In Part 1 and Part 2 I looked at the common themes that lead to professional athletes having financial difficulty and bankruptcy. At the core the reasons are the same as most people: they spend more than they make and they don’t have a sound financial plan for the assets they do have.
Athletes, financially speaking, are not much different than mega jackpot lottery winners. We have all heard the stories about 10M lottery winners going bankrupt shortly after receiving their windfall. Why does that happen? Commonly it happens because they are not equipped with the financial education to deal with the complexities of sudden wealth. That and they spend the money on outrageous stuff, not unlike many professional athletes.
Here I offer a 4 step guide for professional athletes and young people to basic personal finance.
- Be AwareIt is important for young investors to be interested in their financial affairs and planning from the beginning of their careers. You should know exactly where all of your money is going every month and where all of your assets are located. You need to understand what you are paying in taxes and fees. You should also be aware of how long you are likely to work and how much you can anticipate making during your career.
- Have A Plan
I preach the importance of planning. You didn’t become a professional athlete by accident. It took a plan that took work and time. Your career and your finances are no different. Your financial plan should have phases and they should match up with your career: the rookie years, your top earning years, and life after sports.
During the rookie years your focus should be on saving money and refining your skills so you can maximize your game. Don’t worry about buying fancy cars, homes, watches, rims, clothes, and other luxury items. You will have time to spend more in the future as long as you remain in your means. By saving now you will be able to have a more enjoyable time in your life after sports. The last part of your career plan will be the longest. Odds are that your life after sports will be 40 years or longer so it is important to make a workable plan for all three phases. That is why you see many former players as TV commentators, entrepreneurs, and coaches.
3. Avoid Debt
I wish I had received this advice when I was beginning my career. It is so easy to get caught up in the world of immediate gratification. The problem is that when it becomes a regular habit you could wake up with a mountain of debt. Once that habit starts it is very hard to break. Thomas Jefferson once said “Never spend money before you have it.” It is a wonderful lesson. Debt turns people into slaves constantly working to pay their next bill. I want my clients to be free to pursue all of their hopes and dreams. Now I’m not saying that you can’t borrow money to buy a house in the future but I am saying that you need to live within your means and avoid debt as much as possible.
4. Keep It Simple
Now what should you do with your investments. I believe in avoiding overly complex and expensive investment products. I am a big believer in asset allocation. As a professional athlete you are likely in your early 20’s and have a long time horizon for these investments so you should consider having an asset allocation made up of broad asset classes like US equities, international equities, and bonds. You should have an allocation for the long term that will be able to help you with your needs as you move into the final stage of your career. It’s important to remember that investing involves risk and no strategy including asset allocation assures success or protects against loss.
You have the metaphorical winning ticket what are you going to do with it?
Are you going to work towards thriving financially or are you going the path of many before you toward the B word?
If you need independent objective advice centered on your needs and goals or just want a second opinion, give me a call in the office to discuss how I work with my professional clients. I can be reached at 336-310-4233.
Another 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.