The Problem of Earning Too Much Too Fast

It is not uncommon to hear about sports stars and entertainers going broke.  Often, with the influx of large sums of money, they are clueless how to handle and preserve it wisely.  This is especially true with younger athletes.

Many athletes land multimillion dollar contracts at a young age, sometimes right out of high school.  At such a young age, these athletes have little to no financial experience.  Yet, suddenly they find themselves thrust into a situation requiring a significant amount of knowhow.  They have a new career, a huge paycheck, and people coming from every angle looking to spend that paycheck for them.

Steve Young, NFL hall of famer turned private equity managing director, equates it to driving and “going zero to 100.”  He says it’s a fast transition that very few people could handle.

The list of celebrities and athletes whom have filed bankruptcy or suffered financial difficulties is quite large.  It ranges from the current stars such as Michael Vick and Donald Trump to former icons like MC Hammer, Mike Tyson and Lawrence Taylor.

While the circumstances in each situation vary, the financial troubles of many can be linked to a few key problems.  Some issues are common to all people, but others are unique to the situation that many stars face: coming into large amounts of money in a short period of time.  Those issues are exacerbated for athletes whom often have short careers.

The average NFL athlete’s career spans only 3.3 years.  NBA players, although faring better, are not much better off.  The average career length of an NBA player is 4.8 years.  In this short period, players see a massive influx of cash but fail to appropriately manage it for the long haul.  Due to improper planning, approximately 78% of NFL players are bankrupt or in financial trouble within 2 years of retirement and 60% of NBA players go bankrupt within 5 years of retiring.

Many live barely within or beyond their means based on current earnings as athletes.  Under the assumption of invincibility, young athletes live “hyper-consumptive, glitzy lifestyles” thinking they can make up for mistakes with future earnings.  Often this means purchasing multiple multi-million dollar homes, several luxury vehicles, and dressing in designer clothing.

Recently, former NBA star Antoine Walker discussed his financial problems.  Despite earning more than 4 times the average NBA player during his career, over $110 million, Walker declared bankruptcy in 2010.  He commented on the many causes of his financial troubles but attributes it all to his failure to follow a long-term plan.  As a 19-year old coming from next to nothing, he had his own plans despite what advisors told him.  Just like many others, he bought houses, cars, designer suits, lavish gifts for friends, and made poor investment decisions.

When an athlete lands a big deal, people “come out of the wood work” looking for money and gifts or offering once in a lifetime “investment opportunities.”  Playing on the athlete’s lack of financial knowledge, the newly wealthy are pitched all sorts of crazy schemes.  As Steve Young noted, he was once pitched an opportunity to invest in a “Mexican cat farm.”  While most scams aren’t likely to be as ridiculous, there are many people offering shady deals and faulty advice.

Athletes and entertainers can prevent becoming another statistic by budgeting finances for the long haul and finding trustworthy help.  Just like anyone else, it is imperative to set financial goals and limitations.  Doing so may require the assistance of others.

On a personal level, certain choices can be made to prevent an overabundance of debt.  Much of the time it comes down to managing emotions and ego.  This can be hard to do when teammates are driving new Ferraris and others are looking for hand-outs.  In the short term there is a lot of pressure to waste money.  Some athletes recall players betting each other $30,000 for “stupid” things.  The rapidly wealthy must realize they are better off avoiding this conduct in the grand scheme of things.  People in these situations must learn to reject such advances.

Long term planning requires that the person doesn’t over extend himself/herself.  This means spending wisely.  While there is nothing wrong with the occasional “treat,” it is ill advised to follow in the footsteps of Antoine Walker.  He was in such a habit of waste that he never wore the same designer suit twice.  Developing an over-the-top lifestyle isn’t hard to do when someone has a sudden inflow of money.  But, it is crucial to begin planning immediately.  It’s much easier to start off with a plan than implement one after developing an expensive taste.

Another key point is to avoid putting a substantial proportion of money into one type of investment.  Protecting money can be accomplished by diversifying investments.  It’s not uncommon for celebrities to put as much as 50-70% of their net worth into their homes.  Others, hoping to develop income, invest in large quantities of real estate.  While there is a possibility this will pay off, it opens a person up to a considerable amount of risk.

Mitigating risk will limit the potential for bankruptcy.  It isn’t only done through investments, but is also done with insurance.  Many athletes are at a high risk of injury.  Career ending injuries can easily result in the early termination of expected income streams.  Especially where salary is not guaranteed, insurance plans covering this risk are highly recommended.

When possible, use the resources available to help plan.  The NFL for example offers free financial seminars.  However, this does not mean free advice from anyone is a good thing.

Before entrusting anyone else with financial and business decisions, it is crucial that you ensure their trustworthiness and basis of knowledge.  As mentioned, there are a whole host of scam artists and people looking for hand-outs.  Before looking to others, make sure they are representing your interests and they know what they are doing.

Often times, the help of a professional is highly recommended or even required.  That help may not just come from one person.  Managing wealth and long term planning is complex.  Once trusted advisors are found, take their advice.  They are almost certainly more knowledgeable and experienced in their specialty than you.

It is especially vital to find these persons for certain issues like taxes, legal claims, and long-term investment strategies.  With mandatory tax filings in each state in which a game is played, an experienced accountant is required.  Often financial issues can be avoided or mitigated with the assistance of an attorney.  Failing to stay on top of legal issues can result in default judgments, sanctions, and other consequences.  Finally, rather than gambling the future on unexplored, or even researched, risky investments, it is prudent to seek the assistance of an investment advisor.

Meeting with these people can be challenging considering the busy schedule of both parties.  However, it is imperative to work with these professionals and avoid common pitfalls like ignoring their advice.

Many, including Steve Young and other advisors, recommend avoiding hands-on investments until after an athlete’s career, or at least until the off season.  Instead, these advisors recommend athletes focus on their careers and use lower risk investment vehicles like bonds.

Following this advice will certainly avoid much of the troubles seen by Antoine Walker.  Because he was focused on his career, he didn’t have time to “keep a close eye” on over 140 real-estate investments that he purchased.  In doing so, he lost many to default judgments after failing to get a handle on everything.  He believes if he was able to pay closer attention, many properties could have been saved.

Despite the risk, if an athlete still wants to invest, a trusted business advisor/manager should be hired to handle the day-to-day affairs.  This person, just like any other hired professional, must be trustworthy and knowledgeable.  Far too often entertainers and athletes employ the assistance of family members and friends whom have no experience.  Notwithstanding that confidant’s best intentions, issues arise due to his/her lack of experience.

With or without a day-to-day manager, someone must stay on top of current matters.  Some celebrities and athletes run into easily avoided troubles simply because they are traveling and miss important deadlines.  Bills are paid late, taxes fall behind, and legal claims are overlooked.  These discrepancies can be just as harmful as overspending.

Setting goals and achieving long-term financial stability is a complex task.  For many it requires the assistance of professional advisors.  The same is true for professional athletes and entertainers, except they have the added difficulty of accumulating much of their wealth in a very short period of time.  With these challenges, it is imperative that all persons (celebrity, sports star, or not), manage their financial matters wisely.

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