Even if you did win the lottery, you might not be able to hold onto the money. One of the first things a lot of people do after receiving their newfound financial freedom is to quit their job. It's also natural to go on a spending spree: a fancy new house, a new car, a luxury vacation. And then, maybe, help friends, family, colleagues—everyone you've ever known will come out of the woodwork asking for a handout. Drastically elevating expenditures, ceasing to earn income, gifts, and handouts—it's no small wonder so many lottery winners eventually end up in financial distress.
To avoid that, you will want to assemble a team of experts that may include an attorney for estate planning issues, a financial advisor, and a CPA or other tax specialist to help put a financial plan in place. Get the financial guidance you need, take the time to plan out what you want to do with your newfound wealth, and refrain from making rash decisions—economic or otherwise.
Certainly, helping those close to you is a good thing, but you need to set limits and learn to say no. There's another way that winning a prize can hurt you: If it's a scam.
Here are some things all legitimate prizes have in common:. The following are red flags indicating that a contest may be fraudulent:. Many people dream of winning a big prize in a lottery, contest, or sweepstakes. The problem is, when the prize isn't cash, the tax burden and additional expenses associated with your winnings can really add up.
Before you accept any prize, find out what it's worth—and what it will cost you—before you accept it. Remember, when you win something, you are responsible for paying taxes on it. Generally, you'll pay taxes in the year you receive the prize, which may not be the same year you win the prize. If you get a big cash windfall from the lottery or other types of gambling, avoid the common mistakes: Don't do anything rash or go on a spending spree before you've hammered out an overall wealth management plan and done some long-term thinking and goal-setting.
With lotteries, this includes determining how you want to receive the jackpot, which will impact how much you will actually get, and when you will get it. Before accepting any prize, consider the financial implications of keeping it and make the decision that will have the most positive impact on your long-term finances.
Otherwise, your big win could turn into a losing proposition. Internal Revenue Service. MIT Press Journals. The Financial Consequences of Winning the Lottery. Federal Trade Commission. Wealth Management.
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On top of the struggle to save, a surprising number of Americans are still carrying some form of debt even after they retire, which could be cutting into their net worth despite a lifetime of putting money away. If quickly paying off debt is impossible with a fixed retirement income, consider how to manage it comfortably. Some retirees may want to downsize or refinance their mortgage , which can free up money for everyday living expenses and allow them to pay off more high-interest debt.
Make sure to do your research and even consider speaking to a financial advisor before you do. Meanwhile, if you're overwhelmed trying to pay off high-interest debt that seems to grow daily, consider the popular avalanche method to knock out the balances with the highest interest rates first. Whether you're plagued with chronic overspending or just unsure of exactly how much you'll need to retire, using a budgeting app to set and keep clear goals can help you plan ahead for retirement.
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