Editor’s note: This article was first published in September 2013. Its example of €1 million in fixed income or government bonds at 2.75% reflects 2013 interest rates. Spanish tax rules on lottery prizes have changed since 2013, when a special levy on prizes was introduced.
Who hasn’t had this happen at some point? You fill in a ticket and bam! You turn out to be the winner of a few million euros. People often say that if you win between €10,000 and €300,000, what you get is a tremendous help for plugging holes (debts). The problem is that if you win a lottery prize of over a million euros, you haven’t received help but a curse. Everyone thinks they could handle it, but history shows that’s not the case. I suppose it comes down to that old saying: “a fool and his money are soon parted.”
So, even if it isn’t your case right now, it pays to be prepared in case you ever win the Bonoloto, La Primitiva or the Christmas lottery. What steps should you take to avoid the countless problems that can arise?
0. To start with, don’t be an idiot
Step zero is as simple as not being an idiot. That doesn’t sound so hard, does it? Apparently it is. You’ve probably seen on TV, after the Christmas lottery draw, how people line up to hog the camera with their tickets in one hand and a glass of champagne in the other, drawing the attention of a whole town or area. What they don’t say on TV afterwards is how thefts go up in those areas right after the draw. The new millionaire’s first mistake is drawing attention, which puts you and your family at risk.
1. Protect the ticket
The very first thing you should do is sign the ticket and write your ID number (DNI) on the back (although you should really do this even before the draw, in case the ticket gets lost). Make a photocopy and keep the original in a safe deposit box. Not in your safe at home, but in a safe deposit box at a bank. Remember that you have 3 months to claim the ticket (as a general rule, you have those 3 months in all draws and in all countries, barring the odd exception).
2. Get professional help before you claim the prize
For prizes worth millions, the usual advice is to hire a tax adviser and a lawyer, since the role of financial planner barely exists in Spain. They’ll tell you which part of the prize isn’t yours (it belongs to the tax authorities) and what you shouldn’t do, at least at first. And if you’re separated, going through a separation or even married, the lawyer will have something to say about that too. Meanwhile, while they advise you, try to keep the prize a secret. A very common mistake among lottery winners is to think the prize is net, so they spend and spend, forgetting that they also have to pay tax.
3. We insist: keep it secret until you’ve collected the prize
Very few people realise they could lose almost the entire prize, or run into legal problems that could stop them from cashing the ticket. How? Imagine you work at a company where 10 crooks decide to team up and claim that you’d all bought the ticket together, and each of them wants their share of the prize. You know it’s a lie, but the judge doesn’t, so until the judge decides, your prize could be frozen. This has already happened on several occasions, with rulings both for and against, so don’t take the risk.
4. Don’t make any decisions
Give yourself time to digest your new status emotionally. Many people tend to buy a high-end car, a new house, a boat and so on. Don’t do anything stupid. Before you spend the first cent, put part of the prize straight into some kind of interest-bearing account and into a fixed-income product or government bonds. Assuming we invest €1 million directly at 2.75%, whatever happens, we’re at least guaranteed €27,500 at the end of 12 months, plus that million euros.
5. Pay off your debts
In case the power of your new status ends up clouding your judgement, first and foremost, get rid of all your debts. That way, you might go on to lose your whole fortune, but at least you’d be starting again from zero rather than from minus 100.
6. Set a budget
Remember that the first step to being a millionaire is not living like one, so try to lead a simple life and start thinking the way rich people do. Forget about big expenses, and only buy luxuries with the money generated by the interest on the money you have. Otherwise, before you know it, you’ll find there’s no fortune so large that you can’t blow through it in a few years.
7. Avoid the mistakes others made in your situation
History is full of cases showing how lottery winners end up much worse off than before they won.
Some put it all into a company to fulfil their dream, skipping many of the steps of healthy business growth, so it didn’t take them long to drive the company into bankruptcy and end up in debt again. Others, considered good stock market investors, changed the way they invested and discovered they weren’t prepared to manage large sums of capital, making the worst investments of their lives at the very moment they were most exposed.
Remember that we should take bigger risks with our investments when we don’t have much money. When we have millions of euros, our investments should aim for lower but safer returns, in more solid companies.
And finally, one piece of advice some experts give for staying anonymous is to set up a company that owns the money, rather than holding it in your own name. But that’s something an adviser should help you with, to work out which approach suits you.
In short, I’d split my advice for lottery winners in two:
- Don’t be an idiot.
- Be a little bit smart.
If you can meet those two requirements, congratulations, because not everyone can.
Further reading
Featured image: Barcex, CC BY-SA 3.0, via Wikimedia Commons.
