Won the lottery? How to manage a windfall

SINGAPORE — A few lucky people in Singapore win hundreds of thousands or millions of dollars on the Singapore Sweep or Toto. Other inherit a small fortune. While such a windfall seems wonderful, many people soon end up back where they started financially, or worse. Taking the right steps to manage the money well is essential.

Windfalls bring problem

One challenge with winning a lottery or receiving a multimillion-dollar inheritance is that the sudden windfall may bring plenty of unwanted attention, finance professional James Yeo wrote on Motley Fool Singapore. Moreover, lottery winners often splurge on pricey purchases, then end up losing control of the huge influx of cash. “By the time they realise that they require debt to maintain their spending habits, it’s all downhill from there.”

While research on what happens to windfall winners in Singapore is limited, a variety of studies from other places shows how bad the situation can be.

The National Endowment for Financial Education in the United States, for instance, found that about 70 per cent of people who win a lottery or receive a windfall end up broke in a few years. A more recent study in 2015 by Camelot Group similarly found that 44 per cent of those who won large lottery prizes were broke within five years. Ohio State University economist Jay Zagorsky also found that the average person in their 20s, 30s or 40s who was given an inheritance or large financial gift quickly lost half the money through spending or poor investments. Studies in the United Kingdom and other countries often show similar results.

Seeing such dire results, the National Lottery in the UK started sending financial advisors to offer financial planning advice to lottery winners who receive more than £500,000.

What to do with that windfall

If you do receive a windfall, experts recommend taking a prudent approach rather than telling family and friends about your windfall or going on a shopping spree, tempting as both may be.

The first person you should tell about your windfall is a financial advisor, investment advisor Ric Edelman suggested, and “not your spouse, mom, or best friend. Requests and demands for money is the start of your path to ruin.” The financial advisor can then serve as a buffer. “When someone asks for cash, ‘call my advisor’ is all you have to say.”

Investment advisory firm Fidelity Investments also advises recipients of windfalls to take their time and be thoughtful about how to spend or invest the money. “Talk with experts and family members, and make sure you are clear about what your priorities are. It can be detrimental to your long-term financial planning if you let your irrational exuberance get the better of you.”

Vanguard, another investment advisory firm, said this process can involve picturing how you’d like your life to look in five, 10 or 30 years and figuring out where you want to live and what you want to do. “Setting some goals drives your decisions about how to invest your windfall. With a direction in mind, you can plan more effectively.”

While you’re deciding what to do, it’s preferable to keep the money temporarily in a savings account. As Fidelity suggested, “it’s far better to lose some potential return in a low-interest account than to take major risks or make financial moves that haven’t been fully thought out.”

Finally, work with financial experts to develop a plan and select investments to accomplish your goals. Find an expert by asking for advice from people you trust, and do some research as well as an interview to make sure he or she is the right person. You can then work with the expert to put the money in shares, property or other investments so that the windfall lasts a lifetime.

Some of the money may go into investments such as bonds or property that give you long-term passive income. Part may go into slightly riskier investments that can grow in value faster. You’ll also have enough money to set aside some cash for emergencies.

Taking these steps doesn’t mean you can’t reward yourself. Once you’ve set up your financial plan, spending a little for a nice vacation, a car or another small extravagance is fine. What’s really important, though, is putting most of the money into solid investments.

You’ll also need to decide how to use your time, if you no longer need to work for an income. Perhaps surprisingly, many people who receive a windfall continue working. While people may modify the type of work they do, according to research led by NUS Professor Richard Arvey, a number of lottery winners keep working, especially if work is important or central in their lives.

Turning a windfall into a fulfilling life

While most of us may not win the jackpot or receive a big inheritance, anyone who does receive a windfall can lead a fulfilling life by acting prudently. Taking time to figure out your goals and working with experts to help you achieve those objectives can help you beat the odds and succeed.