If you won the lotto today, what would you do with the money? This subject has probably come up at some point in your life, whether casually joking with friends around a braai or seriously debating the idea with family. The fantasy of being able to buy anything your heart desires is an alluring one, but did you know, that studies done in the UK show that more than half of lottery winners end up going broke within the first 5 years of winning? While it’s nice to think about the things this kind of money can give us, if you won, do you think you would be able to responsibly manage your finances, or would you just end up being another statistic? How you would spend your winnings, theoretical or not, reveals a lot about your views on money and your financial literacy. The potential problem areas are identified below.
No 1. Expensive Cars
To many people, cars represent more than just a means of getting from A to B, they are a status symbol, outwardly communicating to the world your level of wealth. Along with designer clothes and jewelry, fancy cars are generally the first thing people seem to associate with wealth as demonstrated by the influencers and celebrities flaunting their Ferraris and Lambos on social media. However, from a financial point of view, a car is a depreciating asset which means it loses value over time. Not only this, but it also has a relatively short life span, due to maintenance issues that start to occur with age. Owning an expensive car also means forking out more money for a higher insurance premium, tyres and repairs when it starts coming out of warranty. Excess spending in this area, without considering sustainability, seems to be the quickest way lottery winners lose their money.
Patrick Dladla of Melmoth, won R1,4-million in 2002. Dladla, 49, spent his winnings on luxury cars. Once the proud owner of two Mercedes-Benzes, a BMW and an Isuzu 4×4, he now can’t afford to own one.
No 2. Holidays & Consumables
Being able to afford things that previously have seemed out of your grasp may be tempting, but it is the quickest way to fall from grace. If your first instinct is to buy an array of expensive things that don’t generate wealth, then you need to reassess your values and views on money. This type of thinking says that you value short-term gratification over long-term sustainability. Generally, people who have not accumulated their wealth from years of hard work and sacrifice, or seemingly have wealth in ‘abundance’ tend to lose perspective. They no longer understand the value of money which can result in reckless spending.
Vivian Nicholson, of Castleford, England, won £152,300 in 1961, the equivalent of about £3 million today ($3.5 million). She famously vowed to “spend, spend, spend!” She bought expensive designer dresses, vacations, and a new car every six months. By the 1970s, Nicholson was broke.
No 3. Your own Business
While starting a business can be a great idea, having just an idea, no experience and too much capital can be a recipe for disaster. If you study and read about the world’s most successful businessmen and entrepreneurs who have built their businesses from the ground up, they all speak about the value in the lessons they learned along the way. Such lessons include how to prioritise time and resources, how to work hard, and how to be creative and innovative. Without the correct mindset or poor planning, having too much capital, too early, can lead people to become complacent, resulting in bad financial decisions.
Lisa Arcand won $1 million in the Massachusetts lottery in 2004. Of course, a million dollars isn’t much after taxes, so she also opened a restaurant to make some additional income. Sadly, within a few years, she ran out of money and closed the failing restaurant…