How can Professional Athletes going broke help me?
How can Professional Athletes going broke help me?
It’s no big secret that the majority of professional athletes are terrible at maintaining their wealth. There has been plenty of coverage on it in the media over the last few years. In April 2012 ESPN aired a documentary called Broke. The documentary interviewed multiple athletes, managers, analysts and numerous others from a variety of pro sports about the financial difficulties athletes face throughout their lives. Sports Illustrated also posted a popular article in 2009, How (and Why) Athletes go broke and more recently this topic was revisited by NPR.org and The Players Tribune. All of these provide reasons on how and why athletes go broke.
That’s definitely interesting information, how can this help me?
Well that’s what I’m here to help you out with. There’s tons of information (linked above) and the documentary is interesting as well, but they’ll all take time to read and watch. So here’s my take on five things we can learn from pro athletes going broke.
- They try to keep up with the Joneses – On every professional sports team there are only a handful of extremely well off athletes. These are the guys you hear about in the news, A-rod, Lebron James, Christiano Ronaldo to name a few. These are guys who are bringing in 8 figure salaries each year, multiple endorsements and are regularly featured in the media. You also have a few veterans that have been in the league making the average salary for several years. Unfortunately for everyone trying to keep up, these are “The Joneses” in sports.
Now enter a rookie fresh out of university who has never received a pay cheque above a few hundred dollars a week since they dedicated their lives to reaching this point to play on a team with their idols. They’re going to try to impress and be “one of the guys”. They’re out buying tailored suits, big houses, fancy cars and lots of partying; living beyond their means. Before they know it something happens and their income decreases and they cannot maintain their lifestyle.
This is actually a common occurrence in all professions and levels of income. How many times have you seen young people just starting their career and buying a brand new car that stretches their salary out. Or people succumbing to peer pressures and going out to lunches with the office instead of brown bagging it or increasing their spending but not focusing on their saving. You can even see this in grade school with kids trying to wear all of the latest trends and trying to one up each other, although that one isn’t usually their own money but it just shows the social pressures start early.
So what can we learn from this? Well you need to realize that just because some people have really nice things doesn’t mean they can afford them. There’s a good chance with all of that stuff, they also have lots of bills and debt. If you want to achieve financial freedom you need to increase your savings not your spending and don’t ever “make it rain” like a baller.
If you’re going to go into debt, it’s best to do it for hopefully a non-depreciating asset like a primary home or income property; at the very least it should be something that doesn’t instantly decrease in value as soon as you own it.
- They have no idea how their pay works and taxes– In a few articles and documentaries I’ve watched the players mentioned their complete lack in personal finance knowledge. There was mention of an athlete who was paid with a million dollar cheque and never cashed it. When the team managers asked him about why he didn’t cash it, he told them he had it framed! There were plenty of athletes that didn’t even have bank accounts or know that they had to pay so much in taxes.
This one is a lot easier to avoid now a days. Taxes for most people are taken off their pay cheques automatically from their employers. Direct deposit pay days are also extremely common now, especially in larger businesses. The biggest thing is to ask as many questions as you can and don’t stop educating yourself. It’s your money, and ultimately your responsibility to make it through this life on your own. There are tons of online resources you can read and plenty of great books, in a future post I’ll make sure to list a few of my favorites.
- They don’t know who to trust with their money – Athletes are prime targets for white collar criminals trying to swindle as much money out of them as they can. They’re also taken advantage of by family and friends. Sometimes it isn’t malicious from their relatives but it can sometimes be disastrous. I remember reading the story of the Columbus Bluejacket’s star defenceman Jack Johnson and how his parents managed his money into bankruptcy. Jack was making 5 million a year and his parents were taking out loans in his name with interest rates higher than some credit cards.
So what can we learn from this situation? First of all, money exchanged between family and friends should only be gifts. Advice on finances and investments should only be taken if you have someone who has saved and made a lot of money for themselves through their own hard work. Please be very cautious when investing with friends and family that have a “buddy” with a great investment idea.
Secondly, make sure if you’re taking advice off of anyone, their advice does not make money for themselves. Flat rate financial advisors are your friend, they have nothing to gain from telling you one thing or another but they have everything to lose on their reputation and your referrals. If you’re taking investment advice from someone trying to sell you funds they manage, or get a cut of the profits, they’re just glorified sales people.
- They make a lot of high risk investments – Some Pros might have a bit of an ego and think they can just win at everything they do. This is also common in doctors and other high paying professions. They think that because the majority of their lives are just “wins” with the high salaries and dream jobs they can just keep on winning in everything else. I can be guilty of this myself, sometimes I feel like I need to sabotage something small on myself in order to keep me in line and from getting too cocky.
Athletes don’t see risks as most people do, they’ve literally dedicated their lives to being great at one thing and think they can be great in everything. This can also be exaggerated by the fact that large sums of money aren’t as hard to come by for them. $50,000 is a lot of money to the vast majority of people. You can start several small businesses with that kind of cash but that’s a week’s worth of wages for most professional athletes so what does it matter if they give it to someone promising a 100% return on investment? Once you give out a few of those and don’t get anything back it’ll start to hurt no matter who you are.
A lot of these high risk investments usually involve investing in a business of some kind. These are sometimes brought to them by family and friends like above. But the athletes don’t work at these businesses and leave it up to someone else. According to Bloomberg 80% of businesses fail within the first 18 months. Combine that with the fact this business is being funded by some rich athlete and how hard do you think the manager is going to work if they run into some trouble? They don’t necessarily have everything to lose so that may take away some of the drive seen in other entrepreneurs.
- They gamble, a lot. – Gambling at casinos is not in your favor. Period. Placing random bets with co-workers is usually not a good idea either. Athletes can have a competitive drive and urge to win, more so than you or I so they have been known to drop huge amounts of money on single bets and at tables. Charles Barkley once said in an interview he estimated his gambling losses to be about 10 million dollars.
This is something I’ve been guilty of and have seen a lot of working in Fort McMurray, Alberta. Now average salaries in the oil industry don’t compare to average salaries of sports professionals but there are a lot of young people making close to or slightly above a hundred grand in a year. At my work place I’ve seen just random bets on facts for upwards of $100. So I can’t even guess at the astronomical bets that some pros would make in the locker rooms with each other.
This is the easiest one to learn from; don’t gamble. The odds are never in your favor and you’ll be urged to chase your bets to try to win it back, and that’s a steep and slippery slope that will only lead to more losses. Casinos are the inverse of stock markets, the more time you have money in casinos the more you’ll lose.
Basically from all of these articles you can see professional athletes are just like regular people in the sense that we’re all pretty bad on average for managing our money. The only difference is their pay scales are much higher than ours and they can fall a lot faster. Just be smart and try to keep this from happening to you.