What would you do with a multi-million dollar a year salary?
You’d have it made. Money to spend, cars to buy, houses to invest in.
It’d be the life, right?
For professional athletes, the fame and accolades that come with the job often end up costing them more than the money they’re pulling in.
Here are the scary facts:
- By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.
- Within five years of retirement, an estimated 60% of former NBA players are broke.
- Last month 10 current and former [MLB] big leaguers?including outfielders Johnny Damon of the Yankees and Jacoby Ellsbury of the Red Sox and pitchers Mike Pelfrey of the Mets and Scott Eyre of the Phillies?discovered that at least some of their money is tied up in the $8 billion fraud allegedly perpetrated by Texas financier Robert Allen Stanford.
Thanks to an in-depth look at How (and Why) Athletes Go Broke from Sports Illustrated, we can learn how not to manage your money — from people who seemingly have it all.
Lesson 1: Understand What Your Money is Doing
When athletes — and most other people, too — come in to a large sum of money, they don’t know how to manage it.
So what do they do? They hire someone to do it for them.
While it sounds great in theory, if you don’t understand what your money manager — and, in turn, your money — does, how will you know it’s working for you?
Raghib (Rocket) Ismail, a former wide receiver for the Dallas Cowboys (among others), found out the hard way.
“I once had a meeting with J.P. Morgan … and it was literally like listening to Charlie Brown’s teacher,” [says Ismail.]
“I was so busy focusing on football that the first year was suddenly over,” he says. “I’d started with this $4 million base salary, but then I looked at my bank statement, and I just went, What the…?”
“Once you get into the financial stuff, and it sounds like Japanese, guys are just like, ‘I ain’t going back.’ They’re lost,” says Torii Hunter, outfielder for the LA Angels.
Don’t get lost. If you don’t understand what your money is doing, then it’s probably not doing what you want it to.
Lesson #2: Don’t Invest in Can’t Miss Opportunities
When you have a lot of money, you’re more likely to be approached to invest in out-of-the-ordinary ventures.
“Disreputable people see athletes’ money as very easy to get to,” says NFL agent Steven Baker.
But just because you’re rich thanks to your football skills doesn’t mean you know how to run a business. Ismail, again, found out the hard way.
It began in the winter of 1991 when he sank $300,000 into the Rock N’ Roll Café, a theme restaurant in New England designed to ride the wave of the Hard Rock Cafe and Planet Hollywood franchises. One of his advisers pitched the idea as “fail-proof, with no downsides,” Ismail recalls. He never recouped his money and has no idea what became of the restaurant.
This is a key lesson: if you’re offered the chance to invest in a “can’t miss” opportunity, just say no. There’s no “sure thing” when it comes to investing in anything — the stock market, private businesses, or new products.
In addition to the money he invested in the Rock N’ Roll Café, Ismail lost cash in:
- a music label
- a cosmetics procedure
- a phone-card dispenser business
- stores selling framed calligraphy of names and proverbs
Ismail, of course, isn’t the only athlete to lose money in an investment. Hunter spent nearly $70,000 to invest in an inflatable raft for furniture, designed for flooding in high-rainfall areas.
As with any investing, know what you’re buying. A hot tip or a can’t miss is never the best place for your money.
Lesson #3: Know Who’s Managing Your Money
If you decide to hire someone to manage your money, you need to know exactly who they are, what they do, and what they charge.
Torii Hunter and Astros pitcher LaTroy Hawkins recall the story of a former major leaguer from the Dominican Republic whose adviser took care of all his financial matters. One day the player’s mail came to the clubhouse and Hunter playfully asked to see it. “It turns out he was paying this guy $5,000 a month on insurance for two cars in the Dominican Republic,” Hunter says. “I got three cars, and I only pay $250 a month. He’d been with and trusted this guy [for almost 18 years]!”
It’s easy for newly rich athletes to be overwhelmed with the money they’re getting, and as Baker said before, this attracts sketchy characters.
Between 1999 and 2002, the NFL Players Association says that at least 78 players lost more than $42 million combined — to their financial advisers!
The dubious advisers included Luigi DiFonzo?a former felon who claimed he was an Italian count and defrauded players such as Hall of Fame running back Eric Dickerson before committing suicide in August 2000?and disgraced agent William (Tank) Black, who built a pyramid scheme that took a total of about $15 million from at least a dozen players, including Patriots running back Fred Taylor.
Now, this isn’t Bernie Madoff level, but the idea is the same: if someone is managing your money for you, know who they are and what they’re doing.
Lesson #4: Relationships Matter
Couples fight over money. That’s no surprise.
But when one of the partners is responsible for bringing home significantly more money than the other, a divorce could be costly. Really costly.
The divorce rate for professional athletes is between 60% and 80%, according to estimates, and more than 80% of athletes polled by financial-services firm Rothstein Kass say they are worried about it.
Of course, when you come into a lot of money at a young age, you often make stupid decisions that end up costing you a lot of money.
“A friend of mine is a football player, and I asked him why he cheated on his wife,” says Anita Hawkins, LaTroy’s wife of 11 years. “He just said, ‘I love her dearly, but I feel like I got married too early and didn’t get to do what I wanted to do when I was young.’”
It’s not just cheating and divorce that costs athletes — try having child support payments to nine different women, like running back Travis Henry. The 30-year old pays $170,000 each year to support his nine kids and spent time in jail for not paying $16,600 for one of his kids.
Your relationships matter — live a healthy lifestyle and you’ll be in a better position to have healthy finances.
Lesson #5: Buying Stuff to Impress
Call it the Cribs mentality — buying extravagant cars, homes, gadgets and more to impress others.
Off the field, it’s known as Keeping up with the Joneses. Whatever you call it, buying more stuff than you need ends up wasting money in the end.
“When I was a young buck,” says Hawkins, “I was trying to spend all my money. Now I try to preach to young guys in the clubhouse who are like that. I’ve got all this stuff from 10 years ago?jewelry, rims?that I think, Why the f— did I even buy this?”
When you’re spending nearly every penny that you earn, you’re not growing your net worth at all. A multi-million dollar salary isn’t worthy anything if you don’t keep any of it.
Think about these numbers again: 78% of retired NFL players are bankrupt within 2 years. For NBA players, 60% are broke within 5 years of retirement.
How scary is that? Someone making millions of dollars will end up with nothing when they stop working.
Now, there are certainly athletes who have continued to find financial success after they stop playing. But they seem to be the minority.
The lesson here is simple: don’t manage your money like any of these guys. Even if you’re making a lot less cash, you can still make smarter decisions. Chances are, you’ll be better off than some athletes.