If you’ve ever uncovered “found money” and decided to save most of it, you’re already acquainted with the idea of consumption smoothing. It’s the economic principle that people avoid abrupt swings in their standard of living, and income and saving go through cycles over a long period of time. There are many ways to use this theory to support a lifelong financial strategy:

1. Sock away about 90 percent of a windfall. Don’t let the extra money go to your head; you probably have some savings goals that could benefit from a boost. Have you maxed out your Roth IRA, assuming you qualify? Are you working on a down payment on a house? Divide the money among your various priorities, and think about which deserves the lion’s share.
2. Don’t deprive yourself… Especially in the event of an inheritance or work-related bonus, you should enjoy at least part of that money to respect the wishes of close friend or relative or as a reward for a job well done.
3. …but understand the usefulness of delayed gratification. One reason lottery winners so often go broke is that it feels like money will solve all their problems, and that such a large sum will never run out. However, without sound financial planning, neither assumption will be true in the long run.
4. Live like a college student for as long as possible. When your income is the lowest it will ever be, also committing to keeping your standard of living low will make it easier to save as you climb the job ladder and rack up raises. The younger you are when you strike the balance between saving and spending, the bigger your nest egg will be to sustain you when you’re older thanks to the power of compound interest.
5. Yet it’s never too late. Don’t get discouraged if you spent your 20s and 30s paying down college debt and trying to make ends meet for your young family. Income typically peaks around age 50, which puts most households in a great position to play catch-up. Take advantage of this upswing in your financial life-cycle and buckle down on savings when you’re best able to afford it.

What’s a housing lottery? In major cities that have large income disparities and limited desirable neighborhoods, the government has set aside a small number of affordable housing options for people who fit strict eligibility requirements (often prioritizing disabled, elderly, or low-income residents). Apartment dwellers pay rent based on a sliding scale — usually one-third of their income — and the housing authority picks up the rest. But because demand far exceeds supply, you can only get in on this deal through a lottery.

The result is known as an economic shortage.

In New Orleans, for example, 4,000 vouchers were awarded among 28,865 applicants, so lots of people walked away empty-handed based on nothing more than bad luck. And in New York, city workers are also included in that priority pool, leading to accusations of nepotism (a common side effect of shortages).

The smart economic solution would be to do away with housing lotteries and let rent prices achieve an equilibrium where the number of willing buyers equals the number of coveted apartments available. It may not be the feel-good solution, but why should getting the apartment of your dreams be a matter of having your name picked out of a hat?

Callie Rogers was 16 when she won a jackpot of £1.9 million in Britain’s lottery (equivalent to about $3.1 million in USD). Now she is 22 and has virtually nothing left:

Her winnings have been spent on expensive cars, gifts, loans to family members, four houses she bought and furnished for herself and family members, luxury vacations, plastic surgery, clothing, and partying, as well as a trust fund for her children. “I won’t lie, I’ve blown most of it,” she said. “But do you know what? I don’t care. Because all that money has brought me is heartache.”

Rogers said she had £20,000 in a bank account and “that’s about it.”

A child trust fund set up for her son was “raided” by [her ex-boyfriend], but around £15,000 is left.

Rogers also reports spending an estimated £250,000 ($406,000) on cocaine and says she is seeking therapy for depression.

Had Rogers known that sound planning — not wealth — is the biggest determinant of feeling financially stable, she might be in a better position today. And since we at Econ4U are fascinated by how many lottery winners end up broke, we offer these tips on how not to blow your good fortune should you ever be in such a lucky position.

Members who put $25 or more into a Save to Win one-year CD are entered into a monthly “savings raffle” for prizes up to $400, plus one annual drawing for a $100,000 jackpot. Only Michigan residents are eligible to participate.

This unusual CD is federally guaranteed by the National Credit Union Administration and pays between 1% and 1.5% annual interest, a bit lower than conventional rates. In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside.

The New York Times‘ Freakonomics blog calls it “A Lottery for Smart People”, but I prefer “A Smart Lottery for Stupid People.” As the WSJ notes above, their rates are fairly low — about the same as an online savings account. Usually the deal with CDs is that they pay out more in exchange for keeping your money tied up for a while, so a measly interest rate is quite a handicap. And a quick glance at the rules on their site shows that individuals can enter up to 120 times per year for a chance at $415 of monthly prizes and the $100,000 annual grand prize, so the probability of winning is quite slim.

(So, if you live in Michigan and have a bit of income to save every month you should almost certainly buy a CD based on the best rate you can find, not whether it enters you into a raffle.  Start with the always-excellent Bankrate.com’s CD rate comparison tool.)

But putting practical considerations for Michiganders aside for a moment, the idea itself is quite good. One of the problems with savings accounts, CDs, and low-risk long term investments is that they aren’t very exciting. How often have you heard someone at work crowing about the 1-year 1.8%  CD they just bought? We bet about never.

And if you didn’t know very much about investing or saving, what would spur you to put money into something that guaranteed such slight returns? Programs like Save to Win are great because they put a fun, sexy face on what is otherwise boring (yet smart) behavior. Expect to see it widely imitated.

Buying an occasional lottery ticket for fun isn’t a terrible idea. At least if being virtually guaranteed to lose is your idea of a good time. After all, it’s pretty much like making a non-tax-deductible donation to the government, and if you only buy one or two every few weeks then you aren’t spending too much anyway.

But what happens if you’re lucky enough to win? The Seattle Times had an interesting article yesterday with tips on what to do if you pick the right numbers. (The Times’ tips also largely apply to those fortunate enough to receive a windfall inheritance.) Surprisingly, many of the tips are good advice even for people who aren’t absurdly lucky:

Keep an emergency fund:

“One of the first things we recommend has nothing to do with investing at all,” said Dan Keady, director of financial planning for TIAA-CREF, which helps teachers, professors and doctors manage their money. “It is creating an emergency fund of six to 12 months.”

Once you have an investment strategy, you don’t want to disrupt it by constantly pulling funds to cover out-of-the-ordinary expenses. An emergency fund, usually with cash in money markets and other conservative, easily accessed accounts, helps investors navigate the unexpected.

Invest your money into a balanced portfolio, even if that means adding risk:

Investing is an individual exercise. Everybody has different goals, time horizons and tolerance for risk. About the only thing that is constant is the need for diversification, putting money into several kinds of investments to hedge against losses in any one.

Coming in to money will change your lifestyle, tax bracket, and investment strategies overnight. And if you allow the exuberance of winning the lottery (or pain of losing a loved one) to cloud your judgment, you could lose it all. And as this Bankrate.com article points out, losing it all after winning big is not uncommon:

Missourian Janite Lee won $18 million in 1993. Lee was generous to a variety of causes, giving to politics, education and the community. But according to published reports, eight years after winning, Lee had filed for bankruptcy with only $700 left in two bank accounts and no cash on hand.

So if you’re dumb enough to play the lottery but lucky enough to win, first “time a timeout” and don’t make any rash decisions, and then hire the right professionals to make sure you don’t wind up penniless.