Sunday, October 10, 2010

Dog Bites Man: Lottery Winner Goes From Rags to Riches to Rags

The headline of this recent Miami Herald article tells you just about everything you need to know. Talk about a "Dog Bites Man" story: the "lottery winning dream becomes a nightmare" stories are legion. 

A shockingly large number of lottery winners end up in financial ruin. National statistics show that about one-third of lottery winners ultimately file for bankruptcy, and up to 80% of U.S. lottery winners file bankruptcy within five years.

But all of this begs the question - why do lottery winners experience these symptoms? Presumably, at least some have read the ubiquitous "easy come, easy go" articles about their predecessors. More importantly, are their lessons for those of us in the much larger universe of non-lottery winners?

The answer (as it is with most rhetorical questions) is yes. We've seen it couched in both psychological and religious contexts, but the bottom line is this: we are wired to steward money we earn better than the money which falls into our laps.

While the most dramatic examples of money "falling into our laps" is lottery or gambling winnings, the most prevalent example is money received from an inheritance (hence the expression "Inheritance lottery."

In Bernard Goldberg's CBS prime time documentary Don't Blame Me, he chronicles the downward spiral of a former top pre-med student who dropped out and essentially lives under an expressway overpass. His undoing? Inheriting several million dollars with no guidance, management or strings attached. Of course, the psychological experts attributed it to the "condition" of "Affluenza."

In this context, "Affluenza" is simply the inability to handle a sudden gift of money. Some of it is undoubtedly attributable to lack of wisdom and experience: Are your kids ready to have as much wealth as your spouse?  Did you intend that your life savings be invested in college, a mortgage, a business, or a $100,000 red Porsche? 

Irreplaceable life experience might leave an heir to choose a college fund or home down payment over the red Porche. At least as important , however, is the "windfall" factor - receiving money not connected to work or effort. Remember the joke:

Q: How do you wind up with a small fortune?
A: Start out with a large fortune

One of the most successful men in history, Warren Buffett recognized this when explaining why
My family won’t receive huge amounts of my net worth. That doesn’t mean they’ll get nothing. My children have already received some money from me and Susie and will receive more. I still believe in the philosophy – Fortune quoted me saying this 20 years ago – that a very rich person should leave his kids enough to do anything but not enough to do nothing.

Families who preserve their wealth for generations understand this. Wealth is handed down in a strategic - not haphazard - way, with guidance, limits and protection.  A large unmanaged inheritance can often be worse than nothing at all, because money without management is not a blessing but a curse.

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