Have you seen the latest commercials for the California Lottery? I think they’re awful.
The campaign has two versions that I know of: One where a dad, who apparently won the lottery, is arranging for his daughters to have snow in San Diego via snow making machines. The kids are beaming of course. His wife asks him, “Will you do this every day?” And he replies, “Maybe.”
Another version: A lottery winner builds a large baseball stadium just so his family could play together at their reunion. His dad tells him, “You didn’t have to go through all this trouble,” to which he replies, “What trouble?”
Lottery Is About Fantasy
I realize the lottery is all about fantasy and these commercials are creating a fantasy, but these commercials are problematic because they basically tell people that once you win the lottery, you get to splurge. Sure, the splurging here is for the benefit of others – the winners are making their family members very happy – but they are still being extremely wasteful.
It all depends on how much money one wins, of course. If you win 100 million dollars, then yes, you get to be wasteful and still likely not run out of money. But if you win five, ten, even 20 million dollars, there’s a very real possibility that you will run out of money fairly quickly if you don’t realize the basic rule of handling a lump sum windfall.
The Right Way To Handle a Financial Windfall
A lump sum windfall should be invested. Yes, you can take a portion of it and have fun with that. But the majority of the money should be invested, assets allocated according to whatever asset allocation you feel comfortable with (Personally, I like a mix of 40% stocks, 30% bonds, 10% gold, 10% REITs, and 10% cash). You then live off the interest that the bond portion generates, allowing the stocks to appreciate long-term, each year selling just enough of the stock portion (which tends to grow faster) to stick with your asset allocation plan and refill your bond cushion.
To me, having a large sum of money is not about showing off and doing crazy things that will put you in danger of eventually running out of money. Having a large sum of money should be about peace of mind and freedom. Peace of mind, because you know your basic needs and beyond will always be taken care of with the right asset allocation, protecting yourself from inflation and from the stock market inherent volatility. Freedom, because you can pursue your passion once your basic needs are taken care of. You may even work if you want to, but you can choose work that you like and enjoy.
The Risk: Losing It All
If you ever receive a large lump sum of money, whether through the lottery, inheritance or another huge bubble in the stock market, you should invest it wisely, live off the dividends and interest, and keep the principal intact. Too many lottery winners have lost everything because they didn’t realize this is what you do with large amounts of money. Instead, they just freely spent the money, until all of it was gone.