When you receive a lump sum payment or an annuity, there’s always an inherent risk that the actual amount received may be less than what was anticipated. This is due to the very nature of annuities. With annuities, you do not have an accurate idea of how much income is coming in and going out within a specified period of time. This creates quite a bit of concern among people who are receiving these payments. So how do you deal with this risk?

One thing that many people really enjoy about receiving lottery winnings is the feeling of excitement. However, because lottery winners can only collect so much of the prize money, the chance that they won’t have enough left at the end of the allotted time is very real. When you take the time to calculate the value of your annuity payments versus your lump sum payment, there’s a fairly good chance that you will come up short. This is where many would happily give up on their annuities rather than face this possibility.

A few years back, my wife received a small cash award from a credit card company. She was very excited, as she had never won anything big like this before. We all had fun spending the money and splurging on things we wanted….as long as we paid off the debt as quickly as possible! Unfortunately, once we exhausted our credit card limit, the money didn’t really add up.

We were able to settle the credit card debt fairly easily, since my wife had some extra money on her hands. But was she happy? No, of course not! She still owed thousands upon thousands of dollars in interest, and she wasn’t making any more money than she had when we first got the credit card. It turned out that the lump sum we’d gotten was no bigger than she was making at her job as a cashier.

If you’re asking yourself the question “Am I Better Off With a Lump Sum versus Payments?” You should realize that there are definitely advantages to consolidating your debt with a lump sum. You’ll get the same payment each month, and you won’t have to worry about accumulating more interest or having to deal with late fees. And the tax benefits are significant, as long as you have a substantial amount of property (a home in most cases) that you can sell in order to pay off your debt.

You can think of the discount rate on a loan as an interest rate on a loan. The rate is variable, and depending on your circumstances, it could be high or low. If you start with very little equity in the bank, your payments might be pretty high, but you could always sell some of your assets and pay off your debt at a low interest.