Athletes and financial education: Dealing with the financial challenges and vulnerability of athletes
Key topic
This lesson outlines the hard realities faced by athletes who are inadequately prepared to safeguard their financial future. Since for most of you here, the dream is a professional career in sports, in this lesson we explain how and why athletes are financially vulnerable. We also go through the financial challenges that athletes face and guide you through the steps you need to take in order to ensure your long-term financial wellbeing.
Learning objectives
- Understand how and why athletes are financially vulnerable
- Develop a plan to avoid being financially vulnerable
- Discover the steps you must take in order to deal with financial challenges
- Be ready to succeed financially
The financial challenges of athletes
The financial vulnerability of young people, especially athletes, is a real problem. Financial failure is not usually caused by a sudden event, but from a series of bad choices made during our life, especially during the first decade of adulthood. There are a number of factors that contribute to the financial failure of most athletes.
Athletes may turn professional at any given point provided that the opportunity is presented to them. Some athletes value the chance of a college degree, others want to make sure they cash-in at any given opportunity, and others make a choice based on what is offered to them. Reality is that only 6% of high school athletes have a chance to compete in college sports and only 2% of all college athletes get to enjoy a professional sports career. It’s understandable that if given the opportunity any athlete will jump in head-first, as all athletes train and compete from a very young age for what ultimately boils down to the chance of getting the opportunity of a lifetime of becoming pro-athletes.
The reality of professional sports is that athletes most probably enjoy peak earnings before they even hit the age of 30. However, another reality is that an athletic career is so short—as short as 5-7 years in some sports – that athletes will not have the opportunity to accumulate the financial capital which will provide them with the financial comfort for the rest of their life. In fact, athletes will most likely earn 70% to 90% of their lifetime earnings, before the age of 35. It is during that time, during the glory days of big dreams and big money that athletes will have to make some serious financial decisions that will have a lifelong impact. In case someone decides to pursue a pro career outside of sports, that person will still have to make a multitude of decisions that will affect their future financial life. Being financially educated is useful to every one of us, no matter what type of career we are into and no matter at which phase of life we are.
Your future, as exciting as it may seem, hides a lot of challenges. What you need to ensure, through financial education, is that you can achieve the life you aspire to have, both during your sports or other career years and past retirement. In a few years, you will be starting your business or professional sports career, and your goal will be to attain financial freedom and continue to be financially comfortable for the rest of your life. Our aim here is to show you how to do that!
Let’s watch a short video from the Frugal Athlete, soccer player Amobi Okugo who has a few words of wisdom regarding the financial health of athletes.
Financial vulnerability
There are several factors, which contribute to the financial failure of athletes and we want you to be aware of them. Athletes usually earn substantial amounts of income within a short time span, depending on the particular sport, usually 3 to 15 years. Of course, in the case of certain sports, like golf, the life span of the sports career may last much longer. Most of the time, the athletes’ salaries are not fully guaranteed and poor performance, injury, on and off the field behavior, can adversely affect their earning capacity. The end of the athletes’ field play, usually marks the end of the substantial earnings as well.
In addition, athletes earn their money at a very young age, away from their homes or countries, as most of them are offered lucrative contracts around the world. Being away from home and the shelter of their families, puts additional pressure on young athletes. The high income and celebrity recognition that athletes enjoy at an early age, usually leads them to adopt a lifestyle of the rich and famous, living beyond their means and with no real savings. The effect of sudden wealth or “sudden money” cannot be handled appropriately, especially by young men and women, who are inexperienced in handling finances. You want examples? Mike Tyson, Allan Iverson, Sheryl Swoops, Warren Sapp and many, many, many, more.
This sudden wealth phenomenon of having a lot of money all of a sudden fall on your lap, or earning big suddenly causes athletes to lose interest in the small things that make life enjoyable and give intangible benefits; they tend to change attitudes and their spending becomes a way of utilizing their free time. Gambling is often a problem with professional athletes, who seek the thrill of big risk and big return, without fearing the catastrophic consequences. Athletes also tend to go through emotional disturbances, feeling lonely, or feeling exploited, or feeling loved only for their money. Many forms of depression are seen or manifested in athletes, especially as sport careers near their end and athletes have no idea what their future will hold, especially those athletes that did not prepare, did not save money, did not get an education and did not create alternative revenue sources to sustain them after retirement. The results of these emotional stressors are manifested in substance abuse, alcohol abuse, violent behavior that may cause criminal and financial penalties; before they know and realise it, many athletes have hit rock bottom.
Sometimes, family, friends, coaches and others who might have helped an athlete reach success, may seek financial rewards and returns as recognition of their contribution to the athlete’s fame; this is difficult for the athlete to handle properly, given the high degree of loyalty and attachment. Athletes often do not have the same level of financial literacy as people who took more conventional career and education paths. The unique financial challenges that come from life as a professional athlete, combined with the lack of financial education, may lead to poor financial decisions which, unfortunately, can have an adverse lifelong impact. This might include putting trust in the wrong people and/or choosing bad Investments. Advisor improprieties and misappropriations of funds can also contribute to the financial problems of professional athletes.
The question here is how can we take preventive action against financial failure? Many of the factors that make athletes financially vulnerable cannot be altered. Athletes will always be vulnerable, but their knowledge-base and decision- making abilities can greatly improve. The solution lies into educating athletes, so that they acquire knowledge about money, personal finances and financial options, thus giving them the tools to make wise decisions concerning money. As financially educated athletes, you will be able to react in a more prudent manner to situations arising from financial pressures or which involve financial decision making. Financial literacy is a learned life skill which will help you, not only make sound financial decisions, but will give you great confidence over your financial lives as well.
We will now watch a 7-minute video on athletes who are poorer than you thought!
Athletes who are poorer than you thought
Practice makes perfect
Financial vulnerability can only be combated with careful financial planning and well- thought-out financial decisions. As we stressed and will keep stressing, it comes down to doing little things and mastering these skills:
- Set your financial goals and create a financial plan around those goals
- Set a budget and follow the budget
- Always include in your budget a portion for saving
- Build your financial plan around sound investment opportunities
- Take good care of your financial obligations so that no unnecessary risks arise
As you know from your sports experience, nothing comes without effort and practice. You need to start from a young age and practice these skills, so that you will be ready later in your life. Just like the trust you put in your parents and your sports coaches, you should choose financial coaches that you can trust equally and work with them to secure your financial interest.
Going back to what we already discussed, the personal financial planning process is rather simple: You figure out where you are now financially, you decide where you want to be financially in different phases of your life, and you devise a plan on how to get from where you are now, to where you want to go. The difficult part is to have the necessary discipline, consistency and flexibility to stick to your plan, re-evaluate it when necessary and respond to unanticipated needs and desires in a logical manner.
This information will help you create your financial game plan, your organized strategy for maintaining financial health and accomplishing financial goals. Developing your financial game plan will not only allow you to control your financial situation, but it will also enhance your quality of life and it can reduce any uncertainty you may feel about money-related issues and future needs.
Your dreams, goals and values give a direction to your financial plan. All people have dreams and goals in life, for themselves and their families, such as buying a home, creating a business, saving for their children’s college education, travelling and retiring comfortably, etc. You need to have a financial plan in place, which encompasses all your values, dreams and goals in a meaningful way, in order to achieve them. Financial planning can be utilized in order to manage your finances in a way that you can achieve your dreams and goals while not overlooking your values.
The best money management habit to adopt though, is to always live and save within your means. By adopting this habit, you are a step ahead in your financial game plan. The amount available for spending and saving is called disposable income. It represents any income you have earned, less taxes and other withholdings. Your disposable income is what you have available to cover your needs, to spend on wants and to save. Living below your means actually means that what you spend and save during a given timeframe, a month for example, does not exceed your disposable income. It is advisable to first spend money on your needs, save a good part of what is left, and use the remainder to fulfil wants. It is quite important to strike a good balance between spending money on wants vs needs and to save enough for future investing or for large purchases you may plan to do in the future.
To achieve living within your means, you need to formulate a budget. Budgeting is an important tool because it helps you understand the bigger picture, it helps you control your financial situation at any given point in your life, and it helps you take a long- term approach in life. A budget is a summary of your expected income and expenses for a period of time, usually a month or a year. While the word budget may have been falsely connected with restricted spending, you should remember that actually a budget translates into efficient spending.
You should remember that creating a budget is one of the best solutions for creating long term financial sustainability and success, as well as for being prepared for any financial situation in your life and having control of your finances. The most important thing to remember is that a budget is essential in your life and that you should be equally disciplined, as in your sports and academics, in the process of following your budget and adhering to it. If you think you need help with creating your budget you can start working on it with your
parents, so that you better understand the concept. Later in life, especially if you become a professional athlete, it is advised that you utilize the services of a financial advisor (especially if you can afford one), who will guide you and boost your accountability towards the budgeting exercise, thus making it easier for you to stick to your budget.
One of the most common mistakes that many people make, especially when their income is of a good standing, is failing to understand the need to implement a saving strategy; this strategy is imperative to your financial security, but also vital for financial growth, which will allow you to enjoy a lifestyle upgrade later down the road in your life, or take corrective action in the case of possible financial setbacks or errors of the past. Setting aside money each month builds a foundation for establishing future benefits and even wealth.
Saving money should not be confused with investing money and understanding the difference is vital. Your savings are money which you will put into the safest places or products which you can easily access at any time. When you have enough money saved, for emergencies and safety, you can then start investing. When you invest, you have the opportunity to earn more money, but you also have a greater chance of losing money because the money you invest, for example in securities, mutual funds, or other similar investments, is not insured. You can follow some simple steps to develop your saving strategy, which must of course adhere to the goals of your greater financial plan that we have previously discussed.
We suggest you divide and allocate your savings into three basic categories: emergency savings, personal savings and long-term savings. You will reach a stage in your life where you will hopefully earn enough money to be able to save and have different saving schemes. You will also reach a point in your life, where you will be responsible for others (spouse, kids etc) and you will be in the exact same position that your parents are in today.
Saving while earning is one of the most crucial financial goals you should set and perhaps is not a bad idea to discuss with your parents the possibility of starting from now. If you feel that practice makes perfect, why not join your parents and participate in the family savings plan now, using the money you receive from your allowance, from gifts and special occasions etc. Saving can indeed be challenging, but it gets easier over time. Don’t forget that savings is the key to calling your own shots and also the key to a better quality of life. By setting up and following your budget, you’ll see your savings grow over time. Start your savings plan now and reap the benefits every day of your life in the future. Remember that, through saving, your money will grow over time, using the benefits of simple and compounded interest.
Let’s finish off this lesson by watching a video with athletes who did things right and continue to be financially comfortable way after their retirement from sports.
Athletes who didn’t blow their money & became financially successful
Lesson wrap-up
Today we focused on the financial challenges and vulnerability of athletes. We explained why athletes are vulnerable financially and listed some of the most common challenges that they have to face. We then explored some of the preventative steps young athletes can take to mitigate the possible impact in the future. The key to financial freedom is financial education and subsequently a solid financial plan.
At this point we will wrap up today’s lesson. First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved and then we will address any questions you may have. Please feel free to ask anything you’d like in relation to today’s lesson and we would love to hear how the concepts we discussed today relate to you and your life!