Last week’s issue of Sports Illustrated featured a fantastic article from Pablo S. Torre that describes how (and why) athletes go broke. Generally, it’s for the same reasons that people like you and me go broke: they don’t know enough about money. But pro athletes are also besieged by many people who are eager to help them “invest” their fortunes:
“With athletes, there’s an extraordinary metamorphosis of financial challenge,” says agent Leigh Steinberg, who has represented the NFL’s No. 1 pick a record eight times. “Coming off college scholarships, they probably haven’t even learned the basics of budgeting or keeping receipts.” Which then triggers two fatal mistakes: hiring the wrong people as advisers, and trusting them far too much.
“That’s the killer,” Magic Johnson says. Johnson started out by admitting he knew nothing about business and seeking counsel from the power brokers who sat courtside at the old L.A. Forum, men such as Hollywood agent Michael Ovitz and Sony Pictures CEO Peter Guber. Now, Johnson says, he gets calls from star players “every day” — Alex Rodriguez, Shaquille O’Neal, Dwyane Wade, Plaxico Burress — and cuts them short if they propose relying on friends and family. “It won’t even be a conversation,” says Johnson. “They hire these people not because of expertise but because they’re friends. Well, they’ll fail.”
There’s a perfect storm of inexperience, peer pressure, bad advice, and gobs of money that makes it difficult for a professional athlete to hold onto wealth. They need smart financial advice just like everyone else — perhaps more so. Most of the time, they don’t get it. According to the article, only two years after retirement, “78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.”
It’s not in anybody’s interest to sit these players down to educate them about how money works. In fact, the opposite is true. There are layers of people who profit from the ignorant with newfound wealth. (Not just athletes, but lottery winners and others, as well.)
But it’s not just bad advice that causes problems. The players make bad choices, too. They adopt unsustainable lifestyles. If they elected to save their money, they might live comfortably for the rest of their lives. Instead, they often succumb to peer pressure:
It’s all part of that ossified notion of how a pro athlete should live and provide for those around him. If he isn’t consuming conspicuously, then he hasn’t made it. “When I was a young buck,” says [LaTroy 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?”
I still shake my head at the lifestyles of the rich and stupid, but I’m less judgmental than I used to be. It’s easy to imagine I’d do something smarter if I won the lottery or experienced a huge windfall. But it’s one thing to speculate and another to actually live it.
[Sports Illustrated: How (and why) athletes go broke]
This article is about Odds and Ends
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Oprah said that a good way to defend against this kind of problem is to sign all of the checks yourself.
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Just a random note. The Dave Ramsey folks recognized this a while ago and actually started a specific program to help musicians and athletes manage their money.
http://www.daveramsey.com/etc/cms/index.cfm?intContentID=7339
I always thought that was kind of cool.
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I saw an interview of some big star, I don’t recall who, but when asked about the sudden wealth of stardom said that he learned all he needed to know when he first went from flipping burgers to a $200 a week job (late ’60′s). He said it was more money than he had ever thought he would make and his investment strategy started right then. When it turned into multimillion dollar contracts it was simply more of the same.
I only wish I had learned the lesson back then as well as I recall the story now but it’s never to late to put a plan in place.
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I’d venture a guess that one reason these stars go broke is because they are trying to “keep up with the Joneses.” In their case, the Joneses are other stars making double or triple what they are making. Instead of 7 figures 8 figures.
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I didn’t manage my money well when I was 22 and making $15,000. Most likely, I would have been just as stupid if I had been making $1.5 million.
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I feel many “Stars” face financial challenges sometimes becuase many of them came into their great wealth at a very young age, never having struggled before. Going straight from childhood to wealthy leaves no time for having learned the basics of money management or having learned from mistakes.
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Wow! That’s kind of sad especially for some NFL players who destroy their bodies to play the game.
You would think the player associations would provide financial management services or at least a list of approved advisers.
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This reminds me of that commercial where Kevin Garnett says “I have never had to worry about the mortgage.” Athletes already live in a different universe, so if regular people can’t handle their money, they are even more at a disadvantage.
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I see this a bit differently. I don’t think it’s a financial advice problem as much as a basic misconception that more money and more things will necessarily give us more happiness. (Our culture has this misconception, not only pro athletes). Someone did a guest post for me just this week on what actually did create her greatest happiness: http://www.diamondcutlife.org/debs-take-on-happiness/
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Well, I have to say that we kind of get a chuckle out of hearing those stories. What strikes us so, is that those who seem to fall into the pile of money sure don’t seem to appreciate it. You are right in the mention of the unsustainable lifestyle. Who in their right mind needs a 20 plus-room home, unless you are running a boarding house?
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I’d bet that most pro athletes (and actors/other celebs) went to public school where personal finance education is an elective if its even offered, and its most often a program sponsored by megabanks. They go to college on their scholarship because they’re good, they get signed onto an NFL or MLB team and get handed a million dollars, with absolutely no clue what to do with it.
The problem is even worse if they suffer a career ending injury after blowing their first season’s salary, with nothing to last them afterward.
Or even if they’ve been pro for a few years before the injury happens, they spent their entire lives honing their bodies to play one specific sport (usually).
If anyone reading this knows a pro athlete, or knows a kid trying to become one, Dave Ramsey has a program for very wealthy people like this and others called Wealth Coach. He also has a full high school cirriculum, Foundations in Personal Finance. For the former, he works with all manners of rich folk. For the latter he worked with school cirriculum advisors to build up his existing materials.
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Roger,
I don’t know about other players’ associations, but the NFL does provide financial education to its players.
http://sports.espn.go.com/espn/page2/story?page=clemmons/080305
I also remember reading a story a while back about how one player on the Denver Broncos I think convinced a bunch of his teammates to invest in what ultimately turned out to be a financial scam. Made for some tense and awkward times in the locker room.
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Hey JD — I have a sister who has always been careless with her money, and is in what would normally be considered substantial consumer debt. It happens, however, that she’s brilliant and will soon be making a mid six-figure salary, but I’m still worried about her. She’s never developed any money skills, and it would surprise nobody in my family if she ended up bankrupt in five years. I want to send her some reading material so she can study up before she starts getting these paychecks–can you recommend a good book I could send her? I thought of “Your Money Or Your Life”, but she lives for her career, and will be content to work it for the rest of her life. That book seems oriented towards those ‘stuck’ in a rut, which she’s not (I am stuck in a rut, so I’m going to pick up a copy!). Any advice?
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These are very good “cautionary tales”. I often fantasize about what I’d do if I won the lottery. I shudder to think the kind of financial damage I could inflict–all the “stuff” I would buy.
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I’m really glad you also commented on personal responsibility towards the end of the article. I completely agree that a major part of the problem is the so called advisers acting in the “best interest” of the athlete, however I think that a large part of the burden has to fall back on these players wanting to life ridiculous lifestyle.
There’s nothing wrong with wealth, but with a large amount of young sports stars abusing and flaunting it, there’s no big surprise they usually end up with none of it.
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Reminds me of an interview I read by the actress Ann Rutherford. For those who don’t know she was in “Gone With the Wind”, and had played Andy Hardy’s girlfiend.
She related how when she was just starting out as an actress as a teenager, and was under contract to MGM, she appeared in a low budget movie. A movie star all the young girls swooned over had a small part. She asked the director why such a big name was in such a nothing movie. The director told her that’s what happens when you waste your money and need to pay the bills. You have to take whatever they give you. It was a lesson she remembered.
She went on to tell how Louis B Meyer would call her to his office every time her contract called for her to get an increase or be let go. She told how he would go into the same act. How they loved her, she was like a daughter, but the studio didn’t make enough money that year, and they wanted her to forgo the raise.
She would pull out her bank book and tell Meyer she saved every penny he ever gave her, and he could give her the raise or cancel her contract. Meyer would toss her out of his office, but he couldn’t get rid of Andy Hardy’s girlfriend, so he paid up.
What a great lesson to learn early in life.
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There was a cover story in the NY Times magazine last weekend about a 14 year old aspiring basketball player who has a shoe contract and whose mother trains him every day! I think that some of these guys (always guys, isn’t it?) are raised in a bubble, where they’re the most talented and don’t need to hit the books and they don’t need to buy their own gear and athletically the sky’s the limit. It must be much different to the experiences us “mere mortals” had growing up.
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The Freakonmics guys had a very pithy way of describing this phenomenon:
Athletes and rock stars go broke because they have the wrong skills. They have the ability to MAKE WEALTH, but not the ability to KEEP WEALTH.
In fact, rock starts and athletes are WORSE than average people at getting rich. For me to get rich, I would have to create a business, save, and invest wisely. That’s pretty much my only path to wealth. But when I get there, I’ll have all the skills I need to keep it.
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They go broke for the same reason lottery winners go broke (1) they don’t factor in taxes (2) they try to take care of family and friends (a nice thing to do, but generally ends up in bankruptcy) and (3) they spend like a lottery winner to keep up with the Joneses.
Many sports stars have a very short career and as such they ought not to be living the large lifestyle at all they shold be saving and investing (in smart investments) those first 5-10 years as many never have a career beyond 5 or 10 years.
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Given that this is such a well-documented issue, I think the contracting organizations (whether it’s the NFL or Sony Music) ought to create trusts for young artists/athletes, and by young I mean under 30. I’d think it would be advantageous on the tax side, as well as preventing people from blowing millions a year on whatever, and reducing the risk of predatory relationships.
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Wow — Fleecing pro athletes looks like it should be its own genre of fraud. (Cf. the “Spanish Prisoner.”) Love the guy who dropped $70K to invest in inflatable escape couches.
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Anytime someone gets a windfall– watchout!
Professional athletes are a really sad story– they start making “big” money and living like they will always earn this sort of income. They have new found “friends” and “family” that suddenly appear with their hands out. They blow big money on cars, clothes, homes, and God knows what else. They don’t realize that they are getting a lifetime of income in a very short period and that the gravy train will come to an end.
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no money mo problems is what im goin through now.
ill take the mo money and mo problems over no money n mo problems any day of the year
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