Receiving a large amount of money unexpectedly is not always synonymous with happiness, much less with economic well-being. Impulsivity and lack of financial knowledge to manage prizes such as the Christmas Jackpot, worth 400,000 euros per tenth, are often behind the bankruptcy that many citizens have experienced years after being touched by the goddess of fortune.
One of the most famous and emblematic cases is that of Keith and Vivian Nicholson, a working-class couple who in 1961 earned the current equivalent of three million euros, money that they squandered in just four years by “spending, spending and spend,” as Vivian herself explained. The Spanish Francisco Guerrero also experienced a similar situation, who in 2005 won a prize of 6.5 million playing Bonoloto, a fortune that he lost in a few years by investing the money in ruinous investments, for which he blamed his bank.
“In any case, it is legitimate for someone to want to spend the entire lottery prize, if that fits within their financial plan. What they should avoid are results that are very different from those they expected when they originally received the money,” comments Carlos Santiso, educational director of Value Investing Business Education (VIBE). And he continues: “There are many people who receive a large amount of money and, due to the lack of financial culture, are unaware that with that capital they can build an asset that sustains their quality of life without decreasing. Lottery winners, athletes elite… are continuous examples of this situation.
“Many times people act on impulse when it comes to spending,” says Antonio Castelo, economist and analyst at iBroker. Therefore, to get the most out of the prize and avoid ending up in a worse economic situation than before receiving it, it is necessary before Before starting to spend the money, “do an analysis of the personal and economic situation.”
In this sense, the economist recommends paying off the mortgage early, as well as the rest of the debts. And he warns that “we should not be tempted” with promises of investments that leave a return higher than the interest paid on the mortgage loan. Therefore, “the first thing is to get rid of debts at a cost and from there start saving.”
Once the debts have been eliminated, it is time to start thinking about how to make the excess money profitable, if there is any left. “You have to be discreet and, if you do not have enough knowledge to know how to manage it well, look for an independent financial advisor who studies our economic-financial and risk profile before advising on the best way to manage the prize based on the family situation,” explains Castelo.
In fact, the financial plan established will not be the same for a person with a modest income as for another with significant assets. In any case, you will have to diversify your investments and take into account the time horizon with which you want to invest.
In order to meet the set financial objectives, it will be essential to “be strict” when it comes to complying with the financial planning that has been done to get the most out of the money obtained in the lottery. This planning, Castelo warns, must take into account aspects such as “the forecast of future income and expenses, whether the job is permanent or not and whether there are opportunities for job improvement.”
For his part, Santiso recommends taking the opportunity to train to acquire financial knowledge that allows you to appropriately manage and administer your assets. Afterwards, “the best thing is to decide what part of the money earned is going to be used for investment and what part is going to be used for consumption,” he adds. It can help you avoid spending a single extra euro by having both amounts clearly separated in different accounts or banks.
In a recent survey carried out by the broker eToro in Catalonia, 44% of those surveyed said that their favorite option in the event of winning the lottery was to invest in real estate, while 40% said that they would choose to plug holes, and a third, for investing in the stock market and fixed income, an amount similar to those who would save the amount earned before making any expenses.
Regarding the first option, that of investing in billet, Castelo recommends it for those who do not own a home. “It makes sense to buy a house or two, it depends on the size of the prize and where the property is purchased, since it will not be necessary to have a mortgage in the future,” he says. Likewise, it will be necessary to assess before carrying out this investment whether the type of property being acquired entails maintenance and tax expenses – such as IBI, home insurance… – that are acceptable to the buyer in the long term.
For those lucky enough to win a big lottery prize who want to invest the prize money in the long term, Santiso advises doing so in the most profitable assets, even if they are volatile like the stock market. Among the wide range of financial products that the investor can choose depending on their risk-return profile, stocks stand out, “combined if desired with ‘private equity'”, whose valuations “fluctuate little”, which provides peace of mind to the investor, although “liquidity is very low.”
If, on the other hand, you want to invest in the medium term, minimizing risk, Santiso recommends investing in fixed income with a term that matches the desired investment horizon, holding the bonds until maturity. Another possibility is a portfolio with moderate risk, with a high probability (based on historical behavior) of not generating losses in medium terms (3-5 years). For example, a portfolio combining stocks and bonds, or a permanent portfolio (stocks, bonds, gold and cash). “The alternatives are enormous, the important thing is to know them and, above all, to know yourself, to have an investment strategy that adapts to the personal and psychological characteristics of each saver,” he highlights.
Finally, if you want to recover the money invested and the returns it generates in the short term, it is better to opt for money market products – such as bills, promissory notes and bank deposits – with good profitability when rates are high. “But even if they paid little,” Santiso points out, “there would be no alternative if one did not want to lose money. When investing in very short terms, the investor is subject to the central bank’s rate policy.” However, he clarifies that “the environment of high interest rates will not last forever and, when this situation changes, the assets to invest in will be different from the current ones.”