The other night ESPN aired a fascinating documentary called “Broke” which explored the reasons why professional athletes making multi-million dollar salaries end up….broke. As someone who writes a personal finance blog, I found the film to be particularly interesting.
Most people think that professional athletes and other highly paid celebrities live in a completely different world than you and I. But the most fascinating thing I took from the documentary was how the same personal finance problems that you and I face are exactly what is causing these athletes to blow through millions of dollars.
Yes, there is plenty of extravagant spending. You’re all familiar with athletes buying lots of expensive cars, jewelry and big houses. However, the root of the problem is something we’re all familiar with and something we all struggle to avoid. The feeling that we have to “keep up with the Joneses”. Andre Rison, former Atlanta Falcons wide receiver spoke about how the most competitive place in the NFL wasn’t on the playing field, but in the players parking lot.
Where the film got especially interesting is when it dove into some of the deeper issues that lead to the financial issues these athletes were facing. Having to start completely over in new cities when being traded, having to pay large percentages to agents, lawyers and financial advisors (who aren’t always looking out for the players best interest as the film would reveal). Athletes also pay A LOT of taxes. They face what is commonly refered to as a “jock tax” where athletes have to pay taxes in every state where they earn a paycheck. Imagine being a baseball player, playing 81 away games all over the country and having to pay tax to every state you played a single game in during the year. It’s even worse for tennis players, who have to pay taxes in every country they play a tournament in during the year!
The theme that kept popping up over and over was the lack of a financial education. Especially in the NFL, where players are paid on a week to week basis players simply don’t know how to budget to make their money last. This was a very serious problem that the players union faced as last year’s lockout dragged on. Players simply couldn’t afford to miss paychecks if games were missed.
The point was made that a professional athlete has a different earning cycle than the average person, and it makes sense. We all go through college making little to no money. When your average person graduates they get an entry-level job making a modest amount of money, and gradually earns more and more over the course of their career. For an athlete it’s backwards. When they graduate college and go pro, they’re immediately handed extravagant amounts of money at a very young age. Depending on the sport they have about 10 years to earn, and save enough money to last them for the rest of their lives. Seems easy when you make millions, right? But even those of us not making an athletes salary fail to properly plan for our futures. A 23-year-old simply doesn’t think enough about saving for retirement, whether they make $30,000 or $3,000,000 per year.
Of course not having a lot of financial knowledge leads to another problem. Bad investments. Just like the rest of us, athletes focused too much on making “sexy” investments rather than preserving their capital and making smart investments. As one interviewee put it: “Turning $10 million into $11.2 million just isn’t sexy.” Just as a lot of people get obsessed with finding hot stocks and moving money between sectors, athletes get involved in a lot of bad business deals. Whether they’re restaurants, car washes or record labels. They rarely succeed in anything other than draining the athletes bank account.
“Broke” demonstrates that knowing how to budget, plan for retirement and smartly invest your money aren’t just things us finance bloggers like to harp on. They’re extremely valuable life skills that everyone, regardless of income needs to learn and master. Because as the athletes in “Broke” learned the hard way…It’s not about how much you make, it’s about how much you keep.