When a Chicago woman called in to The Ramsey Show for advice on what to do after winning $1 million from a scratch-off lottery ticket, the financial guru’s message was clear: Consult a financial adviser before spending any of it.
Show co-host Dave Ramsey walked Sarah, who chose the lump-sum payout of $600,000, through the tax implications of her windfall, concluding that she would wind up with about $426,300 after withholdings.
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‘It’s going to be worth a thousand dollars, or whatever it is, five hundred bucks,’ Ramsey said.
“The things that get lottery winners in trouble is when they get half a million and they go spend five million,” Ramsey said.
If you hit the jackpot, you have to figure out if you want your winnings all at once or in smaller chunks over time. Both have their pros and cons.
If you choose the lump sum, you can use it right away to pay off debts, splurge a little or invest it to make it grow even more.
But be careful: Having all that money at once can be a huge temptation, so you’ll need a financial adviser to help you manage it wisely.
The annual payments option distributes the jackpot’s value over 20 to 30 years. You’ll get a bigger payout in the end, but the spending power of each payment decreases because of inflation.
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The payments option is safer because it provides a structured, budget-based approach to your winnings, which can be beneficial if you are worried about the pressure from friends and family to spend money or you don’t have the self-discipline to keep spending in check.
Lottery winners who mishandle windfalls may find themselves in a worse financial position than before they got the money.
Take Jonathan Vargas, who won the $35 million Powerball in 2008 when he was 19 years old. Vargas took the lump-sum payment of $14 million, which he used to create “Wrestlicious,” an all-female wrestling show featuring women in scant costumes.
“Wrestilicious” and Vargas’ other financial ventures failed, and Vargas is now broke.
Ramsey said lottery winners like Vargas and Sarah should do first is consult a tax professional.
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Then, pay off high-interest debt — a critical step toward building wealth — starting with credit cards, which charge an average interest rate of 25.35%. After taking care of your credit cards, Ramsey advises paying off your mortgage.
Once you have taken care of your debt, you can invest. And when you have a substantial amount of funds to do so, Ramsey suggests consulting with a financial advisor — but be careful who you choose or you could end up like Abraham Lee Shakespeare, who disappeared after winning the $10 million Florida Lotto only to be found beneath a concrete slab in his financial adviser’s backyard.
Of course, you’ll want to splurge and spend some of your winnings on fun, but be sure to create a spending plan before you do.
Ramsey suggests writing it all down and making sure what you want to spend your winnings on doesn’t exceed what you actually won.
“The things that get lottery winners in trouble is when they get a half a million and they go and spend five million,” he said.
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