Are You Prepared To Win The Lottery?
A silly question that reveals if you’re on the right track to wealth
Are you prepared to win the lottery?
Although your statistical chances make this reality very slim, it’s a possibility. But what would you do with the money?
Would you treat yourself to incredible vacations, buy a bigger house, and a fancier car while you’re at it?
Or would the sudden, dramatic jump in your net worth not result in excessive splurging?
Most people think their lives would be different if they had a set amount of money. “If only I had a million dollars,” is a popular frame of thought that captures this concept.
But if you look at the history of past lottery winners, you’d realize more money isn’t always the answer. According to the National Endowment for Financial Education, over 70% of lottery winners end up going broke within a few years.
Adding more fuel to the fire, CNBC reported that 60% of NBA players go broke within 5 years of leaving the league. 78% of NFL players face financial distress within 2 years of retiring.
More money doesn’t guarantee a smooth lifestyle. In fact, more money can put you deeper in debt. A $10,000 debt, although a pain, isn’t nearly as bad a $100,000 in debt. Add an extra figure to that number, and it can be financially devastating.
Winning the lottery, becoming a professional sports player, or getting a sudden surge of cash doesn’t make you wealthy. It just adds extra figures to your lifestyle. At the start, these individuals’ net worths receive extra figures, but within a few years, their debt receives an extra figure that wasn’t there before they won the lottery.
Let’s say you win a lottery where you get to take home $1 million. It’s enough money for you to be financially set, but it’s also enough money to financially break you.
If you happen to win $1 million, you only made it one time, and you likely won’t make that type of money again in a given year. Most lottery winners get broke because they live like the $1 million is an annual payout rather than a one-time cash surge.
You can semi-retire on this income and give yourself a solid “allowance” by investing the $1 million into dividend stocks. $1 million into stocks that average a 4% yield would result in $40,000 every year.
$40,000/yr isn’t as glamorous as splurging through the money, but you don’t have to work any extra for that $40,000/yr. If you reinvest the $40,000, you’ll make $41,600 next year. Next year’s payout will grow even more if your dividend stocks raise their dividends each year.
If your dividend stocks raise their payment by 5% each year on average, your $40,000 wouldn’t turn into $41,600 the following year. Instead, it would turn into $43,680/yr.
Instead of thinking about how you’d spend an extra million, think about how your life would change if you made $43,680/yr without having to do any extra work. Would you work part-time or eventually not at all? Would you use some of your dividend income as an allowance of sorts to go on an extra vacation each year.
I’d resist using the dividend as an allowance for at least 5 years because of the compounded growth. I might use some extra income to travel, but I’d never get excessive. The reason I’d resist using the dividend for at least 5 years is because $40,000/yr would compound into $62,111.67 assuming all of the other numbers hold. 2 years later, it would compound to almost $75,000/yr.
The more you let the dividend compound, the more financially set you’ll become. At this point, you can consider moving to a place with a lower cost of living so your dividend money can better afford all of your expenses. You may also want to work part-time as well. I believe people should always do some type of work. Not having any work to do can result in boredom and a lack of purpose, two devastating fates.
You don’t have to invest in dividend stocks if you don’t want to. You can invest your money into real estate, peer to peer lending, or some other investing asset. I happen to like dividend stocks the most because they present a blend of safety, respectable growth, and not a ton of time on my part.
If you win the lottery and don’t treat yourself like a king in the moment through a splurge, you’ll eventually feel like a king when your cashflow handles all of your expenses and allows you to life your ideal lifestyle consistently rather than 1–2 years of fantasy land.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
