$1.6 billion reasons to be careful

Here’s a question? What has a 70% bankruptcy rate with 44% of people spending all the money within 5 years….that’s right “winning the lottery!” National Endowment for Financial Education

Now in the true confessions department, I admit to playing the Powerball or Mega Millions sometimes when it gets above $200 million. Candidly, I have found myself daydreaming of what I would do with the money if I won. I further justified my lottery purchasing by feeling good that my $4 investment in (2) $2 tickets, ultimately benefits education or charitable causes! Hey, at least it sounds good!!

It’s easy to see why people play because the largest Powerball ever won was $1.6 Billion, which was split 3-ways at $528.8. The largest Megamillions was $656 million for a lump sum pay-out of $474 million. You could do a lot of great things with all that money.

However, I quickly come back down to earth realizing that the odds of winning a jackpot lottery are 1 in 195,249,054, or to quote line from the movie Dumb and Dummier, “what you are saying is that I have a chance?” So with the population over 300 million, you basically have 2/3’s of the entire population competing against you. Lightening hitting me is greater!

Then, it’s starts to get very scary when you realize that 21% of people feel that the only way they can afford to retire is winning the lottery. Or that recent data has suggested that many more people are turning to the Lottery for their financial solutions  Consider this:

The average Lottery regular spends $206 annually, which at:

5%= $36,623.60

7%= $67,870.22

10%= $179,626.92

This is especially enlightening when you consider that roughly half of Americans have nothing saved for retirement, or a Forbes report claiming that roughly 2/3’s of people couldn’t put their hands of $500 for an emergency! So, rather than dropping money on Lottery tickets consistently, consider these sure-fire ways to financially get ahead:

  • Pay Down credit card debt, you get guaranteed savings on interest charges
  • Put money in a 401(k) retirement plan, especially if your employer matches
  • Add money to your mortgage payments against principal to save mortgage interest
  • Invest in a mutual fund or stock dividend reinvestment plan
  • Put the money aside for a rainy day or emergency
  • Donate it to charity and feel good!

Buying lottery tickets once awhile isn’t the end of the world unless you really need the money. It’s a game and it’s about playing for fun, not out of financial necessity. It’s doesn’t solve financial problems because according to the National Endowment for Financial Education, 70% of Lottery winners are right back to where they were 5 years later..that’s not financial security!

FOCUSING ON WHAT IS BEST FOR US

It’s important to mention that comparing our finances to someone else, or against some benchmark, is financially depressing and destructive.  We should focus on our situation and what’s best for us. There isn’t a magic bullet, or a one-sizefits-all solution.  Also, looks can be very deceiving. “They drive a nicer car, so they must be doing better financially!” or “They have nicer things, so I obviously don’t make enough money!” Chances are that we make inaccurate assumptions because we are unaware of their financial situation, how much they earn, or how they are spending it.  We must focus on budgeting as a process; it’s taking baby steps to finally being able to walk.  Measure success by the little things, the little victories, the fact that you were actually able to put away an extra $5 or $10 this month. Don’t make the mistake of focusing on what others have or think.  It’s the emotional excitement, the psychological well being and the fact that you are in control of your finances that has the biggest impact. As a matter of fact, a 2016 Wall Street Journal article states that research has proven, “Having more money in the bank makes people feel more financially secure, which can lead to further happiness.”  WSJ went on to suggest that even the very wealthy felt much happier with money in the bank, not their aggregate net worth on paper.  The wellness concept is growing exceedingly popular; that sense of physical, emotional and financial well-being.  Feeling better about our finances is a big part of the equation, and budgeting has been proven to improve our ability to plan and save.
If budgeting can do all of this, then why wait? Do we want to make excuses, or do we want to do something about it?

Charitable Gifting Through Life Insurance

Many people don’t realize that using life insurance can make a powerful impact in the planning needs of your favorite charities. The “leverage” that can be used to make gifts allows the amount of the policy’s death benefit to usually far exceed the premiums that were paid into the policy, while still keeping things very flexible. There are many simple ways to use life insurance in charitable gifting:

  1. You can gift a policy’s dividends to a charity, such as a dividend-paying whole life policy
  2. Change your current beneficiary to a charity
  3. Gift a policy that is no longer needed to a charity
  4. A common plan is to buy a new policy with the charity being a full, or partial beneficiary, and making gifts to pay the premiums.
  5. Buy a large life insurance policy to back a future donation, because of the lower costs of the premiums vs. the amount of the death benefit.
  6. Gift a highly appreciated asset to a charity for tax benefits, and purchase a life insurance to replace its value for your heirs.

An example:

Jane is 70, and has a $200,000 C.D. at the bank. She doesn’t need the money, but wants to create a meaningful endowment to her favorite charity. However, she also wants her children to inherit the $200k at her death. Jane purchases a cash value life insurance policy with a

$475,000 death benefit, and names her charity as a beneficiary for a portion of the policy proceeds ($275k), and her children ($200k). Incidentally, if Jane needs the money or changes her mind, she still has access to her cash values in the policy. Also, the policy can be further designed to include a chronic illness benefit (similar to long term care) or critical illness protection (cancer, heart, stroke, Alzheimer’s, etc.)

The above example is just one of many different ways to plan for charitable gifting using life insurance. There is also potential income, estate, gift, and capital gains benefits that can be provided. Life insurance can be a tremendous tool for many charitable gifting programs, and makes a wonderful, powerful impact. When designing a life insurance policy, make sure to use a knowledgeable professional, and consult with your trusted tax advisor for tax benefits.

Pat Moran is an experienced financial professional, and recognized as a leading financial educator for the American Financial Literacy Institute. Pat specializes in many aspects of financial education, and conservative solutions for helping people to invest and protect their money. He can be reached at (602) 571-1035