Managing Your Money Badly

There's a lot of ways to manage your money and everyone has an opinion, especially if you hit a windfall, like a lottery. Everyone thinks they've got the answer.

I read an article today by such a person. In her article, "Getting in Touch with Your Money Style," the author tells of a person who won a million-dollar lottery and her tendency to spend all of her winnings. Because this lottery winner knew her tendency, she was "in touch with her money style."

Therefore, this lottery winner decided to take equal payments of her winnings over 20 years instead of taking a single lump sum. Now on the surface that might sound smart, but actually, that was a very bad decision for 2 main reasons:

1) This individual never addresses the need to change their spending habits
2) 20 years from now, those distribution payments will be worth a lot less.

Let me explain both of these reasons.

First, by not addressing the fact that this person has a spending problem, she will now successfully spend her lottery winnings over the course of 20 years (as apposed to all at once if she had gotten a lump sum). That is managing your money badly.

What this clearly means is that just being in touch with your "money style" will do nothing to get you out of debt and build wealth. Anyone who wins a million-dollar lottery should be wealthy for life but not this person. They are too busy enjoying their short-term wealth. Too bad it won't last.

Second, taking the winnings over the course of 20 years is a windfall for the government or whoever managed the lottery. They've got a million dollars now that they get to play with...forever.

Think about it, if the entity that's holding the bag of gold invests it in just some safe mutual funds earning 10% a year, they'll earn way more than enough interest to pay out the proceeds to the winner, all the while, being able to keep the million dollar principle and do whatever they want with it. That's managing your money wisely.

To make matters worse, the spending power of those lottery payments will dwindle significantly over time. Any idea how far a $50,000 lottery payment will go after 20 years, when inflation has had a chance to creep up at 3% a year or more? Look BACK 20 years and ask yourself what you could have bought for $50,000. Any chance of getting that for the same amount now?

Managing your money doesn't have to be hard or complicated, but it does take some action on your part. Action to CHANGE your "money style," or rather, habits. Once you change your bad habits and start using your money wisely, you won't have to worry about your "style" let alone managing your money badly.

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Reference:
"Getting in Touch with Your Money Style"
http://finance.yahoo.com/expert/article/moneyhappy/34992