What can we learn from riches to rags stories?

31 August 2012, 15:29   By Helen Glaberson

2012 has been a good year for UK lottery wins.

lottery win dollars
Credit: Minerva Studio/Shutterstock.com

In February alone there were three huge wins - £40, £45 and £46.4 million - and this month a couple took home the UK's second biggest prize, £148 million.

How Chris and Colin Weir - who won Europe's largest ever prize, £161,000,000, last year - are choosing to spend their cash has almost become a tabloid staple.

We're mesmerised by these huge amounts of money and their, sometimes dire, consequences.

So much so, in fact, that dire consequences have become their own lottery genre: excited winners blow their new fortunes, get into debt and sometimes depression. Many say they wish they'd never won.

How do winners go so wrong? And are there any financial lessons the rest of us should draw from their mistakes?

Lottery losses

One classic example of the riches to rags story is John McGuinness.

He won £10 million in the lottery in 1997 but ten years later he'd not only lost it all but ended up £2 million in debt.

His downfall was down to many lavish spends - a £500,000 fleet of supercars, a £200,000 wedding - but what really tipped McGuinness into the red was an offer he took up to join the board of a second division football club.

After reaching the Scottish Premier League, the club crashed into administration. McGuinness then used his own funds to guarantee club loans which led him on his downward slope to broke.

Britain's youngest lottery winner, 16 year old Callie Rogers, spent all of her 2003 UK lottery jackpot - £1.9 million - on shopping, cocaine, cars and breast augmentation, according to a tabloid report.

She later worked as a shop assistant and, in April this year, was reported to be renting a modest three bedroom house.

The further you look into lottery losses - the sheer number and variety of them - the more disturbing they seem.

There are whole industries dedicated simply to 'buying back' lottery wins for a lump sum, at a considerable loss to the winner.

In an interview with a guy who brokers deals between winners and buy back companies, he said at one point, "believe me, broke lottery winners or financially troubled lottery winners are the rule. They are hardly the exception."

What can we learn?

The tabloid lesson from this is no lesson at all, it's gawping.

Lottery winners are just like us - they have bad taste and make money mistakes - they're just doing it on a bigger scale.

But maybe there's more to it than that. Is there anything else we can apply to the way we handle our own personal finances?

Seek financial advice

Researchers at the University of Kentucky, University of Pittsburgh and Vanderbilt University have all found that, on average, lottery players have below average incomes and education and that, therefore, winners generally have limited financial literacy.

This theory suggests the importance of seeking financial advice or doing research before taking any financial plunges.

Although on instinct a financial decision may feel right, it can be good to get a fresh view on the decision, think it through and also to clue yourself up on what you're signing up for.

Try talking your thoughts out with friends and family to get an objective perspective on your plans, for example.

Treat windfalls with care

Researchers say winners sometimes also engage in a behaviour economists term 'mental accounting', which means they treat their winnings less cautiously than their earnings.

It's easy to feel the worth of money you've slogged hard and long for, maybe less so for cash simply gained overnight.

Try and treat largish money windfalls (even if they're relatively small, like a work bonus or a competition win) with care, taking a save a little spend a little approach to each amount.

Avoid rash purchases

What most of the stories of these broke millionaires seem to have in common is splurging.

Some winners simply "develop a taste for luxury goods that outlasts their money", the researchers say.

The lesson to apply to your own financial life is to avoid wasting money on items that will give you quick, temporary thrills but over time will eat a huge hole into your bank balance.

There are few ways you can avoid the temptation of rash purchases. Try not to carry too much cash on you, which can encourage spending on those small bits and bobs or go for the backwards budgeting model.

Some research has found that this approach works even for new millionaires: a 2011 Sociology study of 14 Swedish lottery winners found that most had turned the cliche of the "squandering winner" to their advantage. It was a guide to what not to do.

Prosperous winners stuck to the "social norms of rational consumption" the researchers said rather than launching themselves into a new, but uncertain, pattern of high spending.

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