The challenges professional athletes face with money

The challenges professional athletes face with money

In the beginning of a traditional career, while learning the skills of their profession, most people are also learning from the financial mistakes they make with smaller earnings. This natural financial learning process allows them to gain insightful experience and knowledge as time goes by, which prepares them for when they will earn more and be required to handle larger sums of money.

As a career advances, most income peaks happen during its later stages. By then, most people have advanced their money management skills to a level which may not be as high as that of a financial advisor, but will be sufficient to avoid all common challenges a novice faces in the areas of impulse purchases, debt management, loans to friends and family, living within one’s means, proper savings rates, and more.

When most athletes sign their first employment contracts it’s similar to winning the lottery, and they are instant millionaires!

Professional athletes generally evolve through three financial phases of their career: Phase one – accumulation; Phase two – transition; and Phase three – retirement.

Essentially, athletes are broke prior to starting their careers. They typically sign their first contracts around age 21, although this age level has been dropping over the past 20 years. That is not an age when you typically find excellent long-range planning skills. Upon signing those contracts they become instant millionaires and continue to be so as long as they remain professional athletes. Then, they retire and can revert back to being broke following the end of their careers. For the professional athlete, making money is the easy part; keeping it is the hard part.

Outside observers believe that professional athletes are uniquely blessed. The common thinking is that they get a good financial head start, one that the average worker does not enjoy, and they make more than enough to be “set for life”. In most cases professional athletes may actually be cursed. This unbelievable good fortune comes into their lives before they have the money skills to properly manage the money. It is said that financially blessed people have a choice: to either live like a king for a short period of time, taking everything life has to offer, or to live like a prince forever.

Sudden financial good fortune, or instantly gaining large sums of money, can cause “the sudden wealth effect” where by those who feel more financially secure quickly increase their spending.

In most cases, it occurs prior to having financial maturity and money management experience. And, if a person with poor money management skills receives a large sum of money, in most cases, the money will be wasted in a very short period of time. To add to this challenge, while most professional athletes do stay in school long enough to receive a college degree, they get very little financial training and can leave college somewhat financially illiterate.

Most professional athletes expect to play in their leagues longer than they actually do, and have no plans for life after their sport, although a college degree may give some more options for a second career. Often, they never even recognize much less plan for the approaching end of a career because it may come unexpectedly through injury, illness, accident, being cut from the team, or poor performance, to name a few possibilities.

Most professional athletes’ careers last only 5 years, but they need to make their incomes last a lifetime.

As they get closer to the end of their careers, many professional athletes find themselves under financial duress, chasing big money deals and hoping for big money returns; wanting to invest where they think they can double, triple or quadruple their money in a short period of time. They tend to open restaurants/bars, car washes, start record labels, etc. in the hope of finding the big money deals that will allow them to maintain their lifestyles. They can become easy victims to these types of investment schemes and end up losing all the money they invest, especially if the investment advice comes not from a professional, but from friends and family who have little or no formal financial training. Others many end up losing all their assets by granting requests for financial hand-outs or loans.

Few athletes plan for the health care required to provide them comfort after their playing days.

Football players, more than any other sports group, have an additional 65% chance of permanent injury during their professional careers.

After retirement, the professional athlete goes through a metamorphosis, and the entire household must adjust. The athlete, who was only home on a limited basis when playing and making money, is now home 24/7 and may have serious health problems as well. If attempts to start a second career were not successful, the stress increases for all. As a result of these kind of changes, as many as 60% of all players are divorced within three years of their retirement, and the financial impact of such life changing events can be devastating.

Financially blessed professional athletes do go broke. After just two years of retirement, 78% of former NFL players are bankrupt, or in financial distress. Within five years of retirement, 60% of former NBA players are broke. Numbers for MLB and NHL former players are believed to be in the same percentages.

If you are not a professional athlete, what can this mean to you and your own family?

If it is possible that these things occur to professional athletes, the very same things can occur to the heirs of any sizable estate, those who have just sold successful businesses, and anyone else who has received an unexpected windfall. They will have to be able to say no to monetary handouts for friends, spouses, children and siblings. They cannot be financially illiterate, but instead need to show financial maturity and advance their money management skills and experience in order to properly manage their money. They should seek sound financial advice from a trained professional such as our Vermillion Certified Financial Planners®, so that it can never be said within just five years of receiving a large inheritance – “We are broke!”

Concepts from “Broke”, a broadcast of the ESPN documentary series “30 For 30”, 2012

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