5 Most Common Ways Lottery Winners Blow Their Winnings
If you won multiple millions in the lottery, you probably wouldn’t expect to squander your good fortune — your literal fortune. No way. No how. Ah, but that’s probably what past winners like David Lee Edwards thought as well. When Edwards won a Powerball jackpot in 2001 and walked away with $27 million, he seemed like he had it made financially. Yet just 12 years later, Edwards’ obituary read, “$27 million Powerball winner dies penniless.”
Bleak stuff. So, what happened? Like several other big Powerball winners, Edwards succumbed to some common issues that anyone with a lucky lotto ticket should be aware of — bad investments, splurges on luxury items and falling prey to scammers. If you’ve got your eye on the prize, here’s what to be wary of doing.
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1. They Spend Like the Money Will Never Run Out
When Edwards went from rags to riches, he didn’t follow advisers’ advice to spend conservatively and invest in blue-chip stocks and bonds. Instead, he went on a bona fide spending spree, as described in his obituary: “a Lamborghini Diablo, mansions in Palm Beach, Fla., and Palm Springs, Calif., a $1.7 million Learjet, racehorses, a $178,000 diamond ring, a $78,000 watch and much more.”
Even if you’re not going to those extremes, you still need to be aware of lifestyle creep and ensure your expenses don’t balloon to match your new wealth. Instead, follow the advice Edwards ignored: Be cautious with your spending and grow your wealth through smart investing.
2. They Ignore Taxes
Sadly, David Lee Edwards is far from the only lotto winner to go from riches to rags. Despite winning a $13 million lottery and taking 20 annual installments of $666,666, Alex Toth didn’t recognize that the IRS can take a heavy bite out of lottery winnings. By the time he passed away, he and his family owed millions of dollars to the IRS.
Even for millionaires, unexpected tax bills can create debt. So, if you win Mega Millions, know that federal and state taxes can significantly reduce your payout. Working with a trusted tax adviser can help you navigate the process and set aside money for taxes.
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3. They Don’t Have a Financial Plan
When Lisa Arcand became a millionaire thanks to lottery winnings, she splurged on a big celebration. Understandable. And on the surface, some of her other moves — such as enrolling her son in a private school with a $10,000 annual tuition, taking several vacations, buying a house filled with new furniture and opening a seafood restaurant — don’t seem too extreme.
But she made those decisions without having a clear financial plan that prioritized building a nest egg. That nest egg would’ve come in handy when the seafood restaurant failed financially and closed after six months, leaving her with a failed business and a depleted savings account.
She might have avoided these woes with a cohesive financial plan focused on ensuring her long-term financial security.
4. They Give Too Much Away
When you win the lottery, you might have to brace yourself for a lot of requests from friends and family. But filling all those outstretched hands could bleed your winnings dry before you’ve had a chance to enjoy them wisely — or use them as the foundation of a financial strategy.
One common thread in many tales of lottery winners involves friends and family members who need help or want to party. As hard as it can be to say no, you’re going to have to in certain cases.
5. They Trust the Wrong People
Winning the lottery can bring a lot of new people into your life — and some of them are more interested in your money than in getting to know you (despite your sterling personality). This type of situation befell Marva Wilson, a great-grandmother and lottery winner who was tricked out of her $2 million by a scammer named Freya Pearson.
After gaining Wilson’s trust, Pearson convinced her that she was helping with financial matters such as filing a lien, managing taxes and even creating a nonprofit. While Pearson was eventually sentenced to five years in prison for her crimes, she still did a lot of damage to Wilson’s finances — and likely her peace of mind.
Should you win the lottery, be very careful about who comes into your life. Question their motives. And keep financial advisers around whom you know and trust.
The Bottom Line
Hopefully, if you win the lottery, you’ll hold on to your winnings and avoid ending up in one of these horror stories. Learning from these winners’ mistakes could help make your own story much happier.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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