Financial IQ: Is playing lotto okay?

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Financial IQ Philippines Quick Hit(s):

Lotto betting is okay.  Though chances of winning is like getting struck by lightning twice... :)


Is playing the lotto okay or not? How should someone invest P730 million in lotto winnings? I appreciate your columns about saving money and hard work to get rich, but I think the majority of people in our society still prefer faster ways to get rich like playing the lotto, with a record prize money of P730 million. My questions: Is it okay to try government-sanctioned games of chance like the lotto? Is it credible or possibly tainted by fraud, too? Are you yourself buying lotto tickets? Should middle-class people like me buy lotto chances also and continue to hope? Last question: just in case I win the lotto prize of P730 million, where would you recommend that I invest that money (please share several options) and how much should I be free to spend?


Angela Paz Rosario, 37 years old, housewife, part-time entrepreneur, Cavite


Answer


Personally, I think there is nothing wrong with people playing the lotto and hoping to become overnight zillionaires for as long as they realize that the probability of them winning is one in 29 million — this is about the same probability as a person being hit by lightning twice standing exactly on the same spot, as my mentor Rex Ma. A. Mendoza used to say.


To answer your question on how to invest P730 million, please allow me to walk you through the dynamics of investing:


Investment result is usually a function of three components: 1) the amount of money invested; 2) the time the money is invested; and 3) the rate of return. The challenge is to find the ideal combination of all three to achieve the investment result that we desire. For example, if I am aiming for P1 million to fund a child college education seven years from now, to accomplish this, I need to invest 1) P9,967.24 per month; 2) do this religiously for seven years; and 3) earn no less than 5% net per year.


Winning a P730 million bonanza will give you the luxury of completely ignoring the last two components (time invested and rate of return); placing that amount in an ordinary time deposit earning 2% per year will already give you P14.6 million a year or about P1.2 million/month, enough for a very comfortable lifestyle for most people.

http://www.philstar.com/Article.aspx?articleId=636460&publicationSubCategoryId=82

Financial IQ: Jackpot Winners Just as Likely to Go Bust

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Financial IQ Philippines Quick Hit(s):

This happens quite frequently.  Why?  Lottery money can just as easily be spent away if the winner does not have proper financial literacy.  Instead of purchasing income generating assets, lottery money is treated as "free money" and spent on inconsequential items without remorse.

In the new movie "Lottery Ticket," the rapper Bow Wow plays a sneaker salesman from a poor part of town who has to survive a three-day weekend after his neighbors find out he's holding the winning numbers.

But for financially troubled consumers, the size of the jackpot may not matter: Five years out, people who win $150,000 are just as likely to declare bankruptcy as those who win less than $10,000.

That's according to a new study by researchers at the University of Kentucky, the University of Pittsburgh and the Vanderbilt University Law School. The paper appears in a forthcoming issue of the Review of Economics and Statistics.

"I've always been interested in whether you could solve people's problems to some extent by giving them additional cash," says Mark Hoekstra, assistant economics professor at Pittsburgh, who co-authored the paper with Kentucky's Scott Hankins and Vanderbilt's Paige Marta Skiba. "And anecdotally you always hear these things about lottery winners -- someone wins a bunch of money and the story doesn't end very well. But we weren't aware of any real empirical evidence on whether this was true."

The researchers identified 35,000 people who won between $600 and $150,000 in Florida's Fantasy 5 lottery game from April 1993 through November 2002. (They eliminated the 153 people who won more than $150,000). They cross-referenced that list with people who filed Chapter 7 or Chapter 13 petitions in Florida five years prior to winning the lottery and five years afterward. Then they compared people who received $50,000 to $150,000 to those who won less than $10,000.

They found 1,943 winners -- or 5.5 percent -- declared bankruptcy within five years of taking home the jackpot. While the bigger winners were 50 percent less likely than small winners to file for bankruptcy within 24 months, they were more likely to file for bankruptcy three to five years after winning. The net result is that within five years, large winners were just as likely to file for bankruptcy as small winners.

'Found Money'

Moreover, when people who won $25,000 to $150,000 did file for bankruptcy, their net assets were just $8,000 higher than those who had won less than $1,500. Bottom line: The median big winner took home $65,000 in cash. That would be enough, on average, to pay off all unsecured debt or to boost the equity in new or existing assets. Instead, the big jackpots simply evaporated.

"The fact that winning a large sum of money only postponed bankruptcy rather than prevented it didn't surprise me too much," says Hoekstra. "But I was struck by the fact that when the recipients of large sums did file for bankruptcy, they didn't have much of anything to show for the winnings they had received. It didn't go toward a house, paying down debts or buying assets that were worth something a few years later. We couldn't find any evidence that five years earlier, these people had received what would be, for many people, a life-changing amount of money."

What happened? Hoekstra says he can only speculate. "We know quite a lot about lottery winners' finances once they file for bankruptcy, but we certainly don't know what they were thinking when they won the money," he says. "It's possible that people in our sample weren't used to dealing with large sums of money, and thus they may not have used it wisely."

Mental accounting may also play a role. "We treat 'found money' differently than money we earn. So if you find $20 on the sidewalk, you may decide to blow it on a nice dinner, whereas if you earned it you wouldn't have done that," Hoekstra says. (And lottery winnings are the ultimate "found money.") Other possible suspects: A lack of financial literacy or a surplus of impatience -- some people would rather have fun today than be financially secure five years in the future.

The researchers also found that while large winners lived in somewhat more expensive houses than small winners, they were no more likely to own a home outright, and had no more equity in their homes than small winners. This suggests that larger winners were not strategically planning their bankruptcies and gaming the homestead exemption in Florida bankruptcy law, which allows filers to keep their primary residence. If this were the case, winners would have bought a home for cash or paid off their existing mortgage prior to filing, in order to keep some of their assets out of bankruptcy.

Laura Rowley

September 1, 2010

http://finance.yahoo.com/retirement/article/110553/jackpot-winners-just-as-likely-to-go-bust;_ylt=Av3yiZaEwBB9Mli_cwytetO7YWsA;_ylu=X3oDMTFmMHAxZ2NpBHBvcwM1BHNlYwNleHBlcnRPcGluaW9uRHluYW1pYwRzbGsDamFja3BvdHdpbm5l

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