Lottery Winners: What to Do With Your Multimillion-Dollar Windfall
Are lotteries good or bad for America? When they're criticized for hawking a "statistically unwinnable" product, or even levying a "tax on innumeracy," lottery advocates argue that at least their intentions are good: For the most part, lottery revenues not paid out as prizes are earmarked to fund schools.
And actually, this time they're right about that.
The award of three separate $100 million-plus payouts from last month's Mega Millions lottery resulted in at least one undeniable success story for education.
In Maryland last month, three Baltimore area public school employees pooled their money to buy several dozen lottery tickets. On March 30, one of these tickets turned out to be "golden" -- winning a $105 million lump sum payment for this team of a school administrator, an elementary school teacher, and a special-ed teacher.
As Maryland Lottery Director Stephen Martino said when announcing the result: "If it can't be you, these ... are precisely the people you would want to see win."
You also have to applaud how these winners are reacting to their good fortune. They don't plan to quit their jobs. They like teaching kids and plan to keep on doing so.
As for the loot, they plan to fulfill a few wishes, sure -- taking a European vacation, buying a new house. But the rest of the money, they say, will be earmarked for more practical uses. One winner will use his winnings to pay off a mortgage and fund his kids' education.
And all three insist that they'll invest the bulk of their $35 million shares.
But how does one go about "investing" $35 million?
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The 10 States That Pay Out the Biggest Lottery Jackpots
We All Put Our Pants on One Leg at a Time
When it comes to deploying your cash -- whatever the amount -- newly minted millionaires would be wise to do it exactly the same way the rest of us do. After you've accounted for your day-to-day living expenses, any money left over is what you have left to "invest" -- be it $35 million, or just $20 salvaged from your biweekly paycheck.
Successfully investing this extra cash breaks down into three main steps -- three piles of cash that anyone with money to invest should have in place, be they lottery winners, self-made millionaires, or just the rest of us ordinary, everyday working stiffs.
1. Your First Pile of Cash: Rainy Day Fund
All investments carry some risk. Stocks can lose value. Bonds can become worthless when the company that issued them goes bankrupt. The last thing you want is to be hit with a big medical bill, the need to replace a furnace, or a job loss, and forced to sell your long-term investments at the very moment when they've lost a substantial portion of their value.
Key to surviving this risk is ensuring that over any short-term period, you have enough cash around to weather the storm. Whether you're starting with $35 million, or just a few thousand dollars, your very first move must be to set up a rainy day fund -- a bank account that can't lose value, with enough cash in it to cover your living expenses for at least three to six months.
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2. Your Second Pile of Cash: Sleep-at-Night Investments
Once you've got your rainy day fund, the next step is to figure a way to earn more than the 0.1% to 1% your bank pays you for the privilege of sitting on your cash. Bonds are one option here. Certificates of deposit are another.
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Historically, though, the best returns on investment come from investing in stocks. The easiest way to do this, and ensure your stocks are diversified (so that bad news at any one company cannot torpedo your whole portfolio), is to buy a broad-based index fund like the S&P 500.
Sure, even the mighty S&P can lose value from time to time. It can even stay down for years at a time. But historically, investments in this index have returned 10% or so annually to investors who had the patience to wait for the eventual turnaround -- and the rainy day fund to permit them to do so.
3. Your Third Pile of Cash: Maximize Your Money's Potential Investments
The third and final leg of the investment stool is, of course, individual stocks. Picking a single stock to buy is obviously riskier than spreading out your money across 500 separate stocks. But it also gives you a bit more control over the outcome, and a chance to earn more than 10% on your money. (And until you are extremely comfortable investing in individual stocks, the bulk of your money should stay stashed in that index fund for diversification.)
Gallery:
The 10 States That Pay Out the Biggest Lottery Jackpots
To maximize your chance of earning extra profit, investors should buy stocks they're familiar with enough to understand which companies have a leg up on the competition. If you're a teacher, like the Mega Millions winners for example, you might want to start with for-profit education companies such as ITT Educational (ESI) or Strayer (STRA), textbook publisher McGraw-Hill (MHP), or perhaps the company behind all those book-fair inserts sent home with the students, Scholastic (SCHL).
Whatever your profession, though, buy what you know.
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