Do you have the winning lottery ticket? An economist explains what to do with all this money

Jay L. Zagorsky is associate professor at the Questrom School of Business at Boston University

An unidentified person recently in South Carolina won the Mega Millions nearly $ 1.537 billion. Meanwhile, the price of Powerball continues to grow and currently stands at $ 750 million.

This raises a question: what should you do if such a manna falls on your lap, that it is a jackpot, a significant legacy or a profit? huge shot of the sale of a business?

As an economist, I have been thinking about this issue for years. I also ask my undergraduate students every semester what they would do if they suddenly got a billion dollars. The standard answer for students is to repay their considerable academic debts and travel the world.

Although studies are expensive and trips to exotic locations are fun, they do not consume more than $ 1 billion. Yet many people manage to make big money and waste it quickly.

Here are some tips based on research to find out how to handle an unexpected manna.

Finding self-control

The urge to spend is a huge problem.

As I noted in a recent article, people who earn big money eventually go bankrupt. My own research revealed that the average person in their twenties, thirties or forties who had received an inheritance or a large financial donation had spent or lost half of the money fast enough. A 2011 article revealed that those who won average Florida lottery prizes were more likely to declare bankruptcy than smaller winners.

The data suggests that it takes time and experience to radically adapt to a different lifestyle. Given these self-control problems, my advice is simple. If you win the lottery, do not take the lump sum payment. In the case of the Mega Millions jackpot, this allowed a winner to receive $ 878 million immediately – before taxes.

Instead, take the option to receive annual payments over 30 years, which still represents an incredible amount every year. And if you have problems controlling yourself and you spend the entirety of your first and perhaps second payment on luxurious homes and cars, you still have 28 or 29 years of additional payments – which expand with time – to get your financial home. in order.

If your manna came by some other means, such as inheritance, it is still easy to handle a self-control problem. Many insurance companies and brokerage firms sell annuities, which function exactly like this 30-year lottery payment option.

An immediate annuity is a simple contract. You give a certain amount to an insurance company and you pay back a periodic payment that takes into account inflation, whether for a fixed term or for your entire life.

You can buy happiness

And what is the best way to spend this money?

Michael Norton, a social scientist, has good news for lottery winners: you can buy happiness by spending money. Just not as you might think.

He found that the best way is not to spend money on yourself. Instead, spend it on other people by donating money to charity and paying small sums to help others.

Norton suggests that small things like buying coffee from other people will make you happier. If you have a big manna, go to a coffee shop and pay for everyone in the queue. If you are drinking a beer, set the bar.

His research suggests that it will make you happier.

Deal with loved ones

But a more delicate question is how to deal with relatives and friends. Once you hit the jackpot, many people will probably call, even those you have not seen in years. Suddenly, you are the most expensive person that they know.

My suggestion is to make your friends, family and loved ones as happy as possible. And to do this, you could give them a share of your earnings – but research on money and happiness does not suggest much.

Psychologists Andrew Jebb, Louis Tay, Ed Diener and Shigehiro Oishi have studied thousands of people around the world and have discovered that having an annual income of about $ 105,000 in North America maximizes happiness. Getting more has not made people happier.

Based on this research, if you are distributing money to your friends and family, limit it to about $ 100,000 a year for each person. If you want to help people in your life for a long time, buy them a life annuity that earns them $ 100,000 a year.

Giving more can do more harm than good.

This article is republished from The Conversation under a Creative Commons license.