A Massachusetts woman recently won the biggest lottery prize in US history – $759 million. She did what many lottery winners do and contrary to what most financial planners would advise, which is to quit her job and take the prize as a lump sum of $480 million before taxes, instead of installments over a period of years.
While it remains to be seen if this winner will come out better off in the end, the statistics do not look good. In fact, about 70 percent of people who win a lottery or get a big windfall actually end up broke in a few years, according to the National Endowment for Financial Education. Another study of smaller Florida lottery winners shows that lottery winners are more likely to declare bankruptcy within three to five years than the average American.
Whether it’s a lottery prize, an inheritance or a lawsuit settlement, these sources of “sudden money” come with their own challenges and aren’t always the good news they might appear. There are many things that can be done to increase the odds of making the money last and being happier, but one of my favorites is the concept of a Windfall Policy.
A Windfall Policy is a written statement that outlines how any sudden money will be used. It should relate back to your goals and values. It can include many different buckets, but a few common ones are building emergency savings, contributing to kids’ 529 accounts, building a down payment for a house and contributing to charity. You can even have two policies – one for small windfalls (under some dollar amount determined by you) and large ones. I recommend including an allocation for “fun money” in the policy so you get some immediate gratification from the windfall, but also know that the rest of it will be allocated in line with your vision for your life and goals.
A sample Windfall policy might read: “For windfalls under $10K, I will allocate 10% to “fun money”, 70% to emergency savings (until my target is met and then to Home Down Payment fund) and 20% to the kids’ 529 accounts.” A large Windfall policy might have more buckets due to the larger dollar amount in question.
Having a Windfall policy in place before you experience sudden money can help you resist the temptation to make rash decisions that you might later regret and will remind you of what is important to you.