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What happens after you win a lottery?

The statistics behind a typical state sponsored lottery makes it very profitable for the states that run them. The state typically gives out as prizes less than half the money that they take in, and they are free to change the rules to make it even more beneficial to the state.

The average lottery customer has dreams of wealth and luxury, and once in a very great while, the dream comes true. However, behind that dream is a reality that most lottery players don’t recognize. In fact, lottery players have a lot in common with the average dog. The average dog has an almost instinctive desire to chase cars, and would do so without thinking. However, if that average dog ever caught the car, the dog would not have any idea what to do with it, and their most likely response (barking at it or peeing on it) would likely do nothing to improve that dog’s life.

Like the average dog, the average lottery players will chase the dream of instant riches, but if the wish would ever come true, they would not have any idea of what to do with the money, and their most likely response (talking about it to everyone they know or pissing it away on a flashy lifestyle) would likely do nothing to improve that lottery player’s life.

There is no best response to deal with a life-changing monetary windfall, but for the average newly rich person, probably the best things to do are to stay quiet about their new wealth, find some competent financial and legal advisors (both of which should be paid a set fee for their advice), and consider some of the ideas below:

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Financial literacy impacts decision making

Research by the US Federal Trade Commission shows that financial education affects financial decision-making. Failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior can all be linked to ignorance of basic financial concepts.

Some of these findings, from the 2008 paper Financial Literacy: An Essential Tool for Informed Consumer Choice? by Annamaria Lusardi, may seem quite obvious at first glance. For example, the author points out that those who demonstrate even a basic understanding of relevant financial topics are much more likely to have planned for retirement. These are not sophisticated topics, but basic things such as knowledge of interest compounding and the ability to perform simple mathematical calculations . Skills like these were shown to be among the strongest predictors of successful retirement planning.

To appeal to the average person, who may not have had a lot of prior exposure to financial topics or investment experience, the study suggest a social or even a psychological approach to financial education, for example exploiting “teachable moments” like the beginning of a new job, in order to get a person to think about taking action when their minds are open to new ideas about how financial decisions may affect their lives.

While the points raised by this study are reasonable, the challenge faced by society, even wealthy countries, is vast. Since the late 1980s when there were significant changes in laws regarding retirement planning, companies were much more free to move from traditional defined benefit plans like pensions to defined contribution plans like 401K plans that shift the responsibility of planning from the corporation to the individual.

While individuals and organizations with high levels of financial sophistication, such as firms specializing in industry specific areas such as chemicals m&a experts can easily manage rather exotic financial decisions, the average person has a much more difficult situation. Financial instruments have become increasingly complex and individuals are constantly being bombarded by the investment industry with new and financial products. However, most individuals are not well equipped to make financial decisions.

The study showed that most individuals cannot perform simple calculations and lack knowledge of basic financial concepts. Knowledge of more complex concepts, such as the difference between bonds and stocks, how mutual funds, and how to estimate the value of an asset is even rarer. Financial illiteracy is widespread among the general population, and particularly evident in some demographic groups that happen to also be overrepresented among the poor and struggling working class, such as women, African-Americans, Hispanics, and those with low levels of formal education.

What You Need to Know About PayDay Loans

No matter who you are, if you live in the US you have been exposed to payday loan companies. Either you have used one to get a loan, you know someone who has used one, you have seen one of their offices in your neighborhood, or you have heard about them online, on TV, or on the radio. It isn’t just poor neighborhoods anymore. You can find them in the most exclusive Zip Codes in the country. If you don’t want to walk into one, you don’t have to. Online payday loans make it easy to use one in private if you don’t want your boss (or worse, your employee) walk into one.

Most personal financial advisers would suggest that you don’t use these services, and if you are using them now stop doing so. Why would financial experts recommend this, especially if you don’t have access to traditional loan sources like a credit card, bank, or credit union? If you know more about them, maybe their advice would make more sense.

What Is a PayDay Loan?
A classic payday loan nothing more than a short-term term loan where the company issuing the loan requires that you have a job with a steady paycheck before you get the loan. A payday loan may have other names, like a cash advance loan, check advance loan, post-dated check loan, or a deferred deposit loans.

The names may be different, but they all work in a similar way. The borrower writes a personal check payable to the lender for the loan amount plus any fees. The payday loan company the gives the borrower the loan amount (some may deposit the amount electronically into the borrower’s bank account), and agrees to hold the check until the loan is due, usually the next time the borrower gets paid. The loan (plus the fee) gets paid off after the next payday.

Payday Loans Are Very Expensive
If the loan is extended, or “rolled over,” you may be charged new fees or penalties, making it harder for the borrower to pay it off. How expensive can it get? For example, say you need to borrow $100 for two weeks. You write a personal check for $110, with the $10 being the fee for the loan. The payday lender agrees to hold your check until your next payday. When that day comes around, you either pay it off or rollover the loan until next payday. You may have to pay even more than $10 for this rollover fee. If you roll-over the loan several times, the finance charge might be half or more of your original loan amount.

Payday loans are much more popular with people who can’t get short term credit from their bank or credit union. Not surprisingly, payday loan businesses are much more common than banks or credit unions in poor neighborhoods.

Options to Payday Loan Companies

    Before you take out a payday loan, you should consider one or more of the following options:

  • Banks and Credit Unions: Ask if they have credit options that fit your needs. Even if they said no before, they may say yes now.
  • Community Organizations: A local community-based organization may make small loans to individuals or small businesses.
  • Cash Advances: A cash advance on a credit card or check card (typically an ATM card that can be used like a credit card) also may be possible, but it may have a higher interest rate than a regular bank or credit union loan.
  • Negotiate with Your Creditors: If you see a short term financial problem coming up, contact your creditors or loan servicer as quickly as possible if you are having trouble with your payments, and ask for more time. Many may be willing to work with consumers who they believe are acting in good faith. They may offer an extension on your bills; make sure to find out what the charges would be for that service — a late charge, an additional finance charge, or a higher interest rate.
  • Get Help: Contact your local consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget. Non-profit groups in every state offer credit guidance to consumers for no or low cost. You may want to check with your employer, credit union, or housing authority for no- or low-cost credit counseling programs, too.
  • Plan Your Spending: You can avoid going to a payday loan company if you take the time to understand your own finances. That means understanding how much comes in, how much goes out, and making spending decisions so you will have money left over at the end of the month.
  • Save More: You savings can help you avoid borrowing from a payday loan company in emergencies.

If you have not choice and have to use a payday loan company, borrow only what you can afford to pay with your next paycheck — and make it a goal to survive to the next payday without borrowing any more money.