Halfway through 2022, it has become impossible to scroll through social media and news pages and not encounter the terms “recession”, “inflation”, “bear market” and other similar takes, expressing negative sentiment on the state of the world economy. It’s no secret that while the world economy is still strong, the signs of a looming recession become more prevalent by the day with big names such as JP Morgan’s Jamie Dimon talking about an “economic hurricane on the horizon”.
Money Smart Athlete Blog
As discussed in last week’s article, athletes strive for financial freedom – which is all about having the resources to afford their desired lifestyle. In many cases, this financial freedom is attained through investing – as investing can eventually make your money work for you. Investment can be defined as committing capital or funds to different types of assets with the expectation that you will generate a gain or profit in the future. However, there are several factors that can negatively impact athletes’ investment; one such factor is inflation. Inflation is the rate of increase in prices over a period of time which means it can affect the value of future returns, deeming it a critical factor when making investment decisions.
The great desire to achieve financial freedom- which can be interpreted as having the financial resources to afford the lifestyle you wish- can be met by making your money work for you. Investing is one of the key ways to achieve this desire since it allows you to grow your wealth by generating additional income streams to support your lifestyle.
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.
Living in a material world where we aspire to have and experience the best things in life, the temptation of making impulse purchases on credit can be a trap. Making purchases on credit is a major part of everyday life to the point that it is being frequently abused and may be transformed into excessive unmanageable debt.
Almost 78% of professional athletes go broke within three years after retirement. Such stellar proportion is a call to action for every professional athlete out there, to educate and surround themselves with competent financial advisors who will create a solid roadmap to financial freedom. Finding the right balance between spending, saving, and investing is a very tricky task and most financial advisors out there will have an opinion about which allocations between the above three comprise the “magic formula”. Truth be told, there’s no such thing as a “magic formula” and the exact percentage of your income that should be allocated between spending, saving, and investing depends on the individual’s risk appetite and goals. There are some basic rules and thresholds which should always be kept in mind when deciding what portion of your income should go into which basket.
The term budgeting tends to put people off and is usually associated with restrictive spending. Actually, having a budget is the first and possibly most important step in getting your finances in order and establishing the foundations for your long-term financial well-being. Another common misconception is that people with higher salaries – such as athletes – do not need a budget. The reality of it is, if you are prone to overspending it does not matter how much you earn; if anything, higher salaries are harder to calibrate in terms of spending. After all, a budget is nothing more than a summary of your expected income and expenses for a period of time; usually a month or a year.
The term “financial freedom” means something different to each person. Many define it as being able to have the lifestyle they want and knowing they can afford it financially, without worrying about paying bills and making ends meet. Financial freedom means that instead of having to work to generate income, you will have your assets working for you and these assets will be generating the income you need to support your desired lifestyle. In order to attain this goal, it’s important to begin investing as early as possible so that you generate passive income streams instead of having to work for every penny.
On one hand, you have the narrative of a revolution led by young people, computer science geeks and perhaps some charlatans as well, who seek to redefine the matrix of our financial system and who see blockchain technology and cryptocurrencies as the future. On the other hand, we have the traditional investors and hedge fund people who dismiss cryptocurrencies as attempts to subvert political systems along with national currencies, and label them as the next great bubble. In a sense, both are right. Cryptos are the offspring of the two previous financial crises. The dot-com bubble with overspeculation in tech and the Great Recession which eroded trust in financial institutions and “the system”. In short, yes; cryptos are here to stay, but the explanation is much more complicated.
A crucial part of professional athletes’ lives, is their ability to take optimal financial decisions at different stages of their career, in order to build their wealth and sustain their lifestyle after the end of their playing days. Money management is of course important for any average Joe but critical for a professional athlete and the special nature of the athletic profession.
Former US president (1933-1945) Franklin D. Roosevelt (FDR) said ‘real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world’. This statement is frequently recast and repackaged by people familiar with real estate. This article gives a brief overview of the real estate world in order to point out how it might be beneficial to athletes and how this line of investment might be ideal for them in terms of securing their long-term financial well-being.
There is no doubt that the COVID-19 pandemic has had a profound negative impact on all the stakeholders of the sports industry, as the response of the majority of national and international decision-makers to the outbreak was the shutting down of sport competitions at all levels, including the Olympics. Professional and amateur athletes, sports organizations and sports-related companies and their employees, all had to face their own share of financial distress.
Last week we explored the concept of Risk Appetite and its three basic descriptive categories: risk-averse, risk-seeking and risk neutral. Understanding your Risk Appetite or Risk Tolerance is one of the major factors that you have to take into account when creating your investment plan. The second important factor relates to your income; these two concepts are closely intertwined.
When psychologists and sociologists study deviant behavior they tend to focus on socioeconomic backgrounds, conditioning and environmental and structural factors. Economists on the other hand, for right or wrong, have come up with a different perspective: risk-appetite. They argue that people commit crimes as rational beings weighing risk against gain. In the case of criminals, prison sentence against loot. The rational response to risk is not necessarily to avoid it at any cost but to take it into account in your decision making. Risk appetite refers to the amount of risk that an individual or organization is able and/or willing to accept in pursuit of certain objectives. There are three basic categories of risk appetite: risk-averse, risk-neutral and risk-seeking. Every single individual has their own risk appetite, including athletes.
Despite being well paid, many professional athletes are looking for alternative sources of income to grow their wealth. To this end, they often use their sports earnings to invest in various ventures and projects. Most investments are usually made after retirement; however, we have a number of cases where athletes begin investing way before they retire. The rationale behind athletes’ investments is the creation of alternative sources of revenue which can potentially lead to the creation and accumulation of wealth.
The significance of creating a financial plan that can eventually guide athletes to financial freedom, has been reiterated in a number of articles, here on the Money Smart Athlete Blog. Being able to choose wisely when, where and how to invest money, in order for them to grow, is a very critical component of a financial plan which can help athletes meet both their short and long-term goals they set.
Usually, when we hear the word “environment”, the first thing that comes to mind is our ecosystem. However, there is also the artificial environment that we create within our societies that encompasses anything that involves human and social interaction and affects our decisions and our personality.
Athletes particularly the most successful and famous ones have an army of advisers behind them, regulating their every move and advising them on various aspects of their lives ranging from investments to public conduct. Nonetheless, a certain degree of financial literacy is still vital irrespective of how many advisers an athlete has at their back or who those advisers are. At the end of the day, nobody cares as much about your future as you and you should never delegate the handling of your interests entirely to your advisers. Hence, the relationship between financial literacy and your team of advisers should always be seen as complementary and not as substitutive or mutually exclusive.
The reward for athletes who reach a top level in their sport, does not only come in the form of public recognition and a display case full of medals. Most professional athletes are privileged with earning what an average person earns in a lifetime, in just a few years. Many will squander this money away in a short time, but others will make the right decisions, including investments, that will allow them to retain their financial freedom and security after their retirement.