There is an old proverb that states that it is easier to earn money than to keep it, and as South Africa’s latest lotto winner claims his R232-million windfall, most of us can only dream about what it would be like to come in to so much cash.
To all those in this fortunate position – be it through inheritance, prize money, annual bonuses or simply being the owner of the correct lotto digits – it is necessary to take steps to not only preserve your windfall, but to grow your wealth too.
According to research, about 70% of lottery winners, or people who receive a sudden windfall by some other means, end up broke and a third go on to declare bankruptcy within about five years.
Financial experts warn that most ordinary people who suddenly come into a large amount of money often lose all sense of reality and end up squandering their fortune on luxury cars, houses, designer label clothing and expensive holidays, coupled with bad investment decisions. Lottery winners also tend to give away too much money to family and friends, instead of investing their winnings wisely.
What an opportunity to waste when you can conserve, and grow your investment in a few easy steps. This is according to Riaan Verbeek, CFO of Momentum Consult.
There is also an ongoing debate about how much South African lottery winners are taxed. The simple answer is: zero. In the vast majority of cases, South Africans do not have to pay tax on lottery, casino or competition winnings, and are entitled to the entire sum.
The exception to this is when an individual is a “professional gambler” and systematically undertakes gambling activities (including playing the lotto) to an extent that this becomes their primary source of income. In this case, net winnings will be taxed as normal income.
- Verbeek says, “With good money management, there is no reason why you and your children should not live comfortably off your winnings for many years to come.” He gives some tips to help manage your windfall:
- Settle your debt first: Financial experts agree that one of the wisest investments you can make is to settle all your outstanding debt. Credit card debt, overdrafts, home loans and personal loans are generally expensive debt, due to the high interest rate that is charged on these. Clear your debt to stop the bleeding.
- Grow your capital: There are a number of investment opportunities for you to consider when it comes to making your lottery winnings work for you, but you will need the portfolio that you are most comfortable with. Investing in property, equities or starting a business are just some of the ways to grow your capital. But you will need the help of a Certified Financial Planner (CFP) to guide you in diversifying your investment, so that you can extend the life of your winnings and build your wealth.
- Bulk up your pension: Regardless of any other investments you plan to make, setting yourself up for retirement is always a good idea. Look at the various retirement annuities available to you and secure your financial future for your golden years.
A sudden windfall can be difficult to manage, so a financial adviser is critical to helping you make the right decisions. There are a large number of products and investment options out there – each with pros and cons. An adviser can take you through the fine print and explain the financial fees to you.
Verbeek concludes, “You wouldn’t make a big medical decision when it comes to your health on your own, and the same should go for a big financial decision. Financial advice can make the difference between growing your investment and losing it all, and declaring bankruptcy within about five years”.
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