Why Athletes Need Financial Literacy
- A study by Sports Illustrated back in 2009 revealed that 60% of retired NBA players and 78% of retired NFL players experience times of financial hardship.
- Many athletes experience times of financial hardship as they have not had an amicable amount of time to perfect their financial habits.
- Therefore, it is important to raise awareness regarding athletes' steps to ensure they do not go broke once they retire.
Many up-and-coming athletes gain mainstream media attention starting in high school. Young people who receive media attention typically obtain various endorsements and an abundance of money by extension. The issue arises as these young athletes do not have the same experience, and consequently, financial capability as older people who earn the same amount of money to make intelligent, major financial decisions yet.
As these young stars in the making begin receiving large sums of money, without the proper guidance, they can easily run out due to a lack of financial knowledge. This is why athletes must start their journey to learn about financial literacy.
What is Financial Literacy?
Financial literacy is knowledge in financial topics such as being financially aware and spending your money wisely to create passive income. Furthermore, it is the practice of budgeting, not falling victim to lifestyle inflation, and learning not to spend excessive amounts of money on invaluable items.
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Why Athletes Go Broke
According to a study done by Sports Illustrated back in 2009, 60% of NBA players go broke after five years of retirement, and 78% of former NFL players have experienced times of financial hardship.
As mentioned before, most athletes who inherit millions of dollars when playing professional sports in the United States and worldwide are in their late teens and early twenties. Consequently, as these athletes have not had a significant amount of time perfecting their financial habits, their lack of expertise could affect their financial status.
Typically, a normal job that pays the same amount these athletes make takes many years. By the time ordinary people receive the same amount of money as these athletes, they have had time to make mistakes with their money and perfect their financial goals and habits.
However, these athletes have not had the luxury of time, and due to their excessive income, they may make some mistakes here and there. Although mistakes are critical in the learning process, it is crucial for them to understand how their mistakes negatively affected their financial position and ensure these instances are not repeated.
Athletes Who Went Broke
There have been countless stories regarding athletes who were set for life when they retired from their respective sports due to the amount of money they made; however, some athletes were not so fortunate.
Mike Tyson, Allen Iverson, and Dennis Rodman, all had careers and legacies that would outlive them. Their earnings throughout their careers were $154 million, $27 million, and $430 million, respectively. Though these athletes were some of the best in their respective fields, they still struggled financially.
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Mike Tyson is one of the greatest boxers of all time who also received millions of dollars throughout the span of his career. He made his boxing debut at the age of 18, won his first belt at the age of 20, and amassed over $430 million throughout his career.
However, it started to go downhill when he started making poor personal financial decisions via spending millions of dollars on unnecessary items. For example, he owned a pet tiger, which takes a lot more time and money to care for than a dog or a cat. Thus, these expenses quickly racked up and became one of the reasons that caused his financial downfall. Another was due to the fact he would spend large sums of money on women and partying.
He would often host large parties with many people, in which he would supply food, drinks, and substances. Consequently, after multiple years of hosting parties and buying women extravagant items, he didn’t have any money left, leading to him filing for bankruptcy in 2003.
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Mr. We Talkin’ About Practice didn’t practice developing great financial planning and personal finance skills. He accumulated over $154 million over his career yet struggled to have enough money to buy a cheeseburger after he retired. The critical reason he lost money was his lack of trust in banks. Iverson was famous for not trusting any financial institutions, as he felt they were a scam.
This led to him putting large sums of cash into garbage bags all around his house instead of bank accounts. The key issue that arose from this decision was that the people he was supporting financially became greedy and wanted to have more money than Iverson provided. During his career, it was said that Iverson financially supported 50 people. Thus, it was difficult to keep track of where all of his money was going due to his cash-only savings.
Dennis Rodman was one of the most entertaining and controversial players to ever play in the NBA. In the span of his career, Rodman accumulated $27 million in earnings. Though that is life-changing money for many, Rodman’s lack of attention to detail caused him to lose almost all of his fortune. In addition, Rodman was an eccentric and loud player throughout his time in the NBA, which led to him having the fifth-most amount of technical fouls in NBA history.
As technical fouls are frowned upon by both fans and executives, Rodman was ejected and suspended from future games. These suspensions alone have cost him over $1 million. Additionally, he was always partying, which led to many expenses accumulating over the years, ruining his financial wealth.
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Steps Athletes Should Take to Grow Their Money
Becoming financially literate takes time, and there are many different steps athletes can take to learn more about managing their money and ensure their level of wealth is preserved and can grow after they retire. Below are some steps that athletes and everyday people can take to help them grow their financial position.
Open a Savings Account
Having a savings account that regularly gets contributed to is important as the savings account will be helpful when making major financial purchases, such as buying a home. Purchasing a home requires a down payment, a significant amount of money that takes a while to be saved up. Thus, the money saved in a savings account helps prepare for these expensive purchases and limits the financial stress a major purchase can put someone through.
Have an Emergency Fund
The second type of account is an emergency fund, which is critical to have when there is an unexpected expense. An emergency fund account differs from a savings account, as the savings account is used for major purchases that need to be saved up for a while, and emergency funds are used for emergencies. Typically, the emergency fund contains between 3-6 months' worth of expenses to ensure that there is money there to get through the financial hardship if something goes wrong.
One of the most important things to do while working is to invest any income that is not needed. By investing, dividends can be paid for being a shareholder in a company, and over time, these dividends will provide a source of passive income. Furthermore, once one retires, the money put into the stocks will have accumulated over the years due to compound interest.
Lower Outstanding Debt
Lastly, it is essential to pay off any outstanding debt, such as student loans or credit cards. Paying off debt early or on time is crucial as when one’s current level of income decreases yet they have the same level of debt outstanding. This results in their credit score to lower as they have trouble paying it back, and any loans taken out in the future will have higher interest rates.
Thus, it is vital to use a portion of the income towards paying off debts, so once the income level reduces, there are no financial hardships.
How Athletes Are Becoming More Financially Aware Today
Some athletes realize that their high level of income will not last forever. As a result, they are more careful when spending their money, as they have heard many examples of athletes going bankrupt. The increase in awareness helps them create financial security and generational wealth. One of these athletes is Marlon Humphrey, a cornerback for the Baltimore Ravens.
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He tweeted out, saying, “It’s great seeing how athletes have changed from 10+ years ago—used to see guys buying their family huge mansions that you end up having to sell years later to now buying them reasonable houses—moving smarter”.
This quote shows that Humphrey is well aware of his financial situation and knows that he needs to make smart investments to ensure a consistent revenue stream will provide him with the financial stability he needs after he retires.
Another example is NBA Hall-Of-Famer Shaquille O’Neal, who has a net worth of $400 million due to his smart money moves. Shaq is known infamously for spending $1 million in a day when he received his rookie contract and how he was headed down the poor money path. However, the bank manager helped him realize his actions were incorrect and that investing money is better as his wealth will grow over time.
Shaq’s investing philosophy is to invest in entities and ideas that he believes will help improve and change people’s lives. If more athletes and people followed a similar philosophy when investing, there would be a lower chance of people being in a worse financial position once they retire.
In conclusion, many athletes dream of playing a sport at the highest level possible because they know how much money is involved. However, the examples of Allen Iverson, Dennis Rodman, and Mike Tyson prove that it doesn’t matter if you make millions; if you mismanage it, you can lose it all.
What are some other reasons that athletes should become financially aware? Let us know in the comments below.
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