Five money lessons from athletes who lost millions
Americans love sports... Most children want to be a professional athlete at some point in their childhood and dream of the money and fame that comes with it. With the NFL back last weekend I had to write how athletes are managing (or not managing) their money. But as the average American family made $53,000 in 2014 it's hard to feel bad for someone who loses millions throwing or catching a ball. Look at how much these players have earned during their careers:
Estimated Career EarningsTiger Woods (best golfer ever): $1.3 Billion
Alex Rodriguez: $480 Million
Lebron James: $450 Million
Peyton Manning: $400 Million
Kevin Garnett: $327 Million
These examples are also players who have dominated their sport AND been good with their money. Unfortunately there are other athletes who've made similar amounts and blown it all.
Estimated Career EarningsMike Tyson: $400 Million
Evander Holyfield: $250 Million
Curt Schilling: $115 Million
Terrell Owens: $80 million
And so many others.....
It's unreal to think of having hundreds of millions of dollars and ending up broke. But according to a 2009 Sports Illustrated article, "78% of former NFL players face bankruptcy or financial stress within two years of retirement. That same article reported that the rate of NBA retirees going broke within five years of leaving the court was as high as 60%."
Sometimes it's clear why they lost so much so quickly. Usually because they buy jets or exotic pets, houses with 20+ bathrooms, and make high risk investments others would think of making. Other times it can be a shady financial advisor or simply not understanding what to do with that all that money. As I've always said, money management is not emphasized at all in our current education system. Imagine adding in hundreds of millions of dollars, a few to many sports injuries (hint hint Concussion...great film btw), and greedy family or friends to the equation, it's easy to see how end up broke.
Here are the top five ways athletes go broke and how you can apply to your own financial situation, even if you're not a millionaire.
Living Beyond Their Means
What Athletes Do: They buy any and everything they want. I can't blame them, if I just inked a 40 million dollar deal I'd probably be tempted to buy a few houses, helicopters or in Mike Tyson's case a tiger. Do they need to own the jet? No, just lease it whenever you fly. Do you need an 8 bed/10 bath house? No, buy a smaller one that will cost less in upkeep when you retire.
What You Do: Everyday people do the same thing just on a smaller scale. Credit cards make it way too easy to buy things you can't afford. If you can't buy something with a credit card and pay it off in full each month don't buy it. Most credit card interest rates will be between 10-20% making your purchase much more than anticipated.Pay Your Credit Card: Pay your card off in full every month, credit card debt is one of the worst types of debt. Avoid it like the plague.
Set up a spending plan (because I hate the word budget): Sign up for Personal Capital or Mint to understand where you spend your money and find ways to cut excess to save more.
Automate: Set up automatic investments to your 401K, IRA, and/or savings account to you're not tempted to spend it and it goes directly towards your saving goals.
Not Planning Ahead
What Athletes Do: For some reason professional athletes spend money like they are going to make that salary forever. Instead of setting up college funds for their kids, investing in the stock market or simply putting money in a savings account for the future.
The average career length for an NFL player is under six years according to a recent Wall St. Journal article. And I think it's safe to say not many of us feel bad for them when they'll make thousands of times over what the everyday American will make in their lifetime in a matter of years.
What You Do: It can be hard to save for your retirement when you're young, it seems so far away! You always think you'll make more in your 30's and 40's (which you likely will), want the cash in a savings account in case you need it, or simply don't want to think about your future. But no matter what age you are the sooner you start saving and investing you'll be rewarded greatly because of compound interest. Use these three easy steps to get started:
Start your emergency fund (read more here)
Contribute Towards Your Retirement With a 401K or Roth IRA (or if you want to be an overachiever do both)
Save up for big events such as a home, car or wedding in an Ally high interest savings account
Making Poor Investments
What Athletes Do: They make horrible investment decisions. If you've debated on buying a few shares of a hot stock and maybe lost $500 or a $1,000 dollars you can learn from your mistake and move on. But athletes tend to make ridiculous investments like the ones below:
Inflatable Furniture Rafts - $70,000: Do I need to say more than inflatable furniture rafts? What was MLB
Player Torii Hunter thinking on this one?
Rock N Roll Cafe - $300,000: Rocket Ismail claimed he invested in a knock off Hard Rock Cafe and never saw a dime of it and the restaurant was never built.
Nissan Car Dealership - $930,000: Super Bowl Champion Duce McCallister thought a car dealership was the way to go after retiring. Unfortunately he lost it all and faced several other lawsuits for five million.
What You Do: While you may be smarter than starting an inflatable raft company people still make poor investments all the time. Here are a few ways to make sure you don't make poor investment choices:
Choosing Low Cost Funds: When you're investing always look for low cost index funds instead of high cost
mutual funds. Simple, the higher fees you pay the less money you end up with.
Buying New Cars: If you spend $20,000 on a new car as soon as you drive off the lot you just lost $6,000. So
your $20,000 "investment" that you're paying off for the next five years is now worth $14,000. Instead buy a
pre-owned car for a much lower price and understand that a car is a depreciating asset, not an investment.
Keeping Up With Their Peers
What Athletes Do: Athletes in general don't like to be outdone by their peers, whether it's on the field or in the spending category. Athletes tend to buy obnoxiously expensive cars, buy countless pairs of shoes & clothes, and whatever else will look good for them on social media. While they may be able to spend like that for a while, it's unlikely they'll be able to keep that up over the long run.
What You Do: Even if you're an everyday person it's easy to do this in your own personal life, usually with friends and co-workers. I remember reading "Millionaire Next Door" and learning about doctors and lawyers were the people who are usually the worst money managers. Why? Because they were trying to keep up with their peers. Society perceives doctors and lawyers to be some of the top earners so we expect them to act like it by buying big houses, sports cars & fancy clothes. But instead of saving or investing they're spending it all and simply raising their lifestyle with any new raise or bonus. Here's how you can avoid it:
Stop Caring! Do you think you'll be happier if you buy a new car because your coworker, friend or neighbor
did? Or do you think you'll be stressed out thinking about the high interest payment. Quit trying to impress
Save Your Raises: If you get a raise or bonus don't increase your lifestyle to match it! Instead treat yourself
to something you've been wanting to buy and save or invest the rest.
Trusting The Wrong People
What Athletes Do: When you're making millions most people just want to spend it and have someone else manage their money. Sadly these players are vulnerable to shady investment advisors who aren't looking out for them. I read about so many players being involved in Ponzi Schemes and bad real estate deals it almost made me feel bad. Instead they should have spent some time learning a little bit about their options and researched the individuals they were investing with.
What You Do: The financial industry isn't much better for the everyday American either. While we may not be involved in Ponzi schemes everyday people are getting screwed by financial advisors. Why? Because a majority of financial advisors aren't looking out for the client and instead pushing products onto consumers in which they're compensated. Don't believe me? Watch the full clip here...
I personally think if you're net worth is under $200,000 you should manage your own money. But if you do insist on getting a financial advisor make sure to get a FIDUCIARY, fee only advisor. If you see broker in the title literally run out of the office. Fiduciaries are the small percentage of advisors who are legally obligated to look out for your best interest. (HOW IS THIS NOT REQUIRED FOR EVERY ADVISOR?). They charge a flat fee (usually 1%) and don't push products that they don't think is right for the client (like a broker does for whole life insurance or annuities). To locate a fiduciary financial advisor use the FINRA site here.
Hopefully everyone can learn a thing or two from our athletes and make solid financial decisions that will benefit you and your loved ones. Remember to always understand what your investment options are, don't rush on big purchases or investments, and do your research! Sound off in the comments with any other thoughts on how athletes can lose so many millions of dollars.
Related: Athletes at the White House