financial literacy

An Article by Kelley Holland Excerpted From Money Magazine

Imagine you won the lottery. Say you won the latest mega jackpot and had all the money you could ever dream of. What would you do? Would you have the financial literacy to know how to handle a sudden windfall of more money than you’ve ever had before in your whole life? Would you invest it? Would you indulge yourself by spending it on everything you’ve ever wanted?

Even the most financially well restrained of us, before doing any budget planning, before consulting with a money coach to make sure the money would last a lifetime, would probably splurge on new cars, house renovations, and supersized TVs.  This is hardly surprising. But what is surprising is the effect lotto winners have on their neighbors. According to an article published in Money Magazine, lottery winners tend to increase the bankruptcy rates of their neighbors:

After all, a sudden windfall would probably lead the winner to throw a party for the neighbors, indulge in fancy landscaping, or splurge on other things that make the neighborhood a nicer place.

The idea makes sense – but there’s a downside to living near a lottery winner. Neighbors of lottery winners are significantly more likely to declare bankruptcy within a few years of the big event than are people living near ordinary folks, according to a 2016 study. The study focused on lottery winners in Canada, and found that every $1,000 increase in lottery winnings raises the risk of bankruptcy among the neighbors by roughly 2.4 percent.

Why the negative ripple effect? When people win the lottery, they often spend some of the money on envy-inducing goodies like new cars, boats, and supersized TVs. Researchers say that these lifestyle upgrades then tempt their neighbors to boost their own spending on visible markers of prosperity, even though they haven’t had a sudden run of financial luck. Down the road, that leads to more bankruptcies, said Sumit Agarwal, a professor of finance at Georgetown University’s McDonough School of Business and an author of the study.

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