There are lots of sobering statistics about athletes that develop financial difficulties once their playing careers are over. In the NFL 78% of players are bankrupt or in dire financial difficulty within 3 years of their careers ending (Sports Illustrated March 23, 2009). In the NBA it is over 60% (Sports Illustrated March 23,2009). There are a few big questions that I am going to discuss over the next 3 blogs related to this topic. The first two are around the Why and the third is around What can be done to help?
Why does this happen?
At its simplest level it happens for many of the same reasons it happens to regular people in the working class. They spend more than they make and make bad financial decisions that they can’t recover from. At a deeper level I have found 10 more common trends amongst athletes that have fallen on difficult financial times. In this blog I will cover the first 5.
#1 – They don’t understand NET!
What I mean by net is they see these large paychecks and the players don’t fully comprehend how much they will have to pay in taxes, agent fees, attorney fees, and investment fees. In other words they don’t understand how much money they will net. There are too numerous to count the number of times an athlete has gotten in trouble because their tax advisor gave them bad advice and they ended up owing a significant sum of money for back taxes. If they aren’t playing anymore it is almost impossible for them to pay causing them financial difficulty.
#2 – Let the good times roll!
For many athletes getting that first contract is their first encounter with an amount of money that large. With little experience handling hundreds of thousands or millions of dollars they spend recklessly because they think they will be able to get their next big contract or signing bonus. If the next contract doesn’t come then what? For many it would be disastrous. Athletes become like so many people in this country living paycheck to paycheck.
#3 – The look at me effect!
For many professional athletes there is an image, in their mind, to uphold. They see boxer Floyd Mayweather flaunting fancy cars, bags of money, and expensive jewelry and they think that they should be doing the same. I call that the “look at me” disease. Expensive wheels, fancy cars, far bigger houses than necessary, planes, boats and jewelry are just a few of the purchase mistakes I have seen athletes make. Now I am not saying it’s not OK to want to have nice homes and cars and the finer things in life. I am saying that you should wait for those things until you have secured your financial future, whenever that might be.
#4 – Weak financial advice!
It is important for financial advisors to take the time to educate professional athlete clients. Financial literacy is very low across the country and amongst athletes that is no different. It is a financial advisors role to help athletes prepare spending plans during their playing days and then post retirement.
#5 – Bad investment decisions
I’m not talking about they bought Google instead of Apple or other stocks. I am talking about extending themselves into other private assets. I have seen athletes buy nightclubs, restaurants, golf courses, car washes, casinos, film production companies, and various other business and real estate entities. The problem is not necessarily what they are investing in but the level of investment into these various entities. Athletes tend to make big bets in assets that they don’t have control over or a full operating knowledge about. While it may be OK to put a small percentage of your assets into privately-held investments like real estate or a restaurant, it’s not OK to put 50% or more0 of your net worth into it. It is too much risk for athletes to take.
In the next blog I will cover the next 5 common themes I have found with athletes and why they go broke. If you are a professional or soon to be professional and you are looking for objective, independent financial advice, give me a call in my office at 336-310-4233.
A Thought from the Factory on Main
Peter Huminski, AWMA
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The examples of individuals represented is not indicative of all client experiences. Each client has unique circumstances. Examples presented here should not be interpreted as a guarantee of future performance or success.