When as smart as you think you are is as wrong as you turn out to be, your life can fall out from under you. If going broke happened to: Evander Holyfield, Johnny Unitas, Bjorn Borg, Rollie Fingers, Dorothy Hamill, Scottie Pippen, Marion Jones, Mike Tyson it can happen to you. Here are 10 ways to prevent that (if your advisers* poo-poo this, they may not be trustworthy):
- Get good advisers - Prior to obtaining any money through signing bonuses or large contracts do your homework at it relates to advisers who do taxes, cash management, investment strategies, etc. This would include meeting at least three of each type of category of adviser. The problem with many athletes is that they allow their parents, friends, and spouses to do work that they were never trained to do and many times gets the athletes in trouble by not paying taxes, getting over-extended cash flow wise, or over-spending generally.
- Don’t buy expensive assets first thing - Do not go out first thing after signing a contract and buy assets that are huge compared to the contract signed. Just because you have money for the first time doesn’t mean you have to spend it before you know all the ramifications of buying the assets.
- It may not last forever - Athletes need to know where they truly stand on the spectrum of being a professional athlete. First step is signing as a professional. First contracts are usually a lot more money than an athlete has ever had and it may be the only contract that he or she ever gets. Depending on ability and health the athlete may never get anything beyond that contract so they need to think that way. They should analyze the contract and put money away so that he or she will have something should the worst happen. Each contract should be analyzed separately and the goals adjusted accordingly as each new contract is received.
- There are sharks out there that will eat you - Many athletes when they start to make big money get inundated with proposals for investments from friends, business associates, and family. What the athletes don’t know that many of the documents that they sign commit them to much greater financial responsibility and liability than they have thought. For instance, the athlete thinks that he or she is investing $50K, but in reality they have personally guaranteed a loan for $500K. When the venture fails, the creditors come after the deep pockets of the professional athlete.
- Delegate, don’t abdicate - One of the most important aspects of an athlete’s financial life is that he needs to be personally responsible for his own finances. This means that although he uses professionals to assist with investment planning, taxes, insurance, and accounting, the athlete should demand to know at all times where he stands on all aspects of his financial life. This requires at least quarterly meetings to assist the athlete to understand his own personal wealth situation.
- Insurance can protect you - Professional athletes need to understand and accept that there are insurances available that can help them if something terrible happens. A professional athlete is usually very young and can get term life insurance at a very reasonable cost to protect his family if he should die. A more realistic scenario is that he may be disabled. Although it may seem expensive to get disability insurance, should an athlete become disabled, he will get paid according to the contract which could be to age 65. Many athletes think that because they have signed a two or three year deal and the team pays the contract if he is disabled, that there is no need to have disability insurance. What happens at the end of the contract? The athlete may not be able to play again.
- Let your adviser be the bad guy - Many athletes don’t know how to say no to friends and family who are asking for money for all kinds of needs and wants. It is very difficult for an athlete, who cares about his family to say no, but the athlete cannot support everyone and he must limit who he is willing to take care of. So, let the adviser be a buffer between all the requests so they can be analyzed before an emotional decision is made. Otherwise, the athlete will not have enough to take care of himself in the long run.
- A plan can make the difference - Just like the athlete who has mapped out a plan to become one of the best athletes in the world by putting together a training program and executing it, he too should map out a financial plan from the beginning of his athletic career throughout every stage of his career. If an athlete works the financial plan, knowing the risks at various stages, he will be much further ahead than the athlete who just goes out and buys whatever he wants whenever he wants. He should demand of his professionals that the goals are met, but it takes some discipline and willingness to stay to the plan for a long period of time.
- Trust is earned not taken - Athletes are notorious for giving responsibility for their assets to professionals and business associates to safeguard for them. Unfortunately, many of these people have no vested interest in the athlete and look at what they can take while they are working with them. It takes time to earn trust and for the athlete to believe in the adviser. Once the adviser has done what he has promised, then trust is earned and a good, long term relationship can develop. An example of this would be an athlete who signs all his checks, although the professional is organizing them, printing them, and accounting for them. This gives the athlete the ultimate control to ask questions and make sure he or she knows where his money is going.
- Keep perspective as others make more money - Many athletes who at the earlier stages of their career see more established players who are making considerably more money than they are. Some of them get enticed into spending more money than they are currently earning because they see other players getting cars, houses, clothes, etc. and they want the same things. But they don’t have the means to acquire them yet. Consequently, the younger players spend their money on lavish items rather than establishing a sound financial foundation. After the foundation has been established, then the athlete can spend on the items he really wants, but it doesn’t jeopardize his financial future.
* By the way, I have a list of advisers who I consulted for this article that I can introduce any of you star athletes or star athletes in the making to.
Follow Mark Goulston, M.D. on Twitter: www.twitter.com/markgoulston