By Iacovos Iacovides, The Sports Financial Literacy Academy
The spending habits of many athletes render them unable to save and invest as much as they should, while still active. Approximately 25% of NFL players report financial difficulties in the first year after retirement and, within two years from their last game, 78% of all NFL players are divorced, bankrupt, or remain unemployed. The real issue is not their spending patterns per se, but rather their approach to money and their failure to realize the implications of their current behavior towards their finances upon their long-term financial well-being.
In other words, the root of the problem lies with the short-termism of athletes, particularly when they are young, competing and earning big. Short-termism refers to the excessive focus on immediate gratification and results, at the expense of long-term and usually more important interests.
Whilst many athletes make millions while active, their income takes a huge dip when they retire. If their lifetime earnings were graphed, the dip would look much steeper than the graph of a financial crisis. Nonetheless, elite athletes make more money in the span of a year than what most people make in their entire life. This means that with prudent money management, they should be able to enjoy a comfortable lifestyle for the rest of their lives, even if they rely predominantly on the earnings from their playing days.
We’ve all heard stories of ludicrous purchases and excess, like Mike Tyson spending hundreds of thousands of dollars on tiger-pets or Floyd Mayweather spending $16 million on an engagement ring. Life is meant to be lived, but anyone can easily enjoy life without buying tigers and multi-million-dollar rings.
Investing is the best antidote to short-termism; the conscious choice to forgo immediate satisfaction with the belief that you will generate that income back in the future with interest-profit. At the same time, we should mention that it would be counterproductive to substitute consumer short-termism for investor short-termism. If you’re seeking investments with quick and huge returns then it’s likely that you will waste your money as if you were spending them on luxuries because it’s either misplaced faith or gambling. You would also be more prone to pyramid schemes, Ponzi schemes and other investment scams.
Investing in crypto, for instance, with the hope that you will become a millionaire overnight is probably not going to cut it, unless you get lucky. Two fundamental pillars of sound investing are prudence and patience. At the same time, it’s easy for a 20-year-old to get carried away and lose sight of what is important when they become millionaires out of nowhere. It must be hard for a young athlete to even contemplate bankruptcy in the future with the amount of money coming their way in the present. This is precisely why athletes need to surround themselves with the right people, including a financial advisor who can guard and guide them.
Athletes need to realize that their 15-year career can be their ticket to long-term financial success and investing can be the vehicle. Stakeholders need to tackle the mentality of athletes through education; the mentality that leads to extravagant nights out and meaningless purchases. Effectively addressing the short-termist mentality of athletes will go a long way in helping them secure their financial future.