By Demetris Constantinou, Contributor
Almost 78% of professional athletes go broke within three years after retirement[1]. 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.
Creating a good balance regarding money
To create a good balance between spending, saving, and investing, it’s important to understand what each aspect entails. Spending refers to the money you use from each pay check to cover daily activities. However, not all activities are of equal importance, and this distinction is crucial. Spending is broken down into needs and wants. Needs include essential expenses like housing and clothing, while wants include items like luxury cars or vacations.
Prioritising Wants vs Needs
Athletes should focus on spending primarily on needs rather than wants. However, this doesn’t mean they shouldn’t enjoy some of their wants. Saving and investing are similar in that they both make money unavailable for the present, but their purposes differ. When saving, you put money aside for future use, ensuring security during uncertain times.
Savings
Savings should cover a few months of expenses in case of an emergency or a period without income. Investing, however, involves putting money to work to generate future revenue streams that can support an athlete post-retirement. This is crucial for athletes whose careers are short, and who must rely on investments for financial independence after retirement.
Investing
Investing is even more important for athletes, as it will determine their long-term financial stability. Athletes should allocate a larger portion of their income to investing, as it ensures income flow after they retire from their career. The 20-30-50 ratio, which suggests spending 50% on needs, 30% on wants, and 20% on savings and investments, may not work for athletes.
The ratio assumes a long career span of 35-40 years, but athletes’ careers last only 10-20 years. Their revenue is concentrated over a shorter period, making it necessary to adjust their approach. Athletes cannot follow this conventional ratio and must adapt to their unique career circumstances.
High Earnings
Another aspect that makes athletes’ case unique is their high earnings, which allows them to spend a lower percentage of their earnings and still cover more needs and wants than a non-athlete who spends a higher percentage on needs and wants. For example, it’s estimated that the median salary for professional basketball players in the NBA is approximately $4 million each year[2] while the median annual wage in the U.S. is approximately $62,000[3].
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[1] Why do professional athletes go broke? | Fox Business
[2] NBA salaries analysis (1991-2022) | RunRepeat
[3] Are You Well-Paid? Compare Your Income to the Average | The Ascent (fool.com)