The Low-Down on Lottery Winnings

by Jamie Simmerman · 25 comments

Winning the lottery may not be all it’s cracked up to be. Statistics show 70% of lottery winners spend all of their fortune within a few years. Basically, if you didn’t know how to handle your money well before playing the lottery, you don’t magically get a visit from the Personal Finance Fairy who blesses you with mad money management skills overnight. Most people who play the lottery regularly view their lottery spending habit as an investment for a chance to live happily ever after. Their views on money are skewed, and even if they win, the sudden windfall can rather quickly turn into money lost.

In report after report, studies have found the majority of lottery winners actually win enough cash to get out of debt, yet wind up oweing more than before they hit it big after a series of bad financial decisions. Most aren’t prepared to manage such a large sum of money and are overwhelmed by the emotions that go along with a suddenly padded bank account.

Lottery Fever

Some consumers take the lottery very seriously, and view it as a viable means to financial freedom. Take Angelo and Mario Gallina, who spent $20 every day on tickets since the lottery began back in 1985, totaling over $124,000 in tickets before they won big – twice in the same day – at the age of 78. Like the lure of other financial schemes, the lottery proves to be an enticing way to blow extra cash, but the real problem occurs when consumers choose purchasing lottery tickets over paying for necessities or paying off debts.

Lottery Successes

Of course, there are a few exceptions, like Brad Duke, a recent Power Ball winner who took home about $85 million total in lottery winnings. He played it smart, and hired a team of financial advisors to help achieve a goal of becoming a billionaire by investing most of his winnings. But prior to his winning lottery ticket, Brad already managed five Gold’s Gyms in Idaho, meaning he most likely had a fair knowledge of how to handle his personal finances, and those of the businesses he worked for.

Beating the Lottery Code

While it’s very Davicini-Code-esque to believe there’s a secret to winning the lottery, the chances of you being the one to find that code are slim to none. Jonah Lehrer, author of How We Decide, posted an interesting piece at Wired Magazine about how a mathematician beat the lottery scratch-off game, and we’ve read about other reports of those who’ve cracked the lottery code and won big, but the truth is, these are exceptional rarities. The average lottery player does not have the mathematical skills necessary to uncover such patterns, unless you have a PhD in statistics.

The Worst Personal Finance Advice

In a post by Felix Salmon at Rueters, he slammed a recent (and since pulled) video on CNN Money that suggested consumers use the lottery as a personal finance management tool. Salmon entitled his critique as The Worst Personal-Finance Video Ever.

Indeed, many businesses are getting in on the lottery winning fever and offering “special services” to help consumers crack the lottery code and increase their chances of winning it big (we’re not willing to link to such services, though).

The Low-Down on the Lottery

The final advice on playing the lottery is to do so in moderation and to play responsibly, but only if you’re already personally responsible with your current finances. If you can’t manage your money now, you’re not likely to be able to handle a windfall of lottery earnings wisely, so save your time and money.

What about you? Do you play the lottery regularly? What do you think about using lottery tickets as a personal finance tool?

David’s Note: I don’t play the lottery regularly, but I must admit that there’s a lottery ticket in my wallet as I’m typing this. I only buy if I happen to get gas and see that the jackpot is $100 million+, which is about 3 times a year at $2 each. I don’t plan on winning, though the occasional daydream opportunity is fun. I see it as an entertainment expense. Unfortunately, too many people view the purchase as something other than spending. Don’t you be one of them.

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{ 25 comments… read them below or add one }

Icarus March 22, 2012 at 7:59 am

I’d much rather win a smaller amount, say $250,000. After taxes that’s probably $115K which I would use to either pay down my current mortgage or use as a downpayment on another home.

If I did win a larger amount I’d take it to my financial planner and have him help me invest it wisely.

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ImpulseSave March 23, 2012 at 7:32 am

“If you can’t manage your money now, you’re not likely to be able to handle a windfall of lottery earnings wisely, so save your time and money.” LOVE this point. I’ve never played the lottery, but I have a lot of friends who get a ticket occasionally for fun, like you. It is more of an entertainment expense than an investment. I just have to laugh when people say they buy them because they actually expect to win one of these days – like if they buy enough, they’ll just have to win the jackpot. Even if this were true, I would much rather hitch my wagon to a surer star, like education or developing my professional skills. These are much more likely to pay off than spending tens of thousands of dollars on lottery tickets.

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JK March 28, 2012 at 5:43 am

Wow! Are you kidding? You would rather study than win millions in lottery? Okay, just pass on all you winnings to me. LOL !!

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freddy March 28, 2012 at 8:18 pm

all those winnings. Hhahaha. 99.9999 percent of the people are loosers.

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DS March 29, 2012 at 1:57 pm

What are “loosers”? People whose pants don’t fit?

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Jerry A. April 17, 2012 at 1:34 pm

ImpuleSave said that she would rather spend money on education than the lottery, because an education is “much more likely to pay off”.

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Financial Advice for Young Professionals March 26, 2012 at 3:43 pm

I know that playing the lottery is a horrible idea but I’ll only play if I see it over $100 million. My odds of winning are the same whether it’s 20 million or 200 million so there’s that.. haha

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Jean March 27, 2012 at 12:08 am

Very true about lottery winners squandering their money in most cases. Only few like the Gallinas, make thoughtful use of it by putting it toward an easier financial future for their family.

-Jean

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Drew March 27, 2012 at 2:17 pm

I think it might have been Jim Rohn who said if someone hands you a million dollars, best you become a millionaire, or you won’t get to keep the money. If you’d earned the money rather than won it in a game of chance I’m sure you’d be more careful.

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Butter March 28, 2012 at 8:52 pm

Like many others, I will play once it goes over 100 mil. I never expect to win, but it doesnt hurt to play every couple of years! And, if I did win, I would take the slow payout, investing most of it, setting up funds for my favorite charities to ensure they get a continued piece of the pie, if you will. And, of course, take care of the family and pay off student loans. I would not let my life change at all…I would live as I do now, and just plan on helping others by investing. The love of money is the root of all evil.

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Debbie M March 29, 2012 at 2:23 pm

Butter: I couldn’t have said it any better. Not everyone is a greedy person!! Lot of people are well equiped to deal with large sums of money and you don’t have to be a financial guru, just have a trusted CPA and a great financial firm to help with investments. I would be happy with even just one million. In fact I often play the CA lotto even at it’s lowest dollar amount. Any amount of lotto money is good money. It kills me that Uncle Sam has to get their greedy hands all over it, they didn’t help you win it. As the says goes their are only two things in life that are NOT negotiable taxes and death.

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Butter March 28, 2012 at 8:54 pm

Oh…though I think I’d buy an old vw bus and fix it up and travel around for about a month. But that’s it.

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Debbie M March 29, 2012 at 2:14 pm

I for one even winning a great deal of money would be able to handle it. I am a smart consumer and never spend more than I make. I have always saved and lived within my budget. Not everyone would be stupid with lottery winnings. I just wish all lotto’s would offer more winners which would pump dollars in the local economy. Trust me most people who win big purchase big ticket items. Homes, cars etc. Personally I’m not greedy I would be happy with just winning one million dollars. I would be very generous and share my wealth by helping organizations that could use the finance help.

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T.Doom March 30, 2012 at 7:22 am

With close to $300 million lumpsum after taxes, I’d donate 90% of it and still be left with around $30 million. I’ll put another 90% in some type of trust fund, and then live off the remaining $3 million, pay off my debts, finish my masters degree, start/invest in a business…

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Rink March 30, 2012 at 10:17 am

Oh please! Give it all away? Yeah right!!

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JINXX March 30, 2012 at 9:12 pm

WoW, I really wonder why some of you would still think about getting your masters or think about investments. I thought only poor people & people with limited amount of funds would do something like that. If a $1 investment can get a $600 M return why the hell would you not live life like its your birthday everyday? Why would it matter to anyone if a lottery winner spends all of their winnings in a few years, months or even days? Money is not everything to a lot of people in this world…

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rbmeoe April 2, 2012 at 6:46 am

WHEN I win (not if), if it’s a significant amount, like over 20 million, I already know what to do. Hire a lawyer and accountant. Establish a trust. Have the lawyer pick up the winnings in the name of the trust. This keeps your name and likeness out of the news as much as possible, then the “friend of a friends 3rd cousins, aunts, grandmothers nephew of the kid that sat 4 rows behind you in kindergarden” won’t be knocking on your door looking for a hand-out. Then, write nice checks to all family and friends that you DO want to help. Include a note that says you want to share your good fortune and hope the money helps them have a better life in some way. AND to NEVER ask for another dime, EVER!! Then work with the accountant to invest in safe, secure things that have little to no down side of failing, even though that means you don’t get big returns, but smaller, steady returns that will last forever. Buy some nice things, depending on how much you win, but don’t be stupid, like buying 14 super cars, 4 mansions, and a different fur coat for each day of the month!! Then enjoy life knowing you, your kids, their kids and their kids should live happily ever after (at least as far as money goes!!) “Money can’t buy you happiness, but, it can buy you a big enough boat to sail right up along side!!” Charles Barkley

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okie cowboy August 13, 2013 at 11:35 am

I agree with your plan rbmeoe. A tax professional can let you know how much money you can send each family member as a “gift” per year without tax consequences for them. As far as them not asking for a dime beyond what you are willing to set up that is hopeful at best. If they are satisfied with what you dole out to them great but most will want more and ask. Last time I checked you can send $12,000/yr. to someone as a “gift” without them having to pay taxes. If you want to send more then you will have to personally give them an envelope with cash so there is no trace. As for myself, I inherited a substantial amount of money and have helped some family of my wife. Some people want more and more no matter how much you give them. They call all hours of the day/night and don’t care about you but they give their “story” and you need to Western Union them $$ to get out of their situation. This got to be sickening to me.

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Unto Ryodi April 2, 2012 at 6:59 am

I would collect an annuity over 26 years. That way they invest the money for you and u have a steady income with no worries for the retirement and even if u spend its not possible to spend it all. No need for the attorneys or special investor advisors who surely would make sure that they get their cut. Of course i would retire in a nice place, not in the USA.

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direct lenders @ Harry April 2, 2012 at 9:54 pm

@Author,

I advice you all that just stay out of lottery Fever. No one can be rich with Lottery.

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ALVIS JENKINS December 4, 2012 at 11:56 am

Yes you can be rich with the lottery, just know some simple facts and be able to read well.

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Alvis Jenkins August 13, 2013 at 12:21 pm

Hmmmm, seems like part or most of my comment was not allowed previously. What about taxes and the Lottery? Are you required to pay a federal tax on your mega million win? The answer is a resounding no! Why? Because you must be first “Liable for the tax”. Well why are lotteries withholding the tax if you are not liable? The answer is simple. Lotteries lack knowledge of the Internal Revenue Code from which the lottery claims that they must require withholding of tax. But wait, subtitle A of the Code has no provision for making anyone “made liable” for the tax, and subtitle C of the Code is where only federal persons can be “made liable” when these persons make a voluntary agreement with their employer (Federal Government) by means of a W-4. W-4???? Hey that is the same form we fill out with private employers that are non-federal persons. Yes, and it is nothing less than criminal on the employer and employee because you the employee commit perjury, and the employer commits extortion and conversion of funds. Since only federal persons can be made liable for the tax, why would anyone allow the IRS to have your money? The lotteries in all 43 states stand to be prosecuted for unlawful withholding of tax. Know the law and challenge the lottery when you win one of those prizes of $15,000 or greater.

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Celia April 12, 2012 at 12:15 pm

If you want to retire $1 million won’t get you there, after taxes, the investment won’t bring you enough annual income to quit your day job. You need at least $10 million in winnings to live comfortably and buy a few toys so you actually feel wealthy. People want to get their Masters because those people love to learn. Being financially secure they can take anything they want, for fun. Life-long learning (aka brain-exercise) keeps your brain young and limber just like the gym keeps your body young and healthy. Folks want to keep their jobs because (1) They like it (2) What are you gonna do all day when all your friends are at work? (3) Work is a blessing but most people do not know that until they quit, get laid off or retire. Just the thought of winning makes people smile, sure it’s a long shot, but then it’s zero chance if you don’t have a ticket! And guess what? Some people DO win.

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robert mortel November 30, 2012 at 2:18 pm

what happens to the earnings in a lotto if the person takes it yearly say for 20 years and then dies. Who gets the winnings

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Alvis Jenkins August 13, 2013 at 12:35 pm

A little extra info on the lottery.
The internal Revenue Code at section 1 of subtitle A (this is the subtitle on income taxes) imposes a tax on every individual……..but nowhere in section 1 or any of the remaining 1,563 sections make anyone liable for the tax.
Subtitle C of the Code concerns employment tax and income tax collected at source. In other words, this subtitle is about collections. Both social security and income tax collected at source, is voluntary but only for federal persons. I challenge any tax lawyer reading my comment to prove me wrong with a cite from the Code.
The lottery will tell you that section 3402(q) of subtitle C of the Code, is their authority to require withholding of tax. However the lottery legal staff fails to note that section 3402 concerns only federal persons of subtitle C.
Most people could care less what the law is as what has already been proven. When they win this big sum of millions of dollars, it is more cash that they have ever dreamed of owning, so why bother if taxes are withheld. As for this writer, I plan to file suit against the lottery if I ever win a mega million dollar prize. What will be so very funny in court if this time should ever arrive, is when the lottery expects the IRS to show up in “state court” but they don’t. Why? Because the federal government has no jurisdiction in a “state run lottery”.

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