Many people think that winning the lottery is the best thing that could happen to them. After all, who wouldn’t want to suddenly have lots of money? Mega millions winners might assume they have financial security for life, and can stop worrying about bills and start buying new stuff. The appeal of that type of windfall is clear. No wonder so many people play the lottery.
However, matching the winning numbers might turn out to be as much of a curse as it is a blessing. An estimated one third of lottery winners later go bankrupt. Even those people who won the lottery who manage their finances effectively can find they lose out in other areas, whether that means slipping into depression or becoming estranged from family members.
The harsh truth is that there are plenty of lottery winners who have lost their money. As for the reasons why, those can be complicated.
Of course many lottery winners want to share their newfound fortune with their family and close friends. After all, these are the people who mean the most to them. The problem is that people can soon become greedy if they know someone has suddenly come into millions.
Close acquaintances can demand more and more money under the pretense that they would be just as generous in the same situation. This guilt tripping can quickly deplete funds and leave the winner with far less than they started with.
One of the main reasons why lotto winners lose money and run into debt is due to their tax obligations. While some places will exempt lottery winnings from tax, the majority of countries will tax the prize money like any other earnings. This could mean paying income taxes as high as 40-45%. Things get worse in the United States, where many states have their own income tax, meaning that winners will have to pay twice for the cash they won.
The biggest misunderstanding over what tax is owed comes from gifting money. A lottery winner who gives millions of dollars to their friends and family is obligated to pay gift tax, which can be up to 40% of the amount given away. This is why it is so important to get a competent tax advisor as quickly as possible.
Lotto winners might be surprised by how much money they actually end up with. The vast majority of lotteries allow players to receive their prizes in different ways, like taking yearly payments for a long time or accepting a lump sum. But the lump sum will often be dramatically less than the advertised winnings due to taxes; sometimes it's only around 60-75% of the actual cash prize. This can leave people will a lot less money than they expected.
A psychological behavior called mental accounting impacts the way people think about their money. It essentially puts perceived value onto cash and other valuable belongings. This means that lottery winners treat the money they have won from the prize draw differently than money they have earned, despite the fact that all the cash has the same intrinsic value. As a result, they are much more willing to be frivolous with lottery winnings, as that sum is seen as “free money” to be spent.