Why you’ll end up broke if you win the lottery, and what that teaches about personal finance

We all want to win the lottery, but what if that means financial ruin? Is it true that winners end up losing everything? And if so, why?

Today I analyze this phenomenon with data in hand, to see what it teaches us about personal finance.

Is it true that lottery winners end up broke?

Even if it looks like a lie, not everything you read on the internet is true. In fact, it is common to find online that 70% of lottery winners end up bankrupt.

Nevertheless, that’s a myth.

The figure is attributed to the US NEFE (National Endowment for Financial Education), but this organism has denial.

So it’s all fake? Actually, it seems not.

Others data they do show that, those who receive a large sum of money quickly (lottery or inheritance, for example), they also quickly lose half of the money in exorbitant expenses or bad investments.

In the United States, statistics corroborate that lottery winners are more likely to file for bankruptcyin a period of 3 to 5 years, than someone who doesn’t get anything.

Similarly, other studies also show that sudden large sums they do not prevent the ruin of the winners, but only postpone it.

And then there are the stories of the winners who have wished they didn’t. Obviously, these are anecdotes and we cannot draw conclusions from them, however, it seems that a sudden large sum of money can be, for many, the beginning of the end.

Why this phenomenon occurs and what it teaches us about personal finance

Why We Broke After Winning The Lottery

Each winner is different, however, there seem to be common elements that explain why the lottery is not the answer to our economic woes, quite the contrary.

Lack of financial culture

It is no secret that, according to studies in England, USA o Germanythe people who play the lottery the most have a lower cultural and economic level.

Since they are more in proportion, it is more likely that the lottery will win a person from this stratum and, what happens? That They also tend to have less financial culture.

That means that many are not aware of implications such as:

  • Distinguish between good and bad investments. Winners usually invest in things that are fashionable: real estate at peak prices, NFTs or whatever is hot. My personal compass is that, when something is on everyone’s lips, it’s too late to invest.
  • Possible nuances, such as taxes, which can distort the perception How much net money will be left?
  • The basic principles of home economics to follow.
  • Do not realize that buying something expensive, like a house, then requires constant maintenance, which is also expensive.
  • Cognitive biases and mental traps that make us waste more than necessary.

Ultimately, it is very likely that do not understand how to put money to work so that it generates more money. Also I know also ignores the irrational side of the psychology of money and the following happens.

Making economic decisions based on emotion

Emotions lead to poor financial decisions

Emotion is the enemy of finance and, in a quick money-making situation, those emotions flood everything.

For example, one of the main problems with the lottery is that the number of family and friends multiplies… and they all have urgent financial needs or “silver” businesses.

Enmities, emotional blackmail, bad investments in “unique” opportunities… You will give too much and it is likely that, if you do not know much about personal finances, those around you are not very good either in that.

The phenomenon of “mental accounting” is ignored

The mental accounting it refers to the value you place on money, based on its origin and the use you will give it. In practice, it means that we see the lottery as “free money”not hard earned.

That’s why, spend more on unnecessary or luxurious thingsthan in cleaning up credits or making sensible investments.

“What comes easy, easy goes” is a saying that, according to the psychological phenomenon of mental accounting, makes sense.

Overspending is inevitably incurred

Some of you are probably familiar with the concept of “Lifestyle Inflation”, or put another way, that the more you earn, the more you spend.

This phenomenon (linked to the psychological concept of hedonistic adaptation, by which we immediately get used to what is good and always look for more) joins the above and makes many spend too much unnecessarily as soon as they get money.

And since the source of profit has been unique and not constant, the well dries up.

Leaving work without an alternative plan

In other words, abandoning the usual source of income without having calculated well that this prize does not last as long as we think and that life is too expensive, especially if you don’t know finances.

For all this, the question is clear: Is ruin an inevitable destiny of the lottery?

Noif some principles are followed.

What can we do to avoid losing lottery money?

How to keep lottery money

The best guide is to observe what those who, not only they kept most of the prize moneybut also made it grow.

It will come as no surprise to veteran readers of this blog that these actions align with fundamental principles of personal financial management.

Entrust professionals with money management

These professionals will invest without emotion and will put in place solid systems, based on:

  • Los objectives that the customer wants.
  • How much are you willing to risk?
  • Risk mitigationdiversifying and systematizing purchases, sales, etc., in securities and investment markets.

And if it hasn’t touched us enough to put it in the hands of professionals, we must take note of what they do and imitate it. We must learn the basics, or at least consult an expert once on what to do.

In the end, the antidote is the same as for almost everything: culture, education and knowledge.

systems against emotion

Anyone who invests knows that systems are keythrough the establishment of stop-losses, solid principles, etc. Namely, behave like cold machines with a long-term perspectivenot like casino players dragged by the day to day.

And if you don’t know about investment, we delegate someone with proven solvency, nothing intraday gurus promising gold.

Long-term goal and plans

Until you don’t have clear what you want in the long termand that goes into the budget, most of the prize money is not used, nor do we make rash decisions (such as not working).

frugality and limits

Namely, consciously maintain a comfortable, but not wasteful, standard of living.

Without discipline, I don’t care how big the prize is, the twisted psychology of money will bankrupt us.

When you sit in economics class, there’s always a teacher who calls the lottery “The Fool’s Tax.” Nevertheless, all this that we have seen affects us all, lottery or not.

Therefore, it is convenient to learn it for the day to day and for those moments in which a juicy settlement, a ticket or an inheritance fall into the lap.

Source: El Blog Salmón by www.elblogsalmon.com.

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