“If I won the lottery I would…” How many times have you completed that sentence (if not out loud, at least to yourself)?
Several years ago I met 12 bus mechanics who actually did win the lottery. In fact, they won $12 million – $1 million apiece. Within two or three years most of them had gone through all their money. Several of them actually ended up in debt. One ended up broke and divorced.
And I have news for you. Scratching a slip of paper isn’t the only way to win the lottery. People inherit large sums all the time. Your odds of actually falling into a big pot of money are probably greater than you think.
So you can see that knowing what you would do if you won the lottery is not just an exercise in fantasy. It could be a survival skill. Conversely, you may not need to win the lottery in order to have the things you really want. More on that in a minute. But let’s get back to the question at hand.
Winning the lottery is like having a financial dream come true…right? Well…when I go to work, I talk to people about their financial dreams all the time. They usually include:
- Having financial security
- Traveling and having fun
- Helping family members and/or giving to charity
I’ll assume that if you won the lottery, you’d probably want some combination and manifestation of these three as well.
The problems arise when people go right to Option 2 (travel and fun) without worrying about Option 1 first – financial security. When they make that mistake, they actually jeopardize their financial security. Here’s why.
Let’s say you win $1 million in the lottery. If so, you start thinking like a millionaire. If you focus on fun and travel you will find ways to spend that money fast. The problem is you’ll become accustomed to that lifestyle and you’ll try to keep it up even after you run through that windfall. That’s why the lottery winners I mentioned above were broke shortly after they won their loot. And that is the reason why most lottery winners suffer the same fate – they become big spenders.
As boring as it sounds, here’s what I’d do if I won the lottery:
1. Update My Financial Plan
Before I did anything else, I’d rework my plan. I’ve mentioned several times that you should update your plan every year or whenever there is a major change to your financial situation – good or bad. Winning the lottery qualifies as a triggering event. By updating my financial plan and considering this newfound wealth, I would be able to view the winnings objectively. That would enable me to make spending and investment decisions that were consistent with my personal definition of success. I know I’d be tempted to buy silly things. But I hope to heaven I wouldn’t do a damn thing until I reworked my financial plan.
2. Financial Freedom
Financial freedom is just another expression for income. With income you have freedom. Without it you don’t. Having done my plan, I’d consider how much income I could generate from the winnings. Then I’d look to see what my life would look like with that extra income. Just to give you an idea, if you win $1 million you’ll pocket about half that amount after you pay your taxes. If you take that $500,000 and earn 4% you’ll have an extra $20,000 in annual income before income taxes. After you pay your income taxes on the earnings you’ll be left with about $14,000 in extra income.
That $14,000 is nothing to sneeze at but it’s not a life-changing amount. The earnings on that $500,000 could, over time, be life-changing but the $500,000 itself is not. It’s certainly not enough to retire on. I’d use that $14,000 to add to my retirement account, travel and give to charity.
3. Forget It
If I won $1 million in the lottery, I hope I would take the steps outlined above and not spend the rest of my life thinking like a lottery winner or a millionaire. The problem with that mindset is that it encourages reckless spending. As I said earlier, that mindset is what takes people who win the lottery and turns them into paupers.
In reality, I don’t need to win the lottery and neither do you. If you are fortunate enough to have a loving family and good health, you already won the lottery. What else do you really need or want? If you want or need an extra $14,000 a year, why not simply start a side business? You can help your customers, your family and yourself by doing so. Who needs those scratchers?
What would you do if you really did win the big one? Would it change your life? How?