Depending on how much money you win in a lottery, saving your newfound money might not be the best idea. Paying off debt and investing your funds should be two parts of a three-part strategy after you win a large sum of money.
You don’t need to invest in risky financial schemes or try to outdo the stock market if your goal is to protect your money. Reviewing your options regarding investing lottery winnings, saving some of your funds and reducing debt will help you manage your windfall in the best way possible.
Wait and Hire an Expert
Don’t rush to the lottery office to validate your ticket and claim your prize. Your first step after you’ve won a large amount of money in the lottery is to hire an expert who knows not just how to spend, save and invest lottery winnings but also knows how to accept the winnings, recommends Trust & Will.
For example, you can keep more of your winnings by taking payments over time, but you won’t have access to all your cash for years (depending on how much you’ve won). You can opt for a lump sum, but then you’ll pay higher taxes.
You might have 90 days to six months to turn in your ticket depending on where you bought it. Your adviser might also recommend that you set up a trust or other plan to help you pay lower taxes or help family and friends pay lower taxes if you want to gift some of your money to them.
Look at hiring a certified financial planner, Certified Public Accountant and/or a tax adviser who has experience handling lottery winnings. Make sure you sign the back of your ticket and keep it in a safe place while you’re making your decisions.
Review All Your Financial Needs
Figure out your current and long-term financial needs. Do you have any emergency savings? Can you comfortably pay all of your monthly bills? Do you have credit card, student loan or other debt with high interest rates? Do you have enough for retirement, and can you make contributions each month to hit your goals?
Once you know how much you need to cover these needs, you can decide where you want to save, spend and/or invest your lottery winnings.
How Much Did You Win?
If you’ve only won a modest amount of money or even a few hundred thousand, putting your money into a savings account probably isn’t a good idea since you might earn a puny amount of interest while your money sits. If you have $10,000 in credit card debt at 20 percent interest that you will carry all year, you can save $2,000 in annual interest payments by paying off that $10,000 debt.
A financial adviser for lottery winners can help you decide what a modest amount of lottery winnings will do for you. If you’ve won millions, one of your main concerns will be your taxes.
Regular Savings Accounts
Savings accounts pay very little interest – less than one percent in some cases. However, most are FDIC insured with the government guaranteeing $250,000 per account ownership category for each depositor. You can set up two accounts or more at different banks as well.
Look at savings account interest rates at credit unions, which are usually higher than those offered by commercial banks (although these rates are still low). You might also try a certificate of deposit. These offer only a slightly better interest rate than a savings or checking account (sometimes only half a percent better) and restrict your withdrawals.
Save With Bonds
As of July 2022, U.S. Treasury Department Series I bonds paid 9.62 percent interest guaranteed, according to TreasuryDirect.gov. You can’t cash your bonds for one year. The rate for new purchases changes every six months. From January to June 2022, these bonds were available with an interest rate of 7.12 percent.
If you sell these bonds in less than five years, you lose the last three months’ worth of interest, but you still come out ahead. You can only buy $10,000 worth of these bonds digitally each year, but you can purchase an extra $5,000 using your income tax refund dollars (if you have a refund). These are per-person numbers, so a couple can double these figures.
Talk to a financial adviser about other bond products that might be right for your portfolio.
Invest in the Stock Market
Depending on how much money you have, you might want to invest in the stock market. Don’t gamble with money you can’t afford to lose, as the market can experience wild swings. A financial adviser can tell you how much to invest and how aggressive or conservative you should be based on your age, net worth and financial goals.
Look at Real Estate
As of July 2022, the residential home market was cooling but was still very strong. When inventory is low and demand is high, the housing market isn’t a good investment. However, if you can find a bargain, a house might be a good long-term investment for you in addition to providing stability and peace of mind.
Steve Milano has written more than 1,000 pieces of personal finance and frugal living articles for dozens of websites, including Motley Fool, Zacks, Bankrate, Quickbooks, SmartyCents, Knew Money, Don't Waste Your Money and Credit Card Ideas, as well as his own websites.