Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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You want to gift the poor for them to become rich? Think again!

Posted by Muthu on September 22, 2010

First and foremost, I would like to thank our client Ms.Usha for her posting in the ‘Visitors Arena’.

To quote her “It might also be that people are not familiar with the fact that blogs can “provide commentary or news on a particular subject” or “function as more personal online diaries”. (Wikepedia).  Thank you Madam.

This should answer some of the people who say that I should write only on finance. They have absolute freedom to read or not read what I write.

I was expecting criticisms for yesterday’s article ‘Transformation’. Instead I’m pleasantly surprised with many positive feedbacks.

I was having a chat around 2 months ago with one of our client on the issue of poverty. He cited instances where people who got paid huge sums of money when Government acquired their lands for infrastructure projects and how many of them became poor again.

The gist of what he said was that poverty is not always necessarily structural. You may give a poor man good sum of money but ultimately he may loose all. The personality traits of a person play a major role in money management. I agreed with him.

Just to add a few words about him. He is one of the very intelligent and knowledgeable person I’ve come across in my profession. To be frank, given his knowledge, not only that he can manage his personal finance, he is capable of advising others too. I feel good when a person of such caliber utilize our professional services.

I stumbled upon a fascinating academic article, entitled “The Ticket to Easy Street? The Financial Consequences of Winning the Lottery”.

The professors were not just looking to learn the habits of lottery winners. They were searching for the answer to a much larger question: “Whether a bailout will have a permanent impact or whether it will merely postpone financial pain.”

In other words, does throwing money at people solve financial problems or just push those problems down the road?

The paper gives empirical proof of two things that I’ve been saying for a long time: (1) Bailouts don’t work; and, (2) People who get large sums of money run through it in five years or less.

The professors came up with an ingenious and comprehensive method for their research. They obtained a list of winners of the Florida lottery Fantasy Five lotto game from April, 1993 to November, 2002.

They compared those names to Florida bankruptcy records to see how many of the winners filed bankruptcy and when.

Filing bankruptcy means a person has completely hit bottom. You wouldn’t expect that to happen to a lottery winner. Yet it does. Over and over again.

In the first couple of years after winning a jackpot, people who won small amounts were more likely to file than were people who won larger amounts. That makes sense. Someone with a large amount of money can initially weather a bad time or keep creditors at bay.

After three years, large winners are more like likely to file bankruptcy than small winners. Also, people who received large sums did not use that money to pay down debt or increase assets.

Winning the lottery did not help people increase their net worth. They needed to have set goals and an understanding of finance to make their lives better. It appears that they did not have those fundamental tools.

Giving someone a lump sum does not make financial problems go away. It’s like putting an overweight person on a crash diet. Unless you can fix the underlying problem, he is going to fall back to his old habits.

This is true for lottery winners and the average American, too.

The professors’ paper refers to a 2007 study in the Journal of Political Economy, where it was determined that although “consumers initially used federal rebate checks to reduce debt, eventually debt levels returned to pre-rebate levels.

In other words, all of those billions we have been throwing at rebates, bailouts and stimulus programs have been a waste of money. They did not make a long term difference for people on Main Street.

You can see why bailouts fail. Wall Street and lottery winners have a common bond. They have access to easy money without restraints.

In my experience with lottery winners, some of the biggest reasons behind winners blowing their money is their family and “friends.” Easy money seems to attract an “entourage” or a “posse” of hangers-on who never tell a lottery winner the one word he needs to hear.

“No.”

The entourage hangs on until the money is gone. Once the party is over, they are nowhere to be found.

Wall Street has its own posse, called “Washington.” The easy flow of campaign contributions, the revolving door between regulators and those they are supposed to be regulating, and the explosion of well-connected, highly paid, lobbyists makes it impossible for Washington to tell Wall Street, “No.”

There has been talk in Washington of another stimulus package. Instead of looking at short term solutions, the country needs to make long term, painful, economic changes.

Otherwise, like the Florida lottery winners, we are going to wind up where we started from.

Or worse.

(with inputs from: Don McNay, The Huffington Post)

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