It can be easy to gawk at the inflated salaries of today's sports stars, but those extremely high paychecks are unfortunately accompanied by extremely high rates of bankruptcy.
Athletes go broke all the time. Within five years after their careers end, Mint.com estimates that 60% of NBA players will go bankrupt. The percentage is even higher for NFL stars, 78% of whom file for bankruptcy.
I know what you're thinking: If even the highest paid athletes cannot stay solvent, is there any hope for us little guys? Well, yes. After taking a look at the most common reasons sports stars go broke, there are some simple ways you can avoid the same mistakes.
Here are five lessons we can learn from athletes who go bankrupt.
1. Keep working!
An unfortunate truth about professional sports is that the lifespan of a typical athlete's career is incredibly short. Take, for example, how impressed we all are with Kobe Bryant's 17-year NBA career. In what other universe would working for 17 years be considered "amazing longevity?" I wish people were telling me to retire at 35! The reality is that Black Mamba is the outlier, here; players in the NBA have an average professional career of 4.8 years. NFL players have an even worse outlook, playing for only 3.2 years on average! So yes, their salaries may be large, but they aren't on the payroll for very long.
Because their playing income only lasts a couple of years, it's especially important for athletes to follow some advice: Invest early. Their salaries may not last in perpetuity, but if they're smart with their investments, their returns will.
2. Don't gamble (everything)
Several bankrupt athletes have a hobby in common: Hitting the tables. Stars from John Daly to Antoine Walker have hit serious financial trouble because of their gambling habits. While it's true that not everyone loses in Vegas (Floyd Mayweather seems to have good luck), most financial advisors would agree that gambling is one of the riskiest ways to "invest" your money.
Not all gambling is done in the casino, of course. There are plenty of risky investments that cross a investor's path everyday; sometimes they pay off... sometimes they don't. The lesson here is to actively manage your risk, and understand exactly how much risk you can afford to undertake. Smart investors approach risk deliberately, and balance their riskier investments with more conservative vehicles.
Pairing a purchase of a high-risk stock with an investment in a low-risk bond? A much safer idea than putting it all on red.
Let's play a game. We'll list three professional athletes who declared bankruptcy, and see if you can spot what they have in common.
1. Mark Brunell -- lost $9M investing in Whataburger franchises.
2. Curt Schilling -- founded a video game company, 38 Studios, that lost him his entire $50M fortune.
3. Dorothy Hamill -- declared bankruptcy after investing heavily in an Arizona skating rink.
Did you notice that all three had only one investment vehicle listed after their name? Yes, if you guessed that a lack of diversification failed them financially, you'd be correct. What these athletes didn't do was hedge their bets by spreading their wealth.
Investing in something you are passionate about and believe in can pay off, but not if you put all of your eggs in one basket. Because if you drop that basket, that's right, you end up with nothing but broken eggs.
As non-professional athletes who may not have the discretionary income to fund multiple fast-food chains, we can still learn from these mistakes. The more ways we choose to save and invest our money, the less risk we have in building future wealth. Don't let your 401(k) become Curt Schilling's 38 Studios.
4. Be lawful
This should be an easy one. Don't break the law. Too many professional athletes have squandered their millions in completely avoidable, unlawful ways.
We can all start by avoiding drugs and alcohol. Take it from Lawrence Taylor. Aside from the obvious health consequences, they also cost a lot of money. And don't forget that abusing them can get you fired. Basically a horrible idea all around.
Also, let's make sure we all pay our taxes, OK? This seems to be a problem for the super rich, and it has caused serious financial problems for athletes like Marion Jones. In fact, tax evasion has become such an epidemic among soccer stars in Europe that countries like the U.K. and Spain have made investigating it a large priority. Even their biggest stars, like Lionel Messi, have had to face the music and fight tax battles in court. Financially, they'd all be better off avoiding the legal fees and paying the taxes up front.
Speaking of legal fees, have you heard that they are consistently enormous? Whether from failing to pay child support, defaulting on debt, or [enter any other type of legal case here], ending up in court can cost you a pretty penny. Just ask Michael Vick, who owes enough in legal fees to negate an incredibly large portion of his future earnings.
The lesson here is that the lawful citizen can avoid a lot of unnecessary expenses. Hopefully this will be one of the simpler rules to follow.
5. Spend within your means
This, ladies and gentlemen, is the big one. If you spend less than you have, you'll always be rich. (Easier said than done, right?)
If you've ever felt the temptation to spend money you don't have, imagine how that temptation must feel for someone making 100 times your salary. With millions, sometimes hundreds of millions, of dollars coming in, it would certainly be easy to feel invincible with money. And so it is with many athletes, who overspend despite their large paychecks.
Allen Iverson, for example, "was known to travel with a 50 person entourage, blew millions of dollars gambling, lavished friends with expensive gifts and had massive monthly child support obligations." Unfortunately for AI, jewelry, cars, and entourages don't pay dividends. If he had spent that money on stocks, bonds, and mutual funds, he'd probably be much better off.
Jack Clark (an MLB player in the 70s) bought 18 luxury cars. He went broke before paying many of them off. The same goes for you, Evander Holyfield. Learn from these mistakes, Fools: If you have to make 11 child support payments every month, you cannot afford a $10 million estate.
So, let these examples go to show that a large paycheck does not necessarily equate to meaningful wealth. Whether you start by investing one dollar or one million dollars, the tenets to growing your money (and not losing it) are the same: Start investing early, manage your risk, and remember to diversify. Most of all, try not to spend more than you have... even if what you have is a pro athlete's salary.
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