Whenever a prominent professional athlete files for bankruptcy, there’s always a chorus of armchair financial experts wondering how such a thing could happen and talking about how they would have invested those millions so much better.
But while they sometimes involve larger sums than most of us can get our hands on in a lifetime, the money mistakes made by players are actually pretty common for other consumers. The difference is that players make most of their money before they’ve had a chance to learn the basics of money management, says Doug Dawson, a wealth management adviser for Northwestern Mutual in Houston.
“The problem with professional athletes is they have got so much capital at a young age, so they do not really have the time to mature, to get old enough to say, ‘OK, maybe I should not be spending this money,'” he says.
Whether you’re making $50,000 a year or $5 million, poor tax planning, overspending and other common errors can trash your finances, Dawson says.
Here are four common money mistakes that typically land athletes in trouble, and how you can avoid them.
1. Overspending instead of saving
When the huge checks are rolling in, many athletes have a hard time thinking about the future, Dawson says.
“It is hard, when you are making a lot of money and you are a young guy, not to buy an expensive nice car. It is hard not to pick up all the meals for your family and friends. It is hard not to give expensive gifts,” he says.
In former NFL quarterback Vince Young’s case, it was all of the above. Young blew through $26 million from his first contract in just six years, reportedly making extravagant purchases such as 120 tickets on a single Southwest Airlines flight so he could fly alone, and regularly spending thousands of dollars feeding a large entourage.
While most of us can’t spend on the scale of Young, spending creep is a common problem for many households, says Jason Bottenfield, a financial adviser with Morgan Stanley and former major league baseball player who counts professional athletes among his clients.
“Most people will spend money if it sits in their checking account too long,” Bottenfield says.
To avoid that, Bottenfield recommends having a chunk of any income that comes in automatically transferred into savings and retirement accounts. While that amount will vary based on what you need to meet your family’s day-to-day needs, automating savings means it will take less effort and willpower to build long-lasting wealth.
2. Getting in trouble with the tax man
Debt is rarely a good thing, but as many pro athletes have found out, it’s even worse when it’s owed to the Internal Revenue Service.
In the course of his career, boxing legend Evander Holyfield earned more than $250 million. Still, Holyfield recently lost his 54,000-square-foot mansion to foreclosure, in part because of the more than $200,000 in debt he owed to the IRS, according to a report by TMZ. But he’s hardly the only American to face tax trouble. The IRS sent out about 708,000 notices of liens on taxpayers’ properties in 2012.
“You really do not want to owe the IRS money. They wield a very big stick,” Dawson says. “Financial discipline is so critical in every area, but certainly as it relates to tax planning.”
An issue he frequently sees is failing to report income and trying to claim too many deductions. Especially for high-income earners, there are very few tax deductions out there that can significantly cut your tax bill, and believing otherwise is a good way to get into trouble.
“People figure out ways of getting into a bind with the IRS or try to write off too many things or do not claim income,” Dawson says. “And that can obviously completely wreck you financially.”
3. Overestimating how long your career will last
Athletes who make it into the big leagues often overestimate how long they’ll be there, Dawson says.
“When you are a pro athlete, your mindset is that you are going to have a great career,” he says. “I do not think pro athletes generally allow themselves to consider the possibility that their careers are going to be cut short.”
Even great players often think they’ll get a few more years to play that never actually pan out. After sustaining a knee injury in 2010, NFL wide receiver Terrell Owens told ESPN in October 2011 that he would be back in the league within a month. Owens hasn’t since played a down of pro football and admitted to struggles with money soon after, including foreclosures on two Dallas condominiums he owns.
But putting your head in the sand about how long your career will last isn’t a problem limited to athletes, Dawson says. Many Americans put off retirement saving only to see their careers cut short by a layoff or health problem.
“I have been planning on going on a diet tomorrow for about two years. And so every day, I eat and I go, ‘Tomorrow I will eat right,'” he says. “I think that is the way people are with saving.”
While losing a high-paying job near the end of your career will always be painful, starting your retirement saving early and consistently can help ensure you have enough money in your retirement account to retire comfortably if your career does come to an unexpected end.
4. Putting all your eggs in a risky investment basket
Competitive drive is a must-have to reach the big leagues, but that often works against athletes when it comes to investing, says Bottenfield.
“I have my athletes come to me and ask me about nonpublicly traded investments and private equity opportunities that are out there. They hear the things like the rapper 50 Cent putting something into Vitamin Water and he gets paid out millions and millions of dollars. The problem is that sometimes these investments pan out,” Bottenfield says. “That is what really lures them in, because they are competitive.”
One recent example of that is former Miami Heat basketball star Antoine Walker. Walker declared bankruptcy after losing a large portion of the $110 million he earned in his NBA career on gambling debt and commercial real estate investments that went bad when the bubble burst in 2007 and 2008.
To help ward off catastrophic investing losses like Walker’s, Bottenfield recommends finding a financial adviser at a trusted firm with strong checks and balances on where clients’ assets are housed and what types of investments that advisers can steer clients’ money toward. That may help investors steer clear of unconventional and risky investments, and make them less likely to get bilked by a crooked adviser, another wealth-destroying scourge for athletes.
A prudent mix of stocks and bonds may not pay like real estate, and some alternative investments sometimes do in the short term, but they also ultimately deliver more consistent returns, Bottenfield says.