The majority of people that win lottery jackpots are financially worse off in only 5 years, than if they hadn’t won any money. How is that even possible? The normal path for lottery winners is: spending too much money and then borrowing an increasing amount of debt until it is unaffordable, and then they are insolvent. In my opinion, the primary reason they end up worse off is that: your net worth cannot exceed your financial capability for very long.
What determines your personal financial capability?
Your behavior and goals toward money. For example, the current balance of your savings account, investment account, and debts reflect your former financial capability. How these balances change during this month reflects your current financial capability. Are you someone that can save money? What percentage of your income can you consistently direct toward savings? Do you consistently make poor investments that fall in value? What percentage of your income can you consistently direct toward paying down your debts? In this way, your financial statements reflect your financial capability in black and white. This is why lenders and potential financial partners want to know your credit rating and the state of your finances.
When you have savings, does it never go beyond a certain plateau because you end up spending it? I know people that are continually shopping for homes, cars, boats, handbags, or antiques. I am not surprised when they show off their latest acquisition because it is their hobby and passion. For some of these people, their shopping hobby is beyond their financial means and is killing their potential saving and investment account balances. Their financial capability is simply unable to move beyond a certain level of savings.
Capability also applies to debts, some people always find a way to be in debt. When their debts shrink, they find reasons to rack up more debts. For example, a friend’s boss always has $300 cash in his wallet. But he can never save $300, so he has to borrow it from his bank. Each month, he pays the interest to keep the $300 in his wallet. It may sounds insane to you and I, but that is simply his level of financial capability. He does not yet have a motivation to begin saving, let alone a philosophy to support building a permanent habit of saving money.
To make the point more obvious, handing someone money that is beyond their financial capability is exactly like handing a 4-year old a loaded gun. The 4-year old does not understand the intrinsic danger of the gun, has no firearm-safety training, and is highly likely to cause accidental damage by shooting something. This is my analogy for lottery winners and how they end up financially worse off: they had a low financial capability and did not improve upon it. The new money was more than they could handle and so they lost it all, and then some. And that is how they end-up financially worse off after winning.
You can easily determine your financial capability by looking at your finances month to month. Are they consistently improving or deteriorating? Have they plateaued or making steady improvement? Now, you have a choice to make: Are you willing to improve your financial capability or leave it to happenstance? Are you willing to confront and shore up your weaknesses or let them destroy your finances?