Lottery Riches

The majority of lottery players tend to think that they need to hit the jackpot to secure financial freedom for themselves, but in real terms I think that this is not the case at all. Yes, if John Smith has his heart set on buying himself a private jet or his wife Jane wants to live in Smithingham Palace then a decent win of several million would be necessary, but if the couple only wanted to free themselves from having to worry about money for the rest of their lives then a win of six figures could well be sufficient.

Let's assume that the Smiths (the couple, not the masters of melancholic melody) have a combined income of £30,000 per year. Let's also say that they have a £90,000 mortgage and £10,000 in other debts. If all that the Smiths wanted to do was to clear their debts and have an income of the same £30,000 per year (which would seem larger because they would have no mortgage payments) then they could potentially achieve this by winning £400,000. This would give them £100,000 to pay off their debts and leave £300,000 to invest at an annual return of 10%. Even if they could only get a 5% return per year they would only need to win £700,000.

Of course, this doesn't take into account the impact of inflation, but we're assuming that the Smiths know nothing about investment. If they became active investors, rather than passive investors (perhaps by reading a book like Understand Shares in a Day or attending an investment course) they could potentially make 15% or even 20% return on their win. And since they only need £30,000 to live on, the rest would benefit from the magic of compound interest.

Now £30,000 a year does not buy anyone a celebrity lifestyle. But really the majority of lottery players don't want that, and this is clear from the number of winners who choose to remain living in the same neighbourhood - and often in the same house - as they did prior to their win.

What most people want is the mortgage off their back and enough cash in the bank to pause long enough to smell the roses rather than the sweat of their own toil. And for these people, a decent six figure win could well be enough.

This is good news, because winning a mid to high six figure sum is statistically a lot easier than winning a multi-million pound jackpot - especially in games like Euromillions or the Lotto when it rolls over a few times.

So, how much is financial freedom for you? To find out, multiply your household income by ten and add on your total debt, including your mortgage. This is the amount you would have to win to clear those debts and remain on your current income assuming a net rate of return on your investments of 10%.

If you're like many people, when you do this exercise you'll realise that financial freedom costs a lot less then you currently imagine.

Article Last Updated: 12/06/2007 14:03:27

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