ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Sunday, September 29, 1996 TAG: 9609270030
SECTION: BUSINESS PAGE: 1 EDITION: METRO
COLUMN: Wealth
SOURCE: JOHN LEVIN
The Pulaski County couple who this month won $5.8 million in the Virginia lottery said they planned to pay off some medical bills and probably would buy a new car.
The Norfolk winners of $13.3 million in April planned to take a trip to Hawaii and buy a new car.
Last November, a man and woman from Hampton picked up $24.9 million, saying they intended to acquire a new home and a new car.
You have to look back to August 1993 to find lottery winners, a couple from Newport News whose windfall totaled $24.5 million, without such big-ticket spending plans. "We just finished making the last payment" on the 1988 Taurus, Gerald Ranes said at the time.
Buying cars is so common among lottery winners that maybe dealers should consider selling tickets in their showrooms - a one-stop shopping approach.
"It is hard to generalize what people do when they win," said Ed Scarborough, spokesman for the Virginia Lottery Department in Richmond, "but a car is a typical scenario."
"I think it's pretty safe to say that, as far as men are concerned, there's a tendency to look for high-ticket luxury items, boats and cars. For women, they're more inclined to look for a new house," Scarborough said.
But spending plans mentioned by winners at payday news conferences don't really reflect what people encountering such windfalls actually do with their money, according to those who've watched and studied the process.
While most lottery winners talk about buying something that provides them instant gratification, many have longer-term plans, to make sure they enjoy the security of extra income or independence.
"People on average don't just throw it away," said Richard Cothren, associate professor of economics at Virginia Tech. "Basic economic theory about consumption is that it is tied to your permanent income. When you have a windfall, you spend it over the rest of your life."
And it is wrong to assume that buying a house or car or boat reflects profligate spending, because such big-ticket items are durable goods, items that will provide years of service or appreciation or allow the buyers to live more comfortably the rest of their lives.
Wealth, he said, is defined by a combination of financial capital - investments and tangible items - plus human capital, by which he means a person's earnings over a lifetime. Spending generally is a function of both factors.
"On average, we do the right things for ourselves," Cothren said.
That seems surprising considering that spending is natural for most people, while investing money is not as widely practiced. In 1992, according to a Federal Reserve Board study, only 18 percent of American families owned stock and 11 percent owned mutual funds.
Steven Danish, a Virginia Commonwealth University psychology professor whom the Virginia Lottery has hired to counsel winners, said the euphoria of instant wealth generally gives way to a need for financial planning.
When he watches television reports showing lottery winners, Danish said he "can predict how well they'll do with their money.
"When I hear people talk only about spending, you know they're not going to make it. When you hear them say they're thinking about the future, you know that person will do well."
While there are lottery winners for whom the money burns a hole in their pockets and leads them deep into debt, Scarborough said the Virginia Lottery feels responsible to make sure they're aware of the limit of their new wealth.
An instant millionaire is reminded he'll get the cash in chunks over 20 years. After taxes, that amounts to about $34,000 a year and, considering inflation, its buying power is gradually smaller. If winners owe back taxes, that's immediately taken from the payout.
And while the lottery officials are not in the business of providing financial advice, winners who've never had the responsibility of managing large amounts are encouraged to get legal and financial advice, Scarborough said.
The most common factor among winners, he said, is "nobody becomes the great person they want to be simply by winning a lot of money.
"Some look really happy, some are closed and more cautious.
"The ones that are happy, I'd put 100-to-1 odds that they are already happy."
LENGTH: Medium: 81 linesby CNB