Where Bankrupt Lottery Winners Go Wrong

Here’s how winners of the lottery could more wisely spend their cash

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

For most people, winning the lottery would be a very welcome piece of news. It would mean a bigger house in a better neighbourhood, a shiny new car, holidays to exotic locations and, of course, better health care and the chance to look after other members of the family who were not quite so lucky. Furthermore, it could mean the chance to retire early and enjoy various hobbies and pursuits.

While this blissful result can often occur, most of the time lottery winners squander their jackpots and are left facing bankruptcy. In fact, a study undertaken by the US National Endowment for Financial Education found that around 70% of people who unexpectedly come into a large sum of money will lose it all within seven years. This shows that, while having a large amount of cash can be a blessing, it can also easily be mismanaged and leave an individual facing a worse outlook than prior to receiving the windfall.

Of course, budgeting does not always come easy to many people and it appears as though the temptation to spend takes control, with planning for the future seemingly being an unnecessary step to take when cash is so abundant. However, through planning for the long term, lottery winners could enjoy a very high standard of living while also being able to spend a portion of the money on various one-off luxury items.

In this sense, managing a lottery win is no different from managing any other amount of money. As a starting point, it is always a good idea to have a pile of cash which can be easily accessed (i.e. not tied up in fixed rate bonds or similar) and used to pay for unexpected expenses. These could range from food and energy bills resulting from a loss of employment, to funding housing repairs in case of an unexpected external factor such as a storm. This liquidity, while earning a relatively poor return, will provide a peace of mind and allow any individual to survive in the short run if other income channels turn sour.

Clearly, the bulk of any portfolio should be invested in assets which are forecast to offer a mix of capital growth and income, with the proportion between the two differing according to a person’s stage of life. This is also relevant regarding risk since a younger investor (or lottery winner) should be able to take on more risk, since they have a longer investment timeframe through which temporary falls can recover.

In terms of the mix of assets, shares tend to be the preferred option due to their simplicity, accessibility, their ease of diversification and their traditionally excellent long term returns. However, holding bonds is also a sensible move, since they can appreciate in price during challenging periods for the stock market and economy (particularly government bonds).

Furthermore, holding property could make sense for some investors, but valuations are less appealing than they once were and the combined costs of taxes, maintenance, lack of diversity and the potential for problem tenants make is less appealing as an asset class than either shares or bonds. In any case, the key is to only spend a proportion of income from a portfolio (if possible) so as to allow it to grow over the long run.

Clearly, though, the majority of lottery winners do not follow a plan such as that stated above. And, while winning a large amount of money may prove to be a life-changing event, without discipline, risk management and a long term view, it can easily be for the worse rather than for the better.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Abstract bull climbing indicators on stock chart
Investing Articles

Could the Chancellor’s Leeds Reforms trigger a bull market for UK stocks?

More competitive lending and greater interest in shares could help kick start growth for UK businesses. But could it also…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

I think this AI stock could double before Palantir

Palantir stock is up almost 100% this year. As a result, it now sports a market cap of $350bn meaning…

Read more »

Elevated view over city of London skyline
Investing Articles

As the FTSE 100 hits an all-time high, is it time to reconsider the S&P 500?

Christopher Ruane explains why a surging FTSE 100 has not yet made him focus more on the potential of S&P…

Read more »

GSK scientist holding lab syringe
Investing Articles

The FTSE 100 sits at a record high. But some stocks still look dirt cheap!

The usually sluggish FTSE 100 is having a surprisingly good year. But our writer feels there are still potential bargains…

Read more »

Close-up of British bank notes
Investing Articles

With a £20k Stocks and Shares ISA, here are 3 ways an investor could target a £2k annual passive income

Our writer thinks there is more than one way to try and skin a cat when it comes to earning…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

Up 350% in 3 years but my favourite FTSE growth share is still on a low P/E of just 10!

Harvey Jones can't tear his eyes away from this former penny stock turned growth share superpower. But can it carry…

Read more »

Santa Clara offices of NVIDIA
Investing Articles

Up 83% in months, could Micron stock be the next Nvidia?

Chipmaker Micron Technology's stock price has surged by over 80% in just a few months. Could this be a possible…

Read more »

Tesla car at super charger station
US Stock

£1k invested in Tesla stock at the start of the year is currently worth…

Jon Smith reveals the performance of Tesla stock in 2025 and explains why he doesn't believe the move lower is…

Read more »