About Lottery Winnings

Lotteries are a form of gambling and are used by some governments around the world to raise funds for the public sector. In the United States, state lotteries are very common. Lotteries involve purchasing tickets and the drawing of lots for a specific prize, in most cases cash. The odds of winning are usually very unlikely, and that is why lotteries are so profitable for the governments that use them.

Significance

Lotteries, especially those run for or by governments, are used to support public programs such as infrastructure development, public safety, public health and education. The way lottery companies and governments are able to benefit and make so much money is that when everything is taken into consideration--the odds of winning, the taxes on a lump sum payment, the distribution of prices among several winners--a lottery ticket is actually worth substantially less than its cost. That is why buying lottery tickets is often referred to as a tax on stupidity, and is not considered a wise economic decision.

Types

There are different kinds of lotteries from state to state, and the ticket price varies depending on the state in which you live. These include the mega millions, lotto, pick 3, pick 4, pick and play, and instants (see Resources below).

Considerations

The odds of winning in any particular lottery are usually astronomically low and vary with the type of lottery and its design. For example, the mega millions lottery, a popular multi-state lottery in the United States, has winning odds of 1 in about 175 million.

Warning

One of the popular behavioral patterns of lottery winners, especially those who were of poor financial means before they won the lottery, is the tendency to spend it all on frivolous items, and not too long after hitting the jackpot, many end up where they started financially--or worse. The best thing to do when you win a lottery is to put the breaks on all spending and first get professional financial and legal advice.

Expert Insight

One of the things a lottery winner has to consider is whether to take a lump sum payment or take graduated payments over time for years, sometimes decades. This, again, is where professional financial advice comes in. In most cases, the taxes on a lump sum are astronomical. But more importantly, you really will have to compare the numbers to see which pays off better for your particular circumstances. See Resources below for a lump-sum-versus-payments calculator.

Resources

• All About Lotteries
• State Lottery Links
• Lump-Sum-Versus-Payments Calculator