There is nothing better than sitting down on the couch and watching pro athletes go at it against each other. Whether its NFT, NBA, Football or any other sport, there is just something amazing about watching individuals and teams compete at the upmost level. These players have been (usually) training their whole lives and they have mastered their profession. So it comes as no surprise that these classes of athletes earn a bucket load of cash.
However, a lot of professional athletes face extreme financial stress very quickly after retirement.
An article from sports illustrated highlighted the fact that 78% of former NFL players were either bankrupt or under extreme financial stress. Within five years of retirement, about 60% of former NBA players faced bankruptcy. How does this happen?
To help athletes overcome these financial challenges, I have listed 6 rules that could be helpful financial advice for athletes.
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Rule #1: Do not sign away power of attorney
It doesn’t matter who wants the power of attorney (i.e. agents, financial advisors, publicists, your cousins mates neighbour, etc.), you must stay strong and never sign away a general power of attorney over your finances. A general power of attorney gives an individual full power over all of your finances.
The person that you have appointed is supposed to act on your behalf (with your best interests first) but these individuals often act in their own best interests, realising that they can gain from the system.
This is what happens if you give away a general power of attorney:
- The person can write checks without your knowledge
- They can sell assets like stocks, investments, real estate, funds, businesses etc.
- They can take debt out in your name
- They can enter you into binding legal obligations
As an alternative, you could grant someone limited power of attorney over your finances. A limited power of attorney gives an individual the right to perform certain transactions that are specified in a contract or other written document. The action must be stated in a legal document and the person with the power of attorney cannot deviate in the scope of this agreement.
This way you can stay in control of your finances, but allow certain people the ability to help you with various investments.
Rule #2: Save more
Many athletes earn a lot during their careen, but they don’t really seem to have anything to show once they retire. To avoid this problem, you could start looking at ways to save your money.
Many people go by the rule to save more than 10% from each pay check.
This money should be stored in a savings account. It’s not for spending on things like investments, real estate, or other business adventures. This money is set aside to provide you with a financial pillow once you have retired.
You could look at a FDIC insured savings account or a NCUA insured credit union. Both of these are insured by the Federal government.
Credit unions often offer a higher return on your money than commercial banks. These saving accounts are insured up to $250,000. If your account balance exceeds the insured level, you can open another savings account!
Never place more money in your account than what the Government is willing to reimburse if the bank was to go bankrupt.
You can also deposit money in a guaranteed certificate of deposit.
One thing to note is that you should only trust guarantees by the US Federal government. Never listen to financial advisors, money managers, or any other financial professionals offering personal guarantees.
Saving money is contagious and you will want to save more as time goes on. Remember that 10% is the minimum that you want to save. You can go higher. If you want to save 25% of your money, just do it!
Rule #3: Live within your means
Have you ever heard of Mark Brunell? Brunell was a successful quarterback who earnt over $50 million in his career. However, he had to file for bankruptcy after many failed investments. Brunell created a company with a few mates, and bought in a number of different real estate ventures that all went south once the property bubble burst. Before filing for bankruptcy, Brunell had amased nearly $25 million in debt, which was 5x the amount of assets he owned. The only way that he could escape the creditors is through bankruptcy.
While we should not mire in the misery of others, you can learn an important lesson from what happened to Brunell. You must live within your means. You must be aware of how much you are bringing in, and how much is going out. Its basic budgeting. Even high net worth athletes have to budget their money.
The only difference with athletes is that they earn most of their money over a short amount of time.
What’s going to happen once that income stops coming in? Do you have a plan to cutback on your lifestyle, or what do you have in place to help you maintain the standard of living that you desire?
Rule #4: Never trust investments offering high returns
Many professional athletes have fallen victim to scammers that offer investment products with guaranteed high returns. Many “investment professionals” promise investments that offer double your money back guaranteed.
Remember that if it sounds too good to be true then it often is. There is no investment that offers guaranteed returns even close to 100%. The only guarantee that counts when investing is one given by the United States Federal Government (as mentioned in Rule #2). The only risk to these assets is the risk of default by the federal government.
Mutual funds, bonds, and overseas investments that offer high returns can also carry extremely high risk as well. Your potential for a great return on your investment is equal to the potential for a great loss on your investment.
Any investment that can double your money can lose all of your money as well. Athletes should never invest in risky investments. Most athletes are already millionaires and have no need to chase high returns. Their primary goal should be preservation of capital and then a modest return.
Rule #5: Avoid anything speculative
Too many sports athletes have lost their fortunes by trying to help family and friends fund their speculative ventures. Your sister, aunt, and best bud may mean well, but they likely don’t have much experience in running a company. There is no time for them to undergo on-the-job training with your hard earned money. If you do end up wanting to fund a business venture, keep in mind these three additional rules.
- Check the background of everyone involved. Find out their financial history, credit, and work background. You ideally want to know as much as possible about everyone that you are going into business with.
- You should always require a business plan from anything that you are considering backing. Have someone in your legal team, attorney, financial advisor, or other professionals take a look at the plan. Is the business plan feasible, what are the risks, and how long it will take you to recoup your investment.
- Don’t invest what you can’t afford to loose. You don’t want to think that a business venture may not succeed, but this is a serious possibility. Therefore you should be OK financially if everything was to go south.
Rule #6: Develop a retirement plan
The best time to start thinking about what happens after you retire is during your career. You can organise a nice retirement by creating a financial plan and following through with it now. One of the ways that a professional sportsman can set their post retirement portfolios up for success is by investing in companies that pay dividends. This may not seem exciting, or even like a great return on your money, but for someone with a substantial sum of money, dividends can provide a secure stream of income that will fund your retirement for many years to come.
There is absolutely no reason for athletes to invest in risky stocks when they already have cash. They should really be looking at a portfolio that consists of safe stable investments that will not lose their capital. There is a lot of free information out there to help you on your dividend journey.
Professional athletes are typically risk takers by nature. They would not be in the positions that they are in life if they were not. However, what happens on the field should not apply to what happens to your finances.
It is important for every athlete to deal with the risks and challenges that will face them once they move off field. One of the most effective ways to make sure that they have enough money to last them throughout their entire lives is by finding the right financial advisor that can help with financial planning and wealth management. Just make sure you choose the right company (i.e. those that help you with SIPC protection on your assets, and companies that have a strong reputation).
As per Rule #1, it is so important to maintain control over all of your financial assets. As long as you maintain this control, you reduce the amount of risk that your portfolio has, and you increase your financial security
When you are dealing with larger sums of money, you need to take a conservative approach that focuses more on capital preservation than capital appreciation.
The importance of guaranteed investments
Individuals whose incomes are in the highest brackets could look to guaranteed investments that carry low tax consequences. An option here would be municipal bonds. These are a good low risk safe investment that has a higher yields than many corporate bonds, because they are free from state income taxes. They also are typically guaranteed by the state or local government. As long as you don’t live in a bankrupt city, your investment should be fine.
Here is a little summary of the rules that you can follow for better money management as a professional athlete:
- Never give full power of attorney to anyone. It doesn’t matter what the circumstances are. No matter how busy you are, Write your own checks.
- Save at least 10% of your salary in guaranteed securities that are FDIC insured.
- Live within your means and prepare for when the pay checks stop coming.
- Don’t chase high returns. The primary goal should be preservation of capital and a modest return.
- Don’t fund speculative start-ups or other ventures without added caution.
- Retirement planning is important to consider before retirement.
Overall, be sure that you clearly understand everything that you are investing in and where all of your money is. You should know the procedures for how long it will take to withdraw your assets and any penalties associated with an early withdrawal. If you follow some of these basic steps, it will go a long way in helping you preserve your financial future!