How Athletes Go Bankrupt at an Alarming Rate
Written by Daniel Hart, former MAZURKRAEMER paralegal
According to a working paper from the National Bureau of Economic Research, 15.7% of NFL players have filed for bankruptcy within twelve years of retiring. (16% of retired NFL players go bankruptcy, Fortune.com). A Sports Illustrated article reports that 78% of NFL players and 60% of NBA players face serious financial hardships after retirement.
So why do so many athletes wind up bankrupt?
We can begin by looking at the nature of how athletes earn their money. Athletes typically hit their earnings peak within a few years of finishing school. Across the three major American sports (MLB, NBA, NFL), the average career length is about 4.6 years. Thus, the average athlete’s career is over at a young age, and the typical player is only at their peak earnings for an extremely short period. Most never earn at the same level again. In contrast, the typical American reaches their earnings peak usually decades after finishing school and has accumulated a lifetime of knowledge about how to handle finances by that point. Some athletes may never think about an alternative career path for after retirement. Without formulating a “retirement plan” or proper budget, young athletes blow through their money.
Many athletes trust the wrong financial advisor. When you earn as much as athletes, you become a natural target for smooth talking con-men in a nice suit. When you do not have a business/finance background, it can be easy to get conned into investing in what seems like a grand plan that will return huge profits. Stepping into an athlete’s mindset is important to understand why they would trust these people.
First, an athlete is conditioned to listen to people with superior knowledge, like coaches and professionals who seem like savvy investors. Second, an athlete’s mind-set is focused on big rewards (think: championships) with almost anything less as a failure. Almost subconsciously, their goal is to hit a “home-run”(pun intended) with an investment. Therefore, they may trust the wrong people and invest in seemingly glamorous, but unsound investments which, in the end, result in financial ruin. As an example, Vince Young earned around $26 million in six seasons playing professional football. Young trusted the wrong financial planner who reportedly misappropriated $5.5 million of his money. Because of this and poor spending habits, Young was forced to file bankruptcy.
Many athletes are attracted to the flashy investments. Whether it’s a new technology or restaurant with their name on it, many will invest in ideas that do not have great long-term business models. Look at local Pittsburgh kid, Dan Marino. Marino earned millions as a NFL quarterback and studio analyst during the CBS pre-game show, “The NFL Today”. However, he lost millions by investing in over 1.5 million shares in a company called, Digital Domain. Digital Domain is widely known for producing the hologram of Tupac Shakur at the Coachella Music and Art Festival. Digital Domain went bankrupt shortly after, and Marino was out nearly $14 million.
Remember Curt Schilling. He saw a future in video games and spent $50 million in creating his own company, 38 Studios. Fast forward a couple years. 38 Studios filed bankruptcy, and Schilling is out his $50 million investment.
An athlete’s personality traits and world view are almost unique. On the field, a pro is aggressive, demonstrates raw emotion, and uses his inhibitions. While these traits can make a winning athlete, they can make a poor businessman. Also, athletes must have a focus on today or the very near future. Just think about how a football player always talks about the next game and not the game five weeks from now. In financial planning and investing, it is typically better to have a long-term approach.
What are your personality traits? What is your financial lense through which you view the money?
French economist, Ruby Henry, describes the nature of athletes and how that affects their approach to financial situations. His example is that of a three-point shooter in basketball. That player must have a massive amount of confidence to continue to take that long-range, low percentage shot every game. Applying that same confidence to a financial investment often does not work and can leads to financial ruin. Former basketball star Antoine Walker earned over $100 million during his career. He filed for bankruptcy in 2010. As a basketball player, Walker had an insane level of confidence in his game, and, naturally, he applied this personality trait to his investments in multiple business ventures. However, business investments are not the same as professional sports. By taking such a confidence approach to business without having the knowledge base in finance/investing or proper advisors, financial disaster happened.
Many athletes want, and are expected to live, a glamorous, exciting lifestyle. Being in the limelight on the field means nightclubs, mansions, sports cars, and parties. This harms them financially in two ways. First, all of these items cost of lot of money. Not only do many athletes spend exorbitant amounts on their cars and houses, but many feel the need to give back to the people that helped them get where they are now. This means buying their family a house, purchasing their childhood friend a BMW, and investing in their uncle’s not-so-solid business plan to become a music producer. Without having a proper budget, this is a simple way to blow through a million dollars. Second, sound financial planning for your future usually involves NOT making the flashy choice. Let’s face it, telling your friends that you just invested in a 25 year IRA with 8% yearly return on investment doesn’t exactly sound sexy. However, when you aren’t broke five years later, you will know you made the right choice.
How can I take the examples of these athletes’ financial failures and apply them to my life? Some may think that this does not apply to me as I do not live such an extravagant lifestyle. However, many Americans find themselves in a similar situation as they face substantial debt, usually in the form of student loans. First, create a budget and stick to it. Avoid impulsive purchases. Only sparingly purchase the luxury item (read: new pair of shoes, not new car). Second, consult a proper financial advisor, preferably one who has references or works at a trusted investment company, and perform your due diligence before making large investments. Finally, you need to plan for the long-term. It’s not all about getting everything you want now. By investing or saving money now, you will have plenty for down the road. By following these simple steps, you can avoid the fate of a staggering amount of professional athletes.