Winning the lottery is a huge stroke of luck. It’s also a big responsibility figuring out how to spend your lottery winnings. Whether it’s a few thousand dollars or a few million, we’ve got advice to help you start your financial planning.
Hire a Team of Advisors
Even if you’re a wizard at personal finance, you’re going to need help managing your lottery winnings. From daily budgeting to paying taxes, your finances will change radically. That’s why you’ll want to consult with an experienced lawyer, financial advisor, and CPA (certified public accountant) from the start. Here’s how they’ll help you.
Protect Your Privacy
Winning the lottery won’t just make you rich — it might turn you into a celebrity. In some states, the names of lottery winners are public record, while other states allow winners to set up blind trusts to protect their privacy. A lawyer can advise you on the best way to receive your winnings and avoid the spotlight.
Choose Between a Lump Sum or Annuity
Lotteries pay out as lump sums or annuities (annual payments made over a series of years). Some experts suggest that annuities can help you regulate your spending and spread out your taxes. Others argue that receiving the lump sum is better because if you invest it wisely you could end up with more than you won. Speak to a financial advisor or CPA to determine what’s best for your current situation and future goals.
A lawyer can advise you on the best way to receive your winnings.
Protect Your Assets
Asset protection strategies use trusts, limited liability companies, and similar tools to protect your wealth against creditors or legal suits. Consult a lawyer and tax professional to find the best strategies for your situation.
Part of asset protection involves deciding where to store your cash. Your money is equally protected in checking and savings, however, savings accounts are only insured up to $250,000 by the FDIC and NCUA. Your financial advisor can suggest alternate ways to protect money over that amount.
Hitting the jackpot could launch you into a new tax bracket.
Plan for Taxes
Hitting the jackpot could launch you into a new tax bracket and lead to huge tax bills. Work with your CPA to find ways to minimize your new tax bill and keep as much of your winnings as possible.
One way to reduce your new tax burden is through charitable giving. You may also be inundated with charitable requests if word gets out about your lottery winnings. Work with your advisors to create a budget for giving. You might even consider creating a charitable foundation to manage your giving and requests from other organizations.
Create an Estate Plan
An estate plan is a collection of legal documents outlining what happens to your property if you die or become incapacitated. It includes a will along with other documents explaining how your property should be managed while you’re still living. Estate plans minimize discord in families and ensure your last wishes are carried out properly.
Estate plans minimize discord in families and ensure your last wishes are carried out properly.
Cover the Basics
The numbers on lottery billboards may make your eyes pop, but there’s no shortage of things you can spend your winnings on. That’s why it’s important to focus on covering necessities before satisfying wants.
Create a New Budget
Maybe you’re a careful spender and stick to your personal budget perfectly every month. Even so, you’re going to face a lot more temptation to spend when your bank balance is nice and fat. And some things you spend on — like investment properties or stakes in new businesses — could be smart things to spend on.
That’s why you need to work with your financial advisor to create a realistic budget that covers your needs, considers the future, and helps you invest wisely in the present.
You should save enough money to cover 3 to 6 months of essential expenses.
Establish an Emergency Fund
If you don’t have an emergency fund to cover unexpected medical expenses, car repair costs, or periods of unemployment, now’s the time to start one. You should save enough money to cover 3 to 6 months of essential expenses. If you already have an emergency fund, reevaluate your needs based on your new personal budget.
Pay Off Debt
Paying off debt can save you thousands of dollars in interest. If you have enough winnings, you can pay it off in one go. Or, if you choose an annuity and don’t want to spend everything on debt, pick a debt payoff strategy and start getting your finances under control.
Car insurance, homeowner’s insurance, and life insurance are important ways of mitigating loss in case of accident. They also ensure your family’s needs are met no matter what happens. If you’re already fully insured, revisit your plans to see if they fit your new lifestyle.
Wise investing can help you grow your wealth well beyond your original winnings.
Invest to Continue Building Wealth
Wise investing can help you grow your wealth well beyond your original winnings. It’s important to consult a financial advisor and tax expert so you know you’re making the right moves to reach your financial goals. But here are a few ideas to get you started.
If you think savings accounts earn too little to be worth it, think again. From automating your savings to easy account transfers, savings accounts are still the foundation of wealth building and money management.
Savings accounts are still the foundation of wealth building and money management.
While they do lock up your money for a while, certificates offer higher dividend rates than savings accounts as well as a guaranteed return on investment. They build wealth even more efficiently when you use them strategically.
Money Market Accounts
Retirement accounts go well beyond the 401(k), and some offer great tax incentives and strong returns on investment. Supplemental retirement funds offer a safe place to stash extra cash and keep it working for you and your loved ones.
Stocks, Bonds, and Beyond
The stock market offers a range of investment options, from traditional stocks and bonds to newer ETFs and REITs. Rental properties are another lucrative option. Just be sure to discuss any big investment opportunities with your financial advisor first.
Winning the lottery is a one-in-a-million chance. Now you can make the most of it by building the team and plan you need to create the life you’ve been dreaming of.