off credit card debt, thereby having yet another loan debt to pay off in the long run.
There are serious tax implications of winning a lottery prize and one would most likely catapult into a higher tax bracket. Many winners don’t pay attention to the fact that lottery winnings are taxed big time by federal and state governments. Failing to budget for taxes can be a major financial situation when tax season arrives. This can result in penalties, interest, and legal issues.
Not Having a Clear Financial Plan
And once you’ve sought the advice of a financial advisor and have the prize in your possession, you will now need to make a long-range financial plan for the large sum of money. You don’t want the excitement of the win to overshadow the longevity of the prize and lead to poor and impulsive spending decisions. Creating a prioritized list of the most important things to do with your jackpot money and reviewing it with your advisor, helps to avoid overzealous spending.
Based on your age, you could be setting goals that include retirement accounts, college funds for your children or grandchildren, paying off debts, buying a new home or vehicle, donating, or presenting monetary gifts to family and friends. Those goals that align with your financial plan can make the difference between growing your prize money or losing it all. And if you’re thinking a jackpot win would call for immediate retirement, a Forbes report states 70% of winners who quit their jobs within months of their win end up depleting their fortunes within five years.
Spending Money Quickly and Extravagantly
Dreaming about winning a lottery jackpot and winning a jackpot in real life are two different scenarios. Yes, you can now afford anything you want, but sloppy, erratic spending on large ticket items will add up if purchased in a short timeframe. You may incur large, long-term loan payments that one day may no longer meet your budget when your money starts to dwindle.
Many lottery winners fall prey to extravagant spending but it can be avoided simply by managing the monies carefully. Take it slow and keep a running tab on your dream purchases like luxury vehicles, exotic vacations, lavish parties, and business ventures as well. Lottery winners who remained financially grounded seem to have an easier time prolonging their jackpot winnings long enough to enjoy retirement and longevity.
Risky, Poor Investment Decisions
Lottery winners that are convinced to make risky investments are in danger of losing large sums of money. And yes, a risky investment could also turn out to be profitable. However, as a jackpot winner, you need to be sure that your financial investment team has your best long-term financial interest at heart. Not all promised high returns actually come to fruition.
I can tell you that the scams that I have personally come across lately look so real that even I have to take a second look until I confirm it’s from a scammer. Lack of proper knowledge and guidance can also lead lottery winners to get scammed. As a winner, you cannot let yourself fall prey to scams nor be persuaded to invest in a business venture without getting second or third opinions from trustworthy financial professionals.
Giving Money to Friends and Family
Want to see how popular you really are? Win a lottery jackpot and your family and friends will suddenly be your “besties.” This may be a common reason why lottery winners actually lose their money. While my plan, should I ever win a big prize, is to keep it a secret, I’d still have to be in control of how many secret money gifts that I’d send to my loved ones.
As a lottery winner, you can’t afford to be pressured into sharing your money with every person you meet. Your winnings would be gone before you know it. You definitely don’t want to give in to requests for loans or business ventures with your closest people. Your relationships will be compromised. The same holds true for strangers that come knocking on your door. That could be a very dangerous situation when you have to say “no” or set clear parameters.
Takeaways/How to Avoid These Mistakes
Based on what you just read, should you win a lottery jackpot, you can attempt to avoid the same mistakes with your new-found wealth.
Remember to:
- Immediately confront emotional/mental struggles of Sudden Wealth Syndrome
- Hire a professional financial advisor, tax accountant, and lawyer
- Set a clear long-term financial plan including retirement
- Curtail spending money too quickly on large expenses
- Don’t make risky, poor investment decisions
- Refrain from giving too much money; set boundaries with friends and family
Author Bio: Donna Wright is a personal finance blogger for MoolaStakes.com, who enjoys researching, fact-checking, and expressing complex subjects in understandable terms. As a single parent, she knows the pitfalls of poor money management but also knows the satisfaction of improving finances. Her mission is to provide accurate, unbiased money management insights to money-conscious folks, just like her.
This article is for informational purposes only and does not constitute financial advice. Readers should verify all details independently and use their own judgment when following these practices.