What would you do if you won the lottery, the Publisher's Clearinghouse Sweepstakes or some other contest where the prize was millions of dollars? Chances are you already know. If you don't, reflect a few moments before reading on.
The cliché answer is buy a mansion or an expensive car or pay off bills or travel or retire, etc. Those aren't bad things. The problem is people don't usually think about the realistic details. Let's look at the reality of actually winning. More people win a million dollars or five millions dollars than a huge jackpot. A million isn't enough to buy a mansion or even retire. But what if you won $5,000,000?
The federal tax rate for a lottery win is 39.6%(25% due immediately and the rest at tax time). State taxes vary. In my state it's 6%. Combined taxes would equal 45.6% or $2,280,000. That leaves you with $2,720,000. Let's pretend you bought a miniature mansion, a new car, various sundries, gave to relatives and charity and so on for $1,000,000, leaving you with $1.7mil. That's not $5mil, but it's still a decent amount.
Figures for upkeep on a mansion vary widely from around $10,000 a month to the ten of thousands and include various things. Let's pretend you have an energy efficient bargain that costs $2,000 per month for the basics such as heating and cooling and grounds keeping and so on, costing you $24,000 a year. That would cost about 1.412% of your total winnings. Year two would start out at a cost of about 1.432%. And that assumes no other expenses at all, including food. After ten years you would be down to $1,460,000 with a cost of about 1.64%.
Even if the prices stayed the same, the percentage of the total would increase over time. Inflation would also eat away at your buying power. These examples do not account for inflation. A real mansion with maintenance of $10,000 a month would cost $1,200,000 in upkeep over ten years, putting you on the path to bankruptcy. And this doesn't include new cars, food, clothing, travel, life emergencies, home repairs and redecorating, etc. This is a glimpse into why so many lottery winners end up broke. They don't look at the $1mil upkeep bill over ten years. They probably just look at how much they currently have, think, "I can afford that," and buy the mansion. This is also a glimpse into why we see so many celebrity mansions for sale in the news. Their big deals only come for so long. If you hit the big time, I want better for you. How can you win and have it all, too?
The wealthy don't spend their own money. They spend other people's money. To have it all, you would need to do that, too. Let's say you won $5mil, spent a million for a decent house, a new car and all those other things and then wanted to live off the remaining $1.7mil. Most people would budget something like a set dollar amount per year: $30k, $40k, $50k, etc., and spend it like it was a salary. That's spending your own money, money that would run out over time. I want better for you.
The wealthy invest their money and live off the interest. Easy to say, but how exactly do you do that? If you wanted to buy a car, instead of paying cash you would make an investment that would make the car payments for you. At the end of 5 years, you would have the car and still have the money. That's the kind of mindset you need. You need to spend money on things that make money. There are various ways to invest, depending on your level of risk. A savings account is the wrong way. The interest will never keep up with inflation. You may have more money on paper, but you always lose buying power due to inflation. So, think back to the large number of celebrities you've seen who buy or start restaurants. It's easy to understand. There's good money in it. Another way is rental property. Vacation rentals make more money than a family home. Buying and renting out an apartment on a beach could work. The stock market is another way, but be careful. Starting or investing in businesses is a way. Find the niche that appeals to you. Lending money makes money. Places like Prosper.com and Lending Club allow you to loan as little as $25. Basically, you act as a bank sifting through loan applications and assessing risk. These are some ideas that work, but I'm not an expert. At the end of the day, you would need to do your own research or hire a consultant with a much broader perspective than mine who could give you percentages and risk assessments.
Six percent interest is very conservative. In the teens or higher is getting into more risk, depending. Let's say you decide on at least an 8% return and find areas in which to invest that you like. If you invested the entire $1.7mil, you would earn $136,000 per year. If you went with the miniature mansion and your home expense was $2,000, it would cost about 17.65% of your earnings. Most importantly, it would be 0% of the $1.7mil. If you spent less than your interest earnings, the $1.7mil would continue to grow and earn more and more allowing you a better and better lifestyle over time.
Instead of thinking, I have $1.7mil I can afford a $50k car, the thought process needs to be, This car costs $50k. How can I structure an investment that pays for it without losing capital? If you already have investments, you can think, What percentage of my budget will this cost? Is it really worth it? That's how the wealthy stay wealthy. They don't use their own money. If you ever hit the big jackpot, now you're better prepared to join the elite and stay elite.
Is He Still Alive?
Rich Little was born in 1938 and began his acting career in 1963. I remember him from the 80s, when he was the master of voice impersonations(see YouTube), mimicking presidents and celebrities to the delight of all. I hadn't heard mention of him in a long time until I ran across his name the other day. It made me wonder, is he still alive? According to Wikipedia, he is still alive! And still working. He will turn 79 on the 26th, just a few short days away.
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