Why Do Lottery Winners End Up Broke After Winning Millions?

Table of Contents

1. Introduction
2. Lack of Financial Experience and Education
3. Excessive and Irresponsible Spending
4. Higher-Risk Investments and Scams
5. Strained Personal Relationships
6. Lack of Planning for the Future
7. Attempts to Better Support Winners
8. Key Statistics on Lottery Winners Losing Fortunes
9. Key Takeaways and Preventative Measures
10. Conclusion

Introduction

Lottery winners ending up broke shortly after winning millions of dollars seems shockingly common. A reported 70% of lottery winners end up bankrupt within just a few years of their instantly acquired windfall.

How can someone go from rags to multi-millionaire and back to rags again so rapidly? As unbelievable as it sounds, researchers have identified the major explanations behind this financial phenomenon.

Lack of Financial Experience and Education

Most people who play the lottery regularly have had little prior large-scale financial management experience. Before winning, they were living paycheck-to-paycheck like much of the population. The sudden influx of millions of dollars is completely foreign to them.

As a result, they lack education on crucial areas of money management like:

• Budgeting properly - Both short and long-term planning for taxes, reasonable spending quotas per year from interest earned, etc. Many winners grapple with determining even how much they can safely spend per year to sustain their fortune.
• Investing wisely - Knowledge on compound interest over decades, investment vehicles besides stocks, pitfalls with hired financial managers. Conservative investing often seems "boring" but helps secure long-term gains.
• Asset protection - Tax implications of gifts over $16,000 per year, settlor rights for trusts, ways relatives/friends can legally exploit you if not cautious. Wealth preservation takes expertise.

Armed with such incomplete understanding of personal finance and wealth preservation, disaster often follows lottery winners' good fortune. Their lack of restraint, paired with limited skills and inexperience managing such windfalls enables their accelerated paths towards bankruptcy.

Excessive and Irresponsible Spending

Coming into millions instantly creates tremendous social and self-pressure to spend lavishly right away. Financial prudence gets discarded to immediately indulge in excessive luxury:

• Purchasing homes larger than needed justified by hosting more friends/family - but also carrying higher property tax/insurance burdens. Winners buying 3 homes on average according to one Ohio State study.
• Custom luxury vehicles that provide happiness short-term but depreciate value rapidly. Extra cars rarely driven but still insured/maintained.
• Over-the-top electronics/jewelry/designer clothing that deliver little utility beyond status symbols. Also paintings or wine collections unfamiliar to the winner before winning.
• Funding friends/family's failing business ideas which have never turned profits previously. Hard to say no and strain relations despite minimal savvy demand for untested products/services.
• Worldwide first-class leisure traveling which satiates wanderlust but costs thousands daily and leaves behind no lasting benefits.

One statistic reports $21 million spent in the first year alone by the average lottery winner - money that could be left untouched to grow through conservative investments instead. As magnified versions of their former money habits continue, the lavish lifestyle and mounting bills erode away even substantial fortunes surprisingly swiftly.

Case Study: Callie Rogers won £1.8 million in 2003 at the age 16 but blew through all her winnings by continued excessive spending on luxury cars, extravagant gifts, exotic vacations, impromptu surgeries, and even rising drug usage costs. She ended up with just £2,000 left to her name living paycheck-to-paycheck again.

Higher-Risk Investments and Scams

Coming into a financial windfall also frequently provides lottery winners opportunities for higher-risk investments sold as "can't miss" chances to double their newfound wealth even further. These unfortunately often turn out disastrously upon closer inspection:

• Bad business partnerships - Friends/family convince winners to fund their unvetted, under-researched start-up company ideas leading to substantial losses. Saying no and souring relations prevails over financial common sense.
• Predatory real estate/stock deals - "No-risk" real estate or stock market investing touts easy untold riches but actually fund operations enriching a few architects of the scam behind the scenes. Naivety leads to falling for empty promises of low-risk and high returns.
• Unscrupulous financial planners - Not thoroughly vetting hired financial planners through strict qualification criteria enables embezzlement or subpar returns. Rather than carefully research, many winners pick local smiling eager advisors promising the world.

Research by the National Endowment for Financial Education estimates about one-third of lottery winners fall victim to scams or bad investments which rapidly drain their newfound money. Trusting too easily rather than scrutinizing risks hands over their fortunes.

Strained Personal Relationships

Coming into extreme sudden wealth frequently introduces or amplifies strains on relationships as well:

• Family/friends - Arguments arise over perceived owed money gifts or shared distrust in handling the funds properly. Expectations run high while tolerance plummets among inner circles on how winnings get used.
• Marriage - Lifestyle and excessive money spending differences arising lead couples down paths inducing infidelity or separation. Studies report divorce rates as high as 58% for couples after winning the lottery compared to roughly 48% national average rates.
• Children - The newfound family wealth and parents not working often reduces their motivation and life purpose - leading to a lack of self-worth, destructive behaviors, and underperformance.
• New admiration - Opportunists and fake friends appear seeking to exploit generosity and drain funds through predatory lawsuits, bad investments, or other means. High profile money awards can invite scammers.

The money itself becomes corrosive to what were previously stable bonds which exacts a mental toll that further accelerates irrational financial decisions. New costs from relationship stress both emotionally and monetarily accelerates spending faster.

Lack of Planning for the Future

As the initial millions dwindle from the aforementioned factors, lottery winners still overwhelmingly neglect planning properly for what remains for tomorrow. They seem stuck in living for today still:

• Not eliminating all debt burdens with early winnings to have clean slates going forward
• Having no withdrawal system in place pulling modest investment reward sums yearly for reasonable living expenses
• Skimping on safe conservative financial vehicles like bonds/TIPS that guarantee steady lifelong income streams
• Disregarding trusts, asset protection, and tax planning - missing key ways to shield funds from others
• Paying little heed to quantifying their full net worth and calculating exactly how many years their winnings can sustain current spending

Specifically, 70% of lottery winners exhaust their entire monetary windfall within 5 years or less. Planning thoroughly to preserve even a modest amount of their newfound wealth instead of spend it all recklessly seems an afterthought. Living exclusively in today without concern for tomorrow transcends from modest means to instant millions.

Attempts to Better Support Winners

Seeking to provide lottery winners better counseling and financial literacy training support, an increasing number of US states now offer aid:

• Mandatory sessions on smart money management and finding ethical financial advisors
• Encouraged pace spending no more than 4% of winnings per year
• Warnings and classes regarding frauds/scams targeting lottery victors
• Toll-free hotlines providing free financial advice from experts

They also may introduce winners to other winners for mentorship and facilitating connections with reputable legal/wealth experts. However all sessions remain voluntary without force towards prudent actions. So only a small fraction of winners choose to participate to build skills securing their new fortunes.

Key Statistics on Lottery Winners Losing Fortunes

Beyond the psychological and knowledge factors enabling big lottery winners to burn through cash quickly, statistics quantifying outcomes prove startling:

• 50% had zero dollars left within 3-4 years in one Florida study per the Certified Financial Planner Board
• 78% of NFL players also go bankrupt around 12 years after retirement highlighting financial education importance as well
• Only 8% increase their modest lifestyles years after winning rather than having extravagances eventually needing curtailing according to 2015 research

So while warnings abound on money evaporating quickly without caution, very few alter innate behaviors based on such data and outcomes.

Key Takeaways and Preventative Measures

In summary, experts point to the primary explanations behind lottery winners frequently going broke tying back to:

• Never acquiring personal finance education
• Indulging excessively to live a unsustainable lavish lifestyle
• Falling prey to dubious money making schemes without vetting
• Sabotaged relationships bringing emotional/legal consequences
• Abandoning prudent investment wealth preservation practices

As almost unfathomable the outcome seems for instant multi-millionaires to be right back struggling paycheck-to-paycheck in just a few years, psychologists argue most individuals reverting to customary habits and behavior norms applies heavily to lottery winners as well.

Perhaps with proper ongoing counseling, strict spending rules, maintaining jobs/hobbies, conservatively investing the bulk, and establishing trusts - more could maintain good fortunes long-term. But wisdom and reason sadly remain rare bedfellows to rapidly acquired wealth.

Conclusion

In the end, large lottery windfall winners in the vast majority of cases simply lack the proper long-term financial knowledge, discipline, and diligence required to maintain such vastly increased means long-term. Good judgment flees with great newfound fortune instead of locked away to grow sensibly. We have all fantasized about such instant millions changing lives forever. But reality shows having the mental tools and support to steadfastly securing that wealth matters more than the money itself for life to stay better permanently.