12 Reasons Why Most Lottery Winners Recklessly Blow Through All Their Cash

Many people think that winning the lottery is the best thing that could happen to them. After all, who wouldn’t want to suddenly have lots of money? Mega millions winners might assume they have financial security for life, and can stop worrying about bills and start buying new stuff. The appeal of that type of windfall is clear. No wonder so many people play the lottery.

However, matching the winning numbers might turn out to be as much of a curse as it is a blessing. An estimated one third of lottery winners later go bankrupt. Even those people who won the lottery who manage their finances effectively can find they lose out in other areas, whether that means slipping into depression or becoming estranged from family members.

The harsh truth is that there are plenty of lottery winners who have lost their money. As for the reasons why, those can be complicated.

  • They Feel Pressured To Share With Friends And Family

    Of course many lottery winners want to share their newfound fortune with their family and close friends. After all, these are the people who mean the most to them. The problem is that people can soon become greedy if they know someone has suddenly come into millions.

    Close acquaintances can demand more and more money under the pretense that they would be just as generous in the same situation. This guilt tripping can quickly deplete funds and leave the winner with far less than they started with.

  • Tax Obligations Can Get Very Complicated

    One of the main reasons why lotto winners lose money and run into debt is due to their tax obligations. While some places will exempt lottery winnings from tax, the majority of countries will tax the prize money like any other earnings. This could mean paying income taxes as high as 40-45%. Things get worse in the United States, where many states have their own income tax, meaning that winners will have to pay twice for the cash they won.

    The biggest misunderstanding over what tax is owed comes from gifting money. A lottery winner who gives millions of dollars to their friends and family is obligated to pay gift tax, which can be up to 40% of the amount given away. This is why it is so important to get a competent tax advisor as quickly as possible.

  • The Payout Is Much Less Than They Might Have Thought

    Lotto winners might be surprised by how much money they actually end up with. The vast majority of lotteries allow players to receive their prizes in different ways, like taking yearly payments for a long time or accepting a lump sum. But the lump sum will often be dramatically less than the advertised winnings due to taxes; sometimes it's only around 60-75% of the actual cash prize. This can leave people will a lot less money than they expected.

  • Mental Accounting Changes How They Think Of Money
    Photo: Neil Bennett / Wikimedia Commons / CC BY-SA 2.0

    Mental Accounting Changes How They Think Of Money

    A psychological behavior called mental accounting impacts the way people think about their money. It essentially puts perceived value onto cash and other valuable belongings. This means that lottery winners treat the money they have won from the prize draw differently than money they have earned, despite the fact that all the cash has the same intrinsic value. As a result, they are much more willing to be frivolous with lottery winnings, as that sum is seen as “free money” to be spent.

  • The Euphoric Feeling Of Winning Clouds Their Judgement
    Photo: The Walt Disney Company

    The Euphoric Feeling Of Winning Clouds Their Judgement

    Imagine the feeling of discovering you've just won a life-changing amount of money. The happiness and excitement would be almost indescribable. This is exactly what happens to lottery winners, and often that spells disaster. Their joy makes them lose their grip on what is sensible, and they make rash decisions because they think nothing can bring them back down to earth.

    "People who were little, ordinary people all of a sudden become extraordinary," says Steve Lewitthe CEO of Wealth Financial Group. "They're euphoric. They lose all sense of reality. They think they're invincible and powerful. They think they're Superman."

  • They Spend Uncontrollably On Things They Don’t Need

    The easiest trap to fall into after receiving a big cash windfall is to start spending on things you don’t need. With lottery winners who have won tens of millions of dollars, this urge to spend becomes even worse. It's not uncommon for winners to blow cash on extravagant items like luxury cars or gadget-filled mansions. While each individual purchase may not put a dent in the overall bank balance, they can quickly add up if the winners don’t keep a close eye on what they are spending.