Since this story is requested a lot, here is a reprint of the story. This version (a reprint) was posted on 10/03/2012.
After last night’s premiere of ESPN’s 30 for 30 “Broke,” I thought I would republish an article I wrote a while back on professional athletes going broke.
When I first released it, it was up less than 24 hours before Paul Bissonette (Phoenix Coyotes) tweeted the story. At first, I saw NHL player after NHL player making funny jabs at it. I also saw those same players tweet that they went and got a financial adviser and were learning more about making their money last. Others…alumni…were tweeting their sighs of relief that they did something right with their money over the course of their careers and didn’t spend it frivolously.
This article opened the conversation to get players talking about money. When you see a number like 75% of professional athletes are broke within the first 10 years of their retirement…that includes NHL players. Somebody somewhere knows an old buddy they played hockey with that suffered from the same thing 75% of professional athletes suffer from…going broke.
“Broke” explained the crazy things pro athletes do with their money…from paying child support for 10 kids from 10 different mamas, to being tricked out of their money, to agents/advisers not sending in tax payments to the player being audited a few years later…there are a lot of tales of people doing very stupid things with their money.
Even Jaromir Jagr’s name made “Broke” for his tax issues that mirror the likes of so many other pro athletes. Gambling, drugs, spending beyond your means…they all top the list of how professional athletes that made so much money ended up going broke in less than 10 years.
Here is the article I published, “A Player’s Blindside Hit.”
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Just a few months ago, NHL player Dan Ellis took to Twitter to lament his financial woes. He had just signed a $1.5 million/year contract, and then realized after he bought a new house in Tampa Bay and a new luxury car, that he still had to turn 18% of his salary over to escrow to keep the salary cap at its current level.
Being a professional athlete and making millions of dollars is a lot like winning the lottery. You get a huge chunk of change over a short period of time. You pay your taxes on it and you’ll be lucky to receive 50-60% of the winnings to deposit into your bank account.
Like lottery winners, many professional athletes go out and spend the money. They buy houses, cars, designer wardrobes, and Rolex watches. They invest in businesses and real estate without doing their research, but invest based on the information someone else has given to them. They allow relatives, friends or a friend of a friend to help them manage their money or get them to invest in failed business schemes.
Let’s not forget that not only do they buy houses, cars and watches for themselves, but they buy it for their friends and family. They put up the aura of money by spending exorbitant amounts of the liquid green on lavish dinners, expensive wines, and worse yet…they pay for everybody.
One NHL agent told me that rookies tend to make that mistake during their first year of making their few hundreds of thousands. They’ll foot the restaurant bill (which can be in the thousands) when it comes to the table, even if the guy sitting across from him just inked a $100 million deal.
They haven’t learned the whole “Excuse me, I need to take a leak,” and head to the bathroom right when the bill arrives (like the million dollar players do).
They don’t just pay once a season for the tab when it comes, they pay for it most of the time…thus increasing their chances of going broke a lot faster, especially if they don’t make it past their sophomore year in the big leagues.
They spend, spend, spend. They invest without going to certified professionals. They even gamble their earnings away at the tables. After all, ask any athlete after their season is over where they are headed to. It’s not Disneyland! Most head to Las Vegas or Atlantic City.
The main thing that most of these athletes and lottery winners forget is that they are given this rare opportunity. They have millions of dollars in their hands. Many spend their entire lifetime just to attempt to save up a million dollars for their retirement. Even to most, they’ll be lucky to save just a quarter of that towards their retirement.
With this rare opportunity to make millions at a young age, athletes don’t realize that the short amount of time that they have to earn this money should be invested and saved wisely so that it will last them their entire lifetime. Sure, some of it can be spent now, but many make the mistake of thinking they have endless amounts of money, only to find that once the money is no longer coming in, they are more broke than they were prior to making the millions.
I call this Lottery Money. Like lotto winners, professional athletes spend the money, rather than investing it or placing it into a fund with the objective of having the major earnings last their entire lifetime. They go on a spending spree, buying things for not only themselves but their extended family (parents) and on their entourage (friends/leeches…whatever you want to call them).
Instead of buying just one Rolex watch valued at around $20,000, they buy five Rolex watches. Instead of buying just one luxury car and one modest everyday car, they buy a number of luxury and sports vehicles, not realizing that they are not an investment. Cars depreciate in value the second they drive it off the lot.
For some players, they’ve gotten into trouble gambling. From internet gambling to visiting the tables, there are a few that gamble away several hundreds of thousands of dollars.
There are even a few players that have had problems paying their taxes. They end up owing the government more money by having to pay penalties on top of everything they owed already to begin with.
But the truth of the matter is that all of this spending during the highlight of their careers finds them with severe money problems just shortly after their careers have ended. For instance, Sports Illustrated reported that 78% of NFLers that have been retired for two years have gone bankrupt or are under severe financial distress due to divorce or joblessness.
That was within two years of their retirement! 78% of them are already in dire straits financially.
Within five years of retirement, 60% of former NBA players are broke.
Even the current economic climate has taken its toll on MLB players who also have found themselves in similar ruin. Several notable baseball players (Johnny Damon, Mike Pelfrey, Jacoby Ellsbury, and Scott Eyre) found their fortunes tied up in an $8 billion fraud scheme by Texas financier Robert Allen Stanford. Pelfrey found 99% of his fortune frozen due to the federal investigation into the fraud.
For every person with millions to invest, there are always the Bernie Madoff’s of the world seeking to steal away and squander their client’s money. How do these guys get away with it? People put too much of their trust into these individuals without ever checking on their own money and investments to make sure they still have their money.
One of the greatest lessons to be learned comes from personal finance expert and author David Bach. In order to be rich, you have to be smart about money. Being smart means doing your research and not playing dumb when it comes to money. If you play dumb, you deserve to lose it all.
In this day and age, no matter how many pucks you take to the head, you can still learn how to manage your own money. You have to stay on top of your earning capital, or watch your money flow down the drain.
Steven Conville of Macquarie Private Wealth, who specializes in helping his clients in sports and entertainment grow their capital, says that some of the biggest mistakes athletes make in their career are “not being cognizant of the time or the dollar value of the first contract.”
“Most players feel as though they can party and indulge during the first contract and get serious for the second or third contract. The issue that arises is that some players never get that second or third contract, or don’t receive the type of money that they thought they would receive. Those players who typically over spend during their first contract have about 33% less of their money work for them when they reach retirement age.
“Players fail to recognize that they only have 5-10 years to fund their retirement, which can be as long as 65 years.”
Another major problem that many athletes make the mistake of doing is hiring the wrong people to manage their money.
“Putting uncertified, under-educated family members or friends in charge of their financial affairs,” Convillle says. “One mistake in that area often can lead to bankruptcy, difficult retirement years, leaving their families in disarray, or even costing them prison time.”
Another major pitfall for athletes involves the business enterprises they either know nothing about or leave in the hands of a friend or family member. Many open up car dealerships, restaurants, and record labels.
“[They] enter into high risk ventures that they have no experience in or time to properly manage the investment,” Conville says.
He also adds that players make the mistake of “opening sports bars and nightclubs when they are not around to oversee the management of the operation.”
In other words, they invest their money and their name into a venture, but walk away from it, hoping that the people they left to manage the joint will come out profitable. Without properly watching their investments, they could wind up being robbed.
Back in the 1990s, one of the largest skylight companies in the world, LinEl, Inc. fell into ruin. Their President decided that he preferred to be out on the road, building the skylights himself with his crew. He left one of the Vice Presidents in charge to manage the ‘business’ side of things.
That Vice President squandered and embezzled the money, putting the millionaire founders into complete financial ruin. He had to declare bankruptcy and close down the factories, laying off hundreds of workers.
The lesson he learned here was not to let anyone manage your company or your money for you. You always have to keep a close eye, especially on the managers. If you don’t, they will rob you and ruin you, your family, and your way of life.
After they’re done, the federal government will take the rest of what is left behind.
Another money factor that most players do not think about are the investments they put into their homes. Considering how the ‘nature of the business’ for any professional sports team includes players being traded, many find that they have to move their family to a new home and city. Although trades find families moving from one state to another, or simply maintaining two homes during the season, many make the mistake of “buying huge houses and putting custom details into the home that they won’t be able to recoup the expenditure at the time of the sale.”
In other words, that ‘special room’ you just had to have when you bought the new house…you can’t take it with you when you go. The need for a quick sale means you can’t get back the costs you put into the house. That means that you just put all of this money into a house to spruce it up the way you want it only to have to sell it quickly and never get back the money you put into the home.
It would be more worthwhile to make that special investment in the home for the house you retire in, not the one you may live in for a year or two and then move to a new state.
The point of this article is to show that many people make the mistake of not learning how to manage their money when they get it. It’s not just lottery winners or professional athletes, but celebrities also go through these money mistakes. Nicolas Cage recently had to declare bankruptcy. Whitney Houston, Queen Latifah, Toni Braxton (not just once, but twice), Randy Quaid, Stan Lee, Mike Tyson, Donald Trump (not once, but twice this decade), Stephen Baldwin and Sinbad are just a few more big names that filed for bankruptcy.
For fans, they don’t understand how a professional athlete or celebrity who has millions of dollars can go bankrupt or lament financial woes when they have all of this money. Simply put…they’re just like everybody else.
People say, “When I win the lottery, I’m going to buy…”
Guess what? Professional athletes and celebrities have won their own lottery. The first thing on their minds (just like everybody else) is on what they’re going to buy with that money. They’re not thinking about how they should do something with the money so that it lasts their entire lifetime. They’re not thinking about all of the people that they’re going to attract that want a handout. They’re not thinking about how to think like a businessman and make sure that money grows.
Your money doesn’t grow when you spend it. You’re making someone else’s money grow by giving it away.
[In part 2 of this series, you’ll find out what steps you need to make to grow your capital.]