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Simply Smart in 2013

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Six steps all professional athletes should take now to build and preserve his or her wealth

majic-johnsonYou may have heard the phrase, “It’s easy to get rich. But it’s harder to stay rich.” Just look at reality TV personalities as an example of how easily money can be gained and lost. Also, look no further than the numerous professional athletes featured in the ESPN documentary Broke, as an example of how difficult it can be to stay wealthy.

In 2009, Sports Illustrated published an article suggesting that 78% of NFL players will either file for bankruptcy or report severe financial stress within two years of retirement. The same article also reported that within five years of retirement, an estimated 60% of former NBA players go broke. The top reasons quoted: cars, women, bad investments, and dodgy financial advisers.

Fortunately, players are speaking out more about their personal financial woes to help educate the next generation of athletes. Some player’s unions are becoming more proactive in providing resources to their members. However, what players need to realize first is that it starts with them.

Professional athletes don’t have to have an MBA or an economics degree to be financially secure after their athletic careers are over. They don’t even have to go at it alone. The key is that they must have a basic understanding of personal finance to better evaluate their decisions about money and who they trust with it.

The following is a short and easy list of steps that you can implement in 2013 to help you stay wealthy.

Practice today for tomorrow

As a professional athlete, you spend most of your off-time conditioning, studying playbooks, and watching films in preparation for the next game or big match. Planning for a lifetime of wealth requires a similar approach. It requires you to look beyond your playing days, focus on current spending behaviors, and set realistic expectations for the future.

The first step is developing some kind of purpose in your financial life. It doesn’t have to be complex or even written in stone. Sloan Stephens, a rising U.S. professional tennis star, recently had her best performance in a Grand Slam in January at the Australian Open. Sloan reached the semifinals and brought home a $502,457 paycheck. When asked after reaching the quarterfinals how she planned to spend her winnings, the 19-year-old responded that she was going to save it because “I don’t want to be old and broke.” This simple reply indicates that Sloan is actively “training” for life beyond the tennis court.

Once you have found your financial purpose and have established a mission, you’ll want to work with your advisory team to evaluate and project cash flow needs for both today and into the future. Every athlete’s circumstances are different, but a few tips can be useful in guiding your decisions. Start by:

  • Distinguishing between needs and wants. Keep this in the overall context of your financial purpose and family mission. For example, you may not “need” a 10,000-square-foot house to reach your goal of “wanting” to provide a nice home for your family.
  • Setting realistic goals. Very few athletes will have a post-sports career like Magic Johnson. It’s okay to take risks in life, but make sure you understand how much you stand to lose if a particular investment or business venture goes south. There is no room for error when all of your savings and investments are concentrated in one or two areas. Investing $8 million in pistachio farms is okay if it’s only 1% of your investable assets.
  • Underestimating your career longevity. Your compensation depends on peak physical fitness. Even less serious injuries can significantly reduce your performance and the number of years on the field. The average MLB player’s career is roughly five years, according to a 2007 study conducted by a University of Colorado research team. This means that an MLB player may earn a good portion of his lifetime income in just five years.
  • Saving and investing: The career length for sports professionals can be relatively short, so you should squirrel away roughly 30% to 50% of your before-tax earnings during your playing days in order to maintain your lifestyle after you’ve retired. If you’re not a disciplined saver, consider deferred compensation arrangements on your contract, if available.

Cash can be king

The foundation of any good financial plan is an emergency fund. You should have enough cash on hand to cover all essential expenses during prolonged periods of no income. It will help get you through the off-season, the period following a season-ending injury, and the occasional lockout without incurring debt and without significantly jeopardizing your long-term investment program.

When I say cash, I’m referring to FDIC-insured checking/savings accounts, money-market accounts, or laddered Certificate of Deposits (CDs) that come due within a 12-month cycle. Recognize that you won’t get much interest income from these types of accounts, but the goal is to have cash available to pay the bills if you find yourself off the franchise payroll or in a career transition.

Stay away from consumer debt

As a general rule, never finance depreciating assets. Depreciating assets are luxury items such as cars and boats that decrease in value as they age. It is also important to realize that low monthly payments do not mean that you are getting a good deal. On the contrary, it usually means that the lender has extended the loan repayment terms in order for you to pay more in interest costs over the life of the loan. If you finance a $100,000 car for five years at 6% interest, the total interest cost would be roughly $16,000 over the life of the loan. Reducing the loan term by even two years can save you approximately $6,500 in interest. Couple this with the fact that the value of the vehicle depreciates every year, and you can see how continually financing cars can leave you wondering where all your money went.

The only assets worth financing are those that are expected to appreciate in value over time, such as a home. The best time to finance those assets is when interest rates are low and when you expect to get a better return on your investment portfolio than what you are paying in interest costs.

If you have outstanding consumer debt, which is always at a significantly higher interest rate, talk to your advisory team about accelerating your payments to eliminate this debt.

Simplify your investments

For most athletes, life is consumed by training and competition, which means you probably don’t have much free time to pore over corporate financial statements or prospectuses. Understand that you don’t have to be Warren Buffet to be a successful investor. Like with most things in life, common sense will go a long way.

A good place to start is by understanding your financial statements and knowing what you own. You should categorize your investments broadly by appreciable assets and income generating assets. Appreciable assets are physical assets like a home or monetary assets like stocks that appreciate in value over time. Income-producing assets provide a predictable stream of income to you over a specified period of time. These assets include CDs, bonds, lease agreements, etc. Appreciable assets, like stocks, tend to carry more risk than those that provide steady income (bonds), but they also provide better long-term investment returns.

The table illustrates the historical relationship between risk and return when comparing broad investment classes. As you’ll notice, stocks perform best over the long term, but they have wide swings in any given year. On the opposite end of the spectrum, cash provides the lowest return with the least amount of risk. Bonds fall in the middle.

For most professional athletes, some form of appreciation, fixed income, and cash is necessary to build and maintain your fortune, but determining the right mix for you is dependent upon your individual circumstances and personal goals. For instance, your cash accounts should match your income needs for the next 12–24 months. Your stocks and risky investments should work to help you meet long-term goals like funding your post-career endeavors.

Keep friends, family and money separate

One of the biggest financial mistakes that highly paid athletes make is giving money away to family members or friends or starting businesses with them. Remember that money is a magnet for people without it. As soon as you get it, you’ll suddenly have dozens of new friends and “close” family members. You should also be cautious of allowing your parents to have too much control over your money. Just ask Arantxa Sánchez Vicario. This former world #1 women’s tennis player claims that her parents spent and mismanaged $60 million of her money. The bottom line: friends and family members will try to make you think that your success is also theirs. If you fall into this trap, you can and probably will be taken advantage of until you run out of money. Know when to say “no.”

Get a Mentor

As a student athlete, you can probably recall a handful of individuals who played a critical role in preparing you physically and mentally for your shot in the pros. Even now, you probably have a support team that helps you reach personal milestones on the field. If you take one thing away from this article, it should be this: I would strongly encourage you to pursue an off-the-field mentor— Someone who can help you develop and pursue passions beyond the game.

A good mentor should be someone with absolutely no monetary ties your success, either professionally or personally. Generally, this is someone whose opinion you respect and trust as unbiased. A good mentor will not dictate what you should or should not do. He or she will serve as a sounding board to listen to your ideas or dilemmas and help you work through the decision-making process.

If there is one common trait among all professional athletes, it’s that they are all hard working, motivated, and driven individuals. Each has a work ethic that many non-athletes never learn or struggle to maintain. This quality translates extremely well outside of sports. In my experience, most professional athletes don’t want to play golf and check their stock portfolio every day. In most cases, they want to be active in their communities in some capacity, even if they have enough money to meet their family goals without having to work. The key is finding what you’re passionate about and developing your financial mission. Hopefully, these simple, yet smart tips will encourage you to make some changes and help you build and preserve your wealth for generations to come.

About Gabe Gonzalez

Gabe Gonzalez is a financial advisor with Savant Capital Management. For more information, visit www.savantcapital.com.

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