Athletes and Their Money
By Scott Rojas, CFP®, MBA
We often see professional athletes sign million-dollar contracts and somehow file for bankruptcy a few years later. Chris Dudley, a wealth advisor and former NBA player, states that, within five years of retirement, 60% of NBA players and, within two years of retirement, 78% of NFL players are broke or in financial distress. Most of us will not be signing a five-year contract for $100 million, but what can we learn from these athletes to help us achieve peace of mind within our financial and personal lives?
What Not to Do—Real-Life Examples
We kick this list off with NBA player Vin Baker. He played in the NBA for 13 years and earned around $100 million. After being retired for only 10 years, he depleted his bank account. He is now training for a Starbucks managerial position at a store on the East Coast.
Pete Rose, OJ Simpson, and Diego Maradona are all examples of athletes who got into trouble with more than taxes—but we will focus on taxes. Some of the tax issues here can be related to greed, ignorance, or not having the right people around them.
Curt Shilling played Major League Baseball for over 20 years and earned more than $114 million. This wealth did not stop his company, 38 Studios, from filing for bankruptcy. In addition to Curt Shilling’s investment in 38 Studios, the company also received $75 million to start a video game company, and after releasing only one game, they filed for bankruptcy in 2012. Rhode Island lost $75,000, and Curt Shilling filed for bankruptcy.
Dorothy Hamill, America’s 1976 Olympic gold medal winner, also fell into making poor financial decisions. In 1993, she was still more popular than Michael Jordan. Yet, in 1996, she filed for bankruptcy. Her ex-husband was to blame for many of the poor financial decisions. Today she is worth an estimated $5 million, and her advice to others is to surround yourself with a good team.
Mike Tyson made over $400 million during his boxing career and declared bankruptcy in 2003. The primary reason was his excessive spending. One example that needs little explanation is that he owned several tigers.
What Can We Learn?
First step, regardless of how much you make, is to create a budget. This should include everything and allow you to live for today, save for an emergency, and save for the future. I recommend gathering information to understand how you really spend your money, not how you think you spend your money. A good online tool for this is Mint.com, which allows you to automatically track and budget your spending. Mint tracks your paychecks, taxes, and living expenses from both your bank and credit card accounts.
As noted above, a key tool for financial success is to create an emergency account—and forget about it. This fund is for the events in life that are hard to predict. It could be a car accident, broken water heater, major car repair, or medical emergency. As a rule of thumb, a good number to save is three to six months of living expenses or $10,000. Make sure this emergency fund is included in your budget until you get to your target number.
Now you have created and are living on a budget. The next step is to save for the future. As we all know, Father Time is undefeated—someday you will no longer be able to work. Now is the time to save for the future. The earlier you start, the more time your money has to grow. If your company has a match in the retirement plan, use it. It is not uncommon for a company to match dollar for dollar up to 3% of your income. So, at least save 3%, which gets you to 6% when you combine your contribution and your employer’s match. Over time, work toward saving 10% of your income. Please note, the amount to save varies for everyone, so you’ll either need to find a good retirement planning tool or consult a professional.
Diversify your investments and be patient. A good solution can be a target-date fund or a balanced mutual fund. Two balanced-fund examples are the Vanguard Star Fund and the American Balanced Fund. Both of these funds have a combination of bonds, stocks, and cash investments and have low expenses. Most retirement plans offer a target-date fund that matches the approximate year in which you will retire.
A little tax planning can go a long way. Make sure to consult with your CPA or accountant and your financial planner. We have seen situations where planning has saved clients anywhere from hundreds to thousands of dollars.
Summary
The formula for financial success is simple, but the execution can be tough. You cannot execute your plan without gathering the data and following through. Make sure to surround yourself with a qualified team. You’ll likely need an accountant, financial advisor, and attorney.
Please feel free to share this article with a friend or schedule a meeting with us to review your goals and develop a plan for your future.
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Sources
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http://money.com/money/4876643/9-wild-ways-professional-athletes-spend-their-millions/
https://bleacherreport.com/articles/2068695-hilarious-things-athletes-buy-with-their-money#slide0
http://community.seattletimes.nwsource.com/archive/?date=19901210&slug=1108679
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https://www.cnbc.com/2018/05/14/money-lessons-learned-from-pro-athletes-financial-fouls.html
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