You probably buy a lotto ticket every now and then like me, and then try and get your money's worth by dreaming about what you would do it you won it.
With recent Powerball jackpots over $30 million (the one in August was $37 million), I never really fantasise about winning that much. For some weird reason I think that if I fantasise about winning less then maybe it will happen . Ha. Hasn't worked yet!
But what if you do win something decent on Powerball, what should you do?
There are quite a few immediate considerations:
Who do you tell? If you tell family and friends will they treat you differently? Will they harass you for money?
Do you quit your job? If you do, what will you do with your time? And remember, most people have to give notice when they resign, what will you tell people during that time that you are working out your notice? Will you tell them that you won lotto?
Do you celebrate before you get the money, or wait until it is safely in your bank account?
But the more important questions come when you have received your money. In other countries the lotto agency assists winners with sitting down with a financial adviser to try and keep them grounded. This doesn't happen in New Zealand, but when the money hits your bank account, you can be confident that you will hear from the private bankers (which may not be the best solution for you).
There are numerous stories about people who have had their life change in negative ways when they win lotto. Here are some of them:
Here are our suggestions about what you should do if you win Powerball.
Set aside 2% of the money as 'mad money' If you win $4 million, that would be $80,000. If you win $30 m that would be $600,000 (which might be too much, but it is easier to think in %'s). This is money that you can do whatever you want with. You might want to buy yourself a treat or a trip.
Pay off any debt. If your win uses up all your debt, then seriously think about whether that is the best way to use your money, or whether you should pay off the bulk but still keep some money for yourself. Remember, when your debt is paid off, you will have the extra cashflow from the repayments that you were making. You can then capture this and build it up for your future.
Invest at least half the remaining balance. This is what is going to secure your future. If you commit to investing this money for the long term (in a balanced portfolio through a financial adviser), then you will have this as your security and can live off the investment returns (depending on how much you win.)
If you win $4 million and have $1.5 million in debt, this is what this would look like with these steps so far:
a. $80,000 for mad money
b. Pay off debt $1.5 million. This would leave you with $2,420,000
c. Invest at least $1,210,000 of this money. If you assume an investment return of around 4% per annum after tax, this would give you an after tax investment income of $48,400 pa. In this situation, we would recommend that you invest more, ideally enough to give you a good amount of money to live off, depending on your stage of live and whether you want to keep working or not.
That will leave you with a balance that you can use for things like a big trip, new car, and to share with family and friends if you want to.
By taking this approach, you are securing your future first, then turning your attention to other people and to 'toys' and 'treats.
As a quick calculation, if you won the big kahuna of say $30 million, this is how the numbers would work out:
If you win $30 million and have $1.5 million in debt, this is what this would look like with these steps so far:
a. $600,000 for mad money
b. Pay off debt $1.5 million. This would leave you with $28,100,000
c. Invest at least $14,050,000 of this money. If you assume an investment return of around 4% per annum after tax, this would give you an after tax investment income of $562,000 pa. In this situation, we would recommend that you invest more, ideally enough to give you a good amount of money to live off, depending on your stage of live and whether you want to keep working or not.
d. In this situation, that would leave you with $14,050,000 to share with family and friends, toys and trips, which is an awful lot of money. So in reality, you would probably invest around $20,000,000 or more (giving you an after tax investment income of around $800,000) which would still leave you with $8m for toys, treats, travel, new home and sharing with family and friends.
The important thing to remember is that you shouldn't just go and spend it all and make commitments to other people. You should take a structured considered approach over a period of at least a year, to make sure that you are protecting your financial future. And (of course we would say this), working with a financial adviser with experience in helping people work out how to invest, plan and use their money would add a lot of value.
Good luck with those tickets!
