The unexpected happened; you won the lottery. It sounds impossible, but it does come true for a lot of people and you are one of the lucky ones. You have won the big prize and you do what everyone does; go to claim your winnings instantly because you don’t want to risk them being taken away for some reason. But, what should you do now? You have your winnings in your hands now so how should you proceed?
Here are the 8 things you should do for making the most of your lottery winnings:
1. Consult with the right people
Lottery winners need to hire good attorneys with experience in handling financial issues, a CPA and also a financial advisor. When you have hired them, you need to make use of their expertise to make the best decisions about your money. Having this much money is undoubtedly scary and you need to make sound choices to ensure it lasts for a long time.
2. Pay off your debt
The first thing you should do with your winnings is to pay off any debt you may have. Whether it is a second mortgage, your student loans, auto loans, credit cards or anything else, get rid of the burden. You can keep your primary mortgage, as long as the interest rate is low because tax deductions can come in handy as you are now a part of a high-income bracket. Getting rid of the high-interest debt should be your priority.
3. Create an emergency fund
Even millionaires can have financial problems and it is better to be prepared for it. The smartest thing you can do is to create an emergency fund for your winnings. A good rule of thumb is to set aside enough money that you will be able to last for about six months even if you don’t have a source of income.
4. Set some money aside for retirement
It is a good idea to set aside a percentage of your winnings for your retirement funds like an annuity. Do you really want to go back to work at the age of 80, even though you were a jackpot winner? Always be prepared.
5. Establish college funds
If you have kids or relatives and you wish to provide for their education, you can set up college funds for them. These gifts are also tax-free and give you a lot of benefits.
6. Give money to the less fortunate
You can consider sharing your good fortune with other people. This can be a charity that appeals to you, the church or even a family member who is going through hard times. If you donate to a qualified charity, you can also get deductions for your taxes so it is a good thing all around.
7. Learn how to say no
When news of your win gets out, there will be plenty of people rushing to you asking for money. You have to learn how to say no or you are not going to have enough to make everyone happy and will eventually run out of money.
8. Lottery Winnings; The Annuity or Lump Sum?
Congratulations for winning the lottery. It is undeniably an amazing thing and nothing could have prepared you for the adrenaline and rush of emotions. Winning a large jackpot in a random lottery game is one of the most exciting events that could happen. You wake up and find out that your life has changed completely, but along with the excitement, there is a bit of anxiety as well because you have some decisions to make. How will you claim your winnings? There was a time when lottery winners had to decide between annual payments or a lump sum when buying a ticket. Now, people can make the decision after they have won.
But, what option should you go for? Each option has its pros and cons. Let’s take a look at both:
Lump Sum Payment
Taking a lump sum payment doesn’t mean you receive the entire jackpot amount. The jackpot amount that’s advertised is based on the lottery payment made over 20 to 30 years and not all at the same time. Therefore, when you take the lump sum option, you get the current cash value of your winnings and this is less than all annual payments combined. Other significant pros and cons are:
- If you make prudent investments, the money can be worth a lot more than the initial payout.
- All winnings charged by current taxes.
- The lump sum option is good for older people as they will be able to enjoy their entire winnings.
- Unknown variables in the future could affect your payout. The lump sum allows you to get something at least.
- You could end up penniless due to the poor financial management of the lump sum amount like outlandish spending.
- You have to forgo a regular and guaranteed stream of income.
- The lump sum payment is already reduced and the amount decreases even more after-tax payments.
The Annuity Payment
When you opt for the annuity payment, you are going to get your jackpot amount over a period of 20 to 30 years. The advantages and disadvantages of this payment option are:
- You benefit from a long-term cash flow with annual payments.
- You have to pay less in taxes in the long run because you fall in a lower income tax bracket due to annual payments.
- A winner cannot spend his entire winnings at once.
- A guaranteed annual payment allows you to maintain a specific standard of living and leaves room for better budgeting.
- The opportunity of investing a lump sum is wasted so you don’t benefit from compound interest.
- The annual payment loses its value every year because it is not adjusted for inflation.
- If you die before your annual payments end, your winnings may or may not be given to your family. It depends on the lottery and the state where you live.
- Your payments might stop if the lottery shuts down.
- You can weigh the pros and cons of each option and make a decision as per your comfort level.