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Financial Advisor Series: Beware of the Spendthrift Neighbor

| July 26, 2018
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We’ve all heard stories of lottery winners going on spending sprees and then declaring bankruptcy shortly thereafter. Rarely do we hear of the folks who live around them. In our financial advisor series, we wanted to share with you a recent study on the subject that included some interesting findings. Not only were lottery winners more likely to go bankrupt, but the neighbors of lottery winners were also more likely to declare bankruptcy. This brings true meaning to the old adage of “Keeping up with the Joneses.”

                The interesting point surrounding this discovery is that the study actually only focused on lottery winners who won $1 to $150,000. A prize equal to the median annual income of $22,331 increased the bankruptcy rate of neighbors by 6.6%. That’s a dollar amount that may not be far off from a nice bonus or the pay increase associated with a promotion. While a very nice pay bump, such pay increases are not unheard of, especially in the Ponte Vedra/ Nocatee area.

                The conclusion from the study was that, because the actual lottery winner buys goods which are visible by the rest of the neighborhood, then others begin to buy goods which are visible as well, such as pools, cars, external home modifications, etc.  Taken even further the additional spending in those neighborhoods is mostly funded by debt, which becomes a primary driver behind the eventual bankruptcy. The proper handling of debt is a crucial element to long-term financial success, but over one third of people between the ages of 30 and 49 have more credit card debt than savings.

                In addition to increased debt levels, the investment choices of surrounding neighbors were found to be riskier than those not living in proximity to lottery winners.  Neighbors were found to be investing in riskier stocks to try and make up for the gap in net worth between themselves and their lottery winning counterparts.  In addition to the prevalence of riskier investments and increased debt, some believe the downturns of 1929 and 2008 were driven partly by this phenomenon of folks trying to “one up” those around them in terms of their financial personas.

                What do these findings mean for the average person? They serve as reminders to make sure that you understand who you are and what it is that drives you as a person. Write these personal values down, because these are the things that most likely will serve to bring you fulfillment. The next time you want to take on more debt, invest in a riskier fashion, or make a large purchase, ask yourself if the decision is in line with any of those values. If the answer is no, then it’s likely that the decision is not right for you.

                How cash is handled in some of these more fundamental ways early on, when someone is in the accumulation stage of their lives, is very critical to long term financial success. These choices tend to have higher significance in wealth creation than any specific investment choice.  Plan carefully around capital allocations & cash flow, especially as an accumulator. Seek advice from a qualified financial advisor on making the right choices. For more information or to speak with a financial advisor at Capital Analysts of Jacksonville, contact us at (904) 730-7433.

Disclaimer:  This content was developed from sources believed to be providing accurate information. The information in this material is not intended to provide legal or tax advice. You should consult your legal or tax advisor for information concerning your individual situation.


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