$1M One Time vs $1000/Week For The Rest of Your Life (The Lottery Winner’s Choice)

I’ve been seeing a photo of a 20 year old Canadian lottery winner go consistently viral for the past year. This woman named Brenda had two choices of reward:

• $1 Million lump sum payment
• $1,000 per week for the rest of her life

It’s worth pointing out that that is a Canadian state lottery so there’s no income tax, and no risk of the lottery going bankrupt.

She chose the latter, and people are calling her stupid because she “could make more than $1000 a week by investing the money in safe bonds”.

I’ve had a tax/law firm for well over a decade now and I’ve dealt with all sorts of clients over the years, and I’ll tell you why she’s probably made the better long term choice.

First of all, the guys running the numbers are right. Mathematically, picking the lump sum was the right choice because she can get more than $1000 per week by investing it, thus getting both the annuity and principal.

At the same time, in the event of an untimely death, her family could have used the lump sum, while her weekly payments would just stop.

So speaking purely in isolation, the lump sum is a better decision. This is a fact that only a fool would argue against.

However, reality does not exist in isolation.

This is what happens in reality when people get windfalls: They blow away a big part of the money.

People get a big payout and immediately proceed to spend a big chunk of it on a nice car, expensive vacations, “loans” to friends and family, and before they know it, more than half of the money is already gone.

VERY FEW people have the financial discipline to handle a large payment hitting their bank.

I have seen the money disappear from client’s bank accounts quickly more than a few times now.

A million dollars is not that much money. A small business that makes $10k a month will sell for $1M on an 8.5x annual multiple. A million dollars is a small amount of money that only sounds big.

Because it sounds big, all sorts of relatives and friends start showing up begging for money for reasons that are hard to refuse e.g. medical assistance, school fees, etc. You will never see the money again and it will all start to add up.

You will want to improve your lifestyle and want to travel more, all of which will further burn the cash. Again, a million dollars is not that much money.

It becomes $900k fast, and then $800k then $600k, etc.

It doesn’t have to be this way but it is usually this way because most people lack financial discipline.

This is why this woman, and most other 20 year olds, are better off picking the $1000/week for life because that basically prevents them from blowing the money away.

What to do if you ever get a windfall

If you ever sell a business or a part of it, or something else and get a big chunk of cash in the bank, here is my advice:

1) Do not tell anyone about it. The more people you tell the more beggars will show up to your door. They will beg in such a way that you will have no choice but to give them money, or suffer massive social consequences.

“I am your aunt, and I’m telling you that your cousin has made some mistakes and needs money to pay off his debt to a loan shark. If you do not help him, they might hurt him. We will blame you for refusing to help. Don’t be selfish.”

“Your uncle is very sick and needs help with the hospital bills. Without your help, he might die. You will be responsible.” (You will literally be called greedy if you don’t pay up. Jealous people will act as if you owe everyone money even though they’ve done nothing to deserve it.)

2) Immediately invest 90% of the money for a 1 year lock in. 1 year because it gives you time to digest the windfall and plan for the future. It protects you from the natural tendency to blow away the money.

You can keep the 10% and spend it how you see fit. After all you also need to live and enjoy life. 10% is a reasonable amount to spend on enjoyment from a windfall.

Buy whatever you like, or go on whatever vacation you want, from that 10%.

The remaining 90% needs to either stay invested or be used for a new business opportunity. It’s not there for consumption.

– Harsh Strongman