Congratulations! You just won a $315 Million lotto. What are the three things you will do with the money? If you choose the lumpsum payment and after taxes you will be left with about $100 Million, but that’s still a lot of money, so think big.
When I ask this question to people, I get a host of answers, some common ones, such as ‘buy a house, a car or travel the world’ and some uncommon ones such as ‘go back to school, start a school or fund a specific research area’. Nobody ever says spend everything, gamble the money away or go bankrupt. Unless they are mentally unsound, why would they?
Yet, that is what happened to Andrew Jackson ‘Jack’ Whitaker Junior after he won the $315 Milllion lotto in 2002. He started gambling, drinking heavily and carried so much cash around that he kept getting robbed. Within a few years, he was back to work. When asked about winning the lotto, he reportedly said, “I wish I had torn up that ticket”. This is not an isolated case. According to the CFP Board, almost a third of lotto winners declare bankruptcy. Some put the estimate as high as 50%. What makes the example of Andrew Whitaker unique is that he was a successful businessman and a multi-millionaire even before he won the lotto. You would think he would have known how to manage his finances. Why do people, both the well off and the not so well off lose their way around money? We think there are two reasons – a lack of self-awareness and a lack of a financial plan.
The first and foremost step in creating a financial plan is understanding yourself. Understanding yourself is understanding your relationship with money and your values. Your relationship with money is how you view money and what you would do if you had and/or if you did not have it. Values are things that are important to you.
Money relationship: How you view money
- You value money for the security it provides
- You want a lot of material items, and you want then now.
- Money helps you feel important.
- Money is a resource to get things you need or want.
- You are not concerned with money; there is no reason to worry about it.
Examples of Values
- Accomplishment
- Contentment
- Creativity
- Culture
- Esteem
- Experience
- Family
- Fitness
- Flexibility
- Friendship
- Honesty
- Integrity
- Independence
- Personal Growth
- Popularity
- Power
- Religion
- Risk Taking
- Security
- Self Confidence
- Stability
- Status
- Strong Convictions
- Teamwork
- Technical Excellence
- Uniqueness
- Wealth
- Winning
Creating a financial plan based on your values will increase the probability of success and give you the motivation to carry out the hard decisions such as making sacrifices in the short term to benefit over the long term. You can also have a clearer vision of your future based on your values. Having a clear vision will give you the confidence to carry out the steps needed. Based on your value and your vision you can create your mission statement (Statement of purpose) and then set your goals. A good mission statement includes your strengths, passions, gifts and the people that matter to you. Goals should include short term goals and long term goals.
These steps when completed, would provide a solid foundation to your financial plan. You can then create a plan which is consistent with the things that are important to you, which capitalizes on your strengths and consolidates your weaknesses.
Foundation of a good financial plan (Please click on the image if not clear)
Immediately after winning the lotto if Andrew Jackson had been told he would soon lose it all, he would probably have laughed it off. Understanding yourself involves deep introspection and unbiased evaluation. Seeking the professional help of a qualified planner is highly recommended