What if You Won the Lottery?

“If you really want something in life you have to work for it.  Now quiet! They’re about to announce the lottery numbers.” – Homer Simpson

The lottery question is one that people love to discuss when the jackpot reaches some astronomical sum in the $300-400 million range. People rush out to buy more lottery tickets. And the water cooler talk at work shifts to “What you would do if you won that much money?”

What would you buy first? What kind of car would you drive? How big of a house would you buy? Whose mortgage would you pay off? Would you quit your job? Just so you know, if you do defy the odds and win the lottery someday, I’d be happy to serve as your personal financial advisor.

With the powerball jackpot we’re talking walk away money (meaning you can walk away from your job). But what if you won somewhere between $100,000 and $1 million? Or what if you got a large inheritance in that same range? Or had the unfortunate scenario of getting a life insurance check? Then what would you do?

For purposes of this article let’s assume you have won, inherited, or been the beneficiary of a life insurance policy of between $100,000 and $1 million. While you will have to pay income tax on any lottery winnings, the good news is that inheritance (up to $5.25 million) and life insurance proceeds are not taxable. That means that you would have a good chunk of money and have to make a decision about what to do with it. This kind of money could be a game changer for a lot of people.

Once you have received the proceeds let’s consider what you could do with your windfall.

• The first recommendation I would make would be to pay off any and all credit card debt. With interest rates ranging from 15% to 24% there is likely no financial move you can make that will be more beneficial to your long-term financial health than ridding yourself of your credit card debt. That’s an easy one.

• Setting up or fortifying your emergency fund. You already know that things tend to breakdown and show wear & tear over time (especially cars or your house). Set up a fund to cover life’s unexpected costs that happen periodically and actually aren’t all that unexpected in most cases. This move will reduce your stress when something does come up.

• Establish or add to your IRA. This is another no-brainer, especially since the 2013 contribution limit is $5,500. You should fund this to the max (whether you get a windfall or not you should still try to contribute the max if you can. You can contribute to an IRA even if you have a 401(k) at work).

• Establish a 529 college savings plan for your children (you can also set them up with a Roth IRA if you want to be a really generous parent).

• Pay down any other high interest rate debt (car loans, student loans, home equity line of credit, etc.). Run the numbers to make sure that it makes sense to pay off the debt instead of saving for the future. Carrying debt at very low interest rates can actually be beneficial to accomplishing your other goals.

• Use some of the funds to make a large purchase you have been putting off. It could be a new car, furniture, appliances, etc. Make sure these are need purchases and not just things that you want.

• Take that dream vacation you have always imagined. Life is no fun if you are always worrying about saving for the future. You should feel free to have some fun with your money and create lasting memories. Set aside a certain amount of fun money that you have to spend on yourself or your family. Splurge and enjoy some of your new found wealth.

• Give away some of your money to charity.  People say money can’t buy happiness, but studies have found that people that spend money on others are happier while those that spend on themselves are not any happier (and the amount of money you spend doesn’t matter).

• Any leftover funds can be put into a savings account until you determine a long-term investment plan. You shouldn’t feel like you have to be in a rush to do something with the cash right away. Take your time and don’t make any irrational decisions. Sometimes doing nothing and evaluating your options is the best move for your overall well-being.

If you are fortunate to come into a large sum of unexpected money take some time and come up with a disciplined approach so that you won’t wonder where all the money went in a year or so and have nothing to show for it.

This amount of money might be overwhelming for some people. If this is the case, it will make sense to talk to a professional and find a trustworthy financial advisor. They should be able to help you make rational decisions with your money.

Even if you don’t win the lottery or receive a six to seven figure windfall of cash you can still use this exercise to prioritize your financial goals. Think about what you would do with this much money and figure out how that answer fits with your current financial plan. This can help you determine what really matters to your personal situation. You can adjust your plans and goals accordingly.

Sources:
How to Buy Happiness

Related:
Winning the Lottery: Does it Guarantee Happiness?

What would you do if you won the lottery or received a $100,000 to $1 million dollar payout?

And here are my favorite stories from around the web this week:

•  My “dream house” turned into “my dream is to sell this house” – Jalen Rose (Grantland)
• Little Known Facts About Warren Buffett (The Street)
• Optimism as a Default Setting (The Reformed Broker)
• Why Everyone is Wrong About Austerity (MarketWatch)
• Is the U.S. Economy in Trouble? (CBS Moneywatch)
• The Fine Art of Being Wrong (The Big Picture)
• The Rise of the Marxists (Pragmatic Capitalism)
• Five Reasons I’m Not Worried About a Canadian Housing Bubble (The Reformed Broker)
• Mr. Money Mustache, the Man Who Retired at 30 (Washington Post)
• Dividends: Don’t Be Such a Size Queen (The Reformed Broker)

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