Recently, my 10-year old son Ethan asked me what I would do if I ever won the lottery. What a great question. How we answer this question says a lot about how we feel about money and what we value most. After pondering the question for a moment, here is what I would do.
1. Pay off my mortgage
Ever since I took out my first mortgage, I’ve longed for the day when it would be paid off. Like many of you, my mortgage payment is my largest monthly expense, and every time I write that check, I imagine all of the other things I could do with that money. There are plenty of people who would argue that paying off debt with a low, tax-deductible interest expense is not a sound financial principle, and I understand the logic behind the argument, but I simply don’t like the idea of owing someone else money, no matter how inexpensive the cost to borrow may be. Having this monkey off my back will allow me to pursue other endeavors I’d much rather be doing
2. Invest in my children’s education
As Whitney Houston once sang, “I believe the children are our future,” so for this reason, I would plan to fund their education (that and knowing that their financial aid options would probably be limited to student loans, and you know how I feel about debt). There are two important questions I would need to answer to fulfill this wish, namely how much to set aside, and what type of account to use to hold the money.
Since the cost of their education will depend on where they go to school and on what they study, and since my children are too young to be able to answer those questions definitively, I look for help from the College Board website. This resource not only provides information and statistics on the cost of education, but it also has tools to help kids identify fields of study they may be interested in, along with tools parents can use to estimate how much to save for each student’s education.
When it comes to setting money aside, if the total cost of investment is below $100,000, a 529 College Savings Plan is a relatively simple and tax-favored way to save, but for larger investments, I might need to consider an educational trust. Whatever I decide, the important thing is to make sure my kids benefit from my good fortune.
3. Execute my retirement plan
With my mortgage paid off and my kids’ education well-funded, I’d probably focus next on my retirement. Just to be safe, I would assume that I would NOT receive any benefits from my employer or the government when it comes to retirement income and healthcare. With that in mind, I would use a simple financial calculator to estimate the amount I would need to save in order to enjoy the retirement lifestyle I am looking forward to, keeping in mind that the average 65-year old couple is expected to spend nearly a quarter of a million dollars on average on medical expenses in retirement (in today’s dollars).
4. Prepare my estate
Lastly, once I’m confident my retirement is well-funded, I would look at what needs to be done to ensure my assets transfer to the next generation in the most cost-effective, tax-efficient way. Recent legislation made last year’s estate tax exemption amount permanent, so in 2013 my wife and I can each transfer a little over $5 million apiece without incurring any transfer taxes, but if my lottery winnings exceed this amount, even after I take steps 1-3, then I may need to do some more advanced estate planning to solidify my legacy
5. Live out my true passion
So far, all I’ve talked about is how my family and I could benefit from winning the lottery, but I also think it is important to consider how winning the lottery could benefit the greater good. I have a heart for ministry, and I love to support some of our local ministries through both charitable giving and service. If I were to win the lottery, I would use the money to establish my financial independence such that I could pursue my true desire, which is to work in youth ministry full time.
And this is what I believe to be the greatest benefit to the question. I know I’ll never win the lottery—simply because I never play—but that should not stop me from dreaming about it. These dreams can help us develop financial goals, which in turn can help us develop plans for pursuing these goals. It’s often in the absence of goals that we end up making less than desirable financial decisions. As an exercise, contemplate the question “What would you do if you won the lottery,” and write out your answers. Use those answers to formulate financial goals and then consider working with a financial coach or professional that can help you reach them.