Why do people run through large sums of money quickly?
Iâ€™ve devoted over thirty years to finding the answer to this question.
When you hear about Powerball Jack Whitaker running through millions that he received from the lottery or Allen Iverson, who has none of the $154 million he made as a professional basketball star, you wonder what happened.
Itâ€™s not just famous people who do stupid things with their money. Itâ€™s everyone.
A report by the National Endowment for Financial Education said that seventy percent who receive a lump sum from any source run through it in aÂ few years.
For over thirty years, Iâ€™ve worked with injury victims, lottery winners or people getting an inheritance. At first, I thought that the problem was people getting too much money too quickly. I assumed that controlling the flow of money, such as giving them monthly payments for a lifetime, would keep them in line.
Itâ€™s a little more complicated than that.
People blow through money for five different reasons.
1. Family and friends. People try to â€œbuyâ€ love and friendship or they feel compelled to show off by buying houses, cars, clothes and items. As Will Rogers used to say, â€œThey are spending money they donâ€™t have to impress people they donâ€™t know.â€
2. Bad habits, bad advisors, lack of knowledge. People who spend more than they make will not suddenly be â€œcuredâ€ when they get a lump sum of money. In fact, whatever problems they had will now be magnified by having more money to get in moreÂ trouble with.
3. Taking the money in a lump sum. Social security, defined benefit pension plans and many other programs pay out money over a lifetime instead of in a lump sum. They know that people will run through a lump sum quickly and be broke. Iâ€™m in the structured settlement and annuity business and have been successful as I am not a peddler of products; I am a hard core, true believer. The people who are happiest in my role are those who have a monthly check coming in that they can count on.
4. They donâ€™t think before they act. People make impulse decisions. They think they can pay something off â€œover time.â€ Then time runs out on their money.
5. Not having a purpose for their money. My father was a professional gambler and owned bars. As a child, it would stun me to see men who had toiled all week in a steel mill or hard labor job come into a bar and gamble a weekâ€™s pay in one night. The workers knew to make money, but had no purpose for it.
Making sure that I never have to worry about money in old age is a purpose. Making sure my children and grandchildren are educated is a purpose. Giving to causes I support isÂ a purpose.
Blowing money aimlessly is not a purpose.
I wrote a bestselling book about lottery winners. I tell people to do five things if they find out they hit the jackpot:
1. Never tell anyone you won. If you live in a state where you can collect the moneyÂ anonymously, do so.
2. Donâ€™t make any quick decisions. Take some time and put together a plan.
3. Take the money in payments instead of aÂ lump sum.
4. Talk to experts who have worked with more money than you have. If you win $100 million, find advisors who have received $150 million.
5. Use your money for a purpose.
Having made the connection that people who get any kind of lump sum have the same problems that lottery winners do, Iâ€™ve taken the advice for lottery winners and distilled it into practical advice, commentary and insights that the average personÂ can use.
The book is called â€œLife Lessons From The Lottery.â€ It will be out on Kindle on November 10 and in paperbackÂ next spring.
As Springsteen noted in his song Brilliant Disguise, many people donâ€™t trust themselves. With money orÂ anything else.
After learning some lessons from lucky and unlucky lottery winners, it will help people trust themselves whenever their financial ship comes in.
Don McNay, who lives in Richmond, Ky., is an award-winning financial columnist for Huffington Post Contributor. You can learn more about himÂ at www.donmcnay.com.