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Why Do Lottery Winners Go Broke?

Why do lottery winners go broke
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It’s easy to think that winning the lottery would be the best thing that could happen to you. After all, who wouldn’t want to suddenly have lots of money? 

However, guessing the winning numbers might turn out to be as much of a curse as it is a blessing. The harsh truth is that there are plenty of lottery winners who have lost their winning money. Exessive spending, risky investments and poor money management can burn through a sudden windfall in next to no time.

In this article, we explore the reasons why so many lottery winners go broke.

How many lottery winners actually go broke?

Various news outlets report that 70% of people who win a lottery or get a big windfall end up broke in a few years, quoting a study by National Endowment for Financial Education (NEFE). However, NEFE has clarified this data isn’t backed by their research.

Another research has found that the average person in their 20s, 30s and 40s who was given an inheritance or large financial gift quickly lost half the money through spending or poor investments.

While it’s impossible to know exactly how many lottery winners go broke, the available data suggests that it’s a fairly common issue.

Further studies have found that winning the lottery generally didn’t help financially distressed people escape their troubles. Instead, it only postponed the inevitable bankruptcy.

Accordingly to the book The Emotional Life of Money, lottery winners frequently become estranged from family and friends. They also have a greater incidence of depression, drug and alcohol abuse, divorce, and suicide than an average person. Like losing all the money wasn’t already enough!

Who plays the lottery?

According to Lottoland, a staggering 70% of the adults in the UK take part in the national lottery on a regular basis. Unsurprisingly, the upper and middle class are less likely to partake than someone who is working class. Lottoland also reports that people on benefits are 4% more likely to buy a ticket than those who are not.

Similar findings were made in the US. A study by Duke University suggests that one-third of the poorest households in the US contribute to half of all lottery ticket sales.

So why do the working classes play more lottery? A German study found that people who find their daily efforts to get out of poverty futile and are surrounded by peers that also gamble spend more money on lottery tickets.

why do lottery winners go broke

Lack of money management skills

Being poor and lack of financial literacy often go hand in hand. However, it’s not only the poorest households that lack basic personal finance skills. In fact, almost half of UK adults say they need help managing their day-to-day finances. In addition, 44% say they would be in much better shape financially if they had learnt basic money management skills earlier. Therefore, the absence of money management skills is potentially the one of the biggest contributing factors to lottery winners going broke. Without these skills, it’s easy for lottery winners to make reckless financial decisions.

Related: Why they don’t teach us personal finance in school

No professional money advice

Whether you had basic financial management skills or not, a sudden, big cash win can sure have its own complications. Yet very few lottery winners seek professional help. The National Lottery in the UK has an aftercare programme in place to ensure that all winners have access to basic legal and financial advice. However, this isn’t a widespread practice around the world. Therefore, many winners are influenced by those around them and rely on their advice. This can easily lead to poor financial decisions.

How you think of money changes

A psychological bias called mental accounting is another reason why some lottery winners go broke. Mental accounting refers to the different values you place on the same amount of money based on factors such as its intended use or its source. 

This means that lottery winners treat the money they have won from the prize draw differently than the money they have earned, even if the amount of money was the same. They see lottery winnings as “free money”. As a result, they don’t spend this money on utilities and eliminating credit card debt but on discretionary items such as lavish holidays or new cars.

Related reading:

Quitting job without a plan

Quitting a job might sound like a good idea when you suddenly come into a big chunk of money, especially if you’ve been dreaming about financial freedom. But it isn’t always that simple. Partly because it gives you more time to spend that big chunk of money. And partly because however big that amount of money is in the beginning, if you aren’t doing anything to replenish it, it will run out eventually.

Uncontrollable spending

Another reason why lottery winners might go broke is reckless spending. Spending is an easy trap to fall into after receiving a big cash windfall. 

It’s common for lottery winners to blow cash on extravagant things like luxury items, sports cars and gifts to family and friends. Individual purchases may not affect the overall bank balance, but they can easily add up in the long run.

It can also be easy to forget the maintenance costs, tax consequences and other expenses associated with these purchases. If you buy a 10-bedroom mansion with a swimming pool and private garden, you will likely have pretty big maintenance costs too. When a lottery winner overlooks these types of expenses, they can quickly lose control of their budget.

Reckless spending habits

Bad investments

Money-savvy lottery winners might know that investing is important to make their winnings work for them. Unfortunately, too many lottery winners don’t put the proper research into these investments or don’t properly understand how they work.

Lottery winners might also get tempted to dabble with “trendy” investments such as cryptocurrencies, NFTs or day-trading without understanding the risks.

Not accounting for tax

Not many things in the UK come without taxes. So you might be surprised to know that you don’t pay either income or capital gains tax on lottery winnings in the UK. However, this is not the case everywhere. For example, in the US, lottery winnings can be subject to both state and federal taxes. Americans can therefore end up paying more than 37% of taxes on their winnings.

While lottery prizes are tax-free in the UK, there could be other tax implications once you’ve banked your winnings, such as gift tax.

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