NFL Draft Offers Success Stories, Cautionary Tales & Plenty of Personal Finance Learning Opportunities
What would you do if you won the lottery? Everyone plays that little game whenever the Powerball jackpot gets especially high, and it can be pretty fun to debate the merits of different payout methods as well as daydream about how you’d allocate your bounty of millions. But, in a testament to grass-is-greener clichés and Christopher Wallace’s famous refrain about the difficulties that accompany money, abstract thoughts of philanthropy, careful investment, and calculated splurging too often turn into tales of wastefulness, jealousy, and even bankruptcy when a dreamed-for windfall becomes reality.
That disconnect is not limited to the lottery, however. Rather, it speaks to the potential for any rags-to-riches story to end with a return to humble beginnings, and there is perhaps no better single example of this boom-or-bust path than the National Football League’s annual “Player Selection Meeting” – better known as the NFL Draft.
The 2013 iteration of this yearly tradition kicks off tonight from Radio City Music Hall in New York. By the time it concludes on Saturday afternoon, the lives of 254 young men will have changed forever, and most will be forced to tackle the same issue: how to avoid the trappings of sudden wealth at a young age and prepare for a stable financial future after football.
Inside NFL Finances: Before, During & After
You see, the physical realities of football, combined with low odds of a given individual reaching the elite level have skewed player demographics toward those with low-income, urban backgrounds for whom the potential payoff is more likely to be worth the risk. The minimum NFL salary in 2013 will range from $405,000 for rookies to $940,000 for players with at least 10 years of experience, and we’ve all seen just how high the ceiling has risen. Yet the average NFL career lasts only 3.5 years, according to the NFL Players Association, and Harvard University researchers have found that former players die an average of 20 years earlier than your typical American man.
“The disproportionate amount of resources that tend to be funneled toward the infrastructure of sports rather than education and a lack of employment opportunities after school in working-class and poor areas may breed motivation and constrain youngsters into these career paths rather than being, say, a doctor or an engineer,” Pat Reilly, a graduate student in the sociology department at UCLA, told WalletHub. “Better off children are probably just as inclined to want to be professional athletes and push for these careers, but, in my opinion, better educational and economic resources allow them to realize other avenues and have the ability to adjust after their dreams of being in the NFL, NBA, or, more broadly, entertainment fizzle.”
And while sports can serve as a gateway to higher education for many disadvantaged young people, the college experience doesn’t necessarily prepare them to all of a sudden handle large sums of money. After all, 86% of college athletes live below the poverty line, according to a study from the National College Players Association, and graduation rates at elite programs often dip below 50%. That’s especially important because professional leagues don’t do much to promote financial know-how either.
“The leagues all provide training for new players on issues that will consider them, and one of the sessions is dealing with their new-found fame/fortune. However, based on the number of former players who are broke it seems to go into one ear and out the other,” Gil Fried, chair of the sport management program at the University of New Haven told WalletHub, adding that while schools could try to target financial counseling to elite student-athletes, “the colleges would in essence be admitting that these athletes are really pro athletes not student-athletes.”
Interestingly, Dr. Sharianne Walker, chair of the Department of Sport Management at Western New England University, also notes that the concern athletic programs have for their own bottom lines can contribute to their passing the financial literacy buck to someone else. "The relationship between the Athletic Department and the student-athlete with obvious professional sport prospects is more likely to be characterized as commercial rather than educational," she told WalletHub. "This is not to say that some athletic programs do not offer opportunities for professional and personal development, specifically in the areas of career transition related skills (resume development, interview skills, personal finance) but this is often viewed as being the responsibility of the University’s Career Development Office or in the case of the future pro athlete, the agent."
The combined result of these various dynamics: 78% of former NFL players have gone bankrupt or are struggling financially, according to a 2009 Sports Illustrated report.
Learn Your Lesson: How Young People Can Turn Newfound Wealth Into Long-Term Financial Security
The cards, it seems, are stacked against NFL draftees for myriad reasons, including their youth, their often humble beginnings, the probable brevity of their careers, and the lack of targeted financial education they receive. When you think about it, those same things actually apply to most young professionals new to the working world because any income will seem like a fortune after living the college life for four (or more) years.
“First, if a young person is from a poor background, the money seems unbelievable and since human wants always outstrip resources, the spending that ensues can be very damaging,” says Dr. Deborah Haynes, an associate professor in the Department of Consumer Economics at the University of Montana. “Secondly, the time horizon young people have in their minds is short. They feel they have a whole lifetime to save and invest, so why start now?”
There are, however, a number of steps that any newly wealthy individual – whether a professional athlete or an Average Joe – can take to avoid the many pitfalls standing between them and a secure financial future. More specifically, the savviest among us can effectively turn new money into old by:
- Taking Stock of Their Situation: In order to plan strategically, you’ll first need a realistic sense of your future earning potential as well as the quality of life you wish to maintain through retirement. This will enable you to determine how long your current wealth will last and therefore what types of concessions you must make in the short-term in order to avoid going broke or having to work for longer than you wish. Nailing these things down from the jump will negate the abstract idea of having “plenty of money” which so often serves as a rationale for overspending.
Finding a Trustworthy Advisor: When someone comes into a considerable amount of money, folks come out of the woodwork looking for handouts, pitching investment ideas, and offering to manage their finances. “The biggest problem is normally their high school and neighborhood friends who want to leach off of them and ride the gravy train until the person is broke,” Fried says. “The key is for athletes not to give any money to any friends or family members. Money can be used to hire people for meaningful and necessary work, but the gifts are the big problem with everyone wanting houses, cars, jewelry, etc.”The right financial advisor can not only serve as a barrier between you and the vultures, but he or she will also help you devise and implement the best possible wealth management plan for your individual needs. Finding that person is the hard part, though. Agents are a natural choice for athletes and other entertainment professionals, but while they may be skilled negotiators well-versed in contracts, that doesn’t mean they’re a wealth of information on wealth. “Agents make their money on endorsement deals and financial consulting,” Fried adds, since player association rules limit their cut of team contracts to 2-7%, depending on the sport. “The problem is that most agents are smooth talkers and not necessarily smart or wise financial planners.” However, Walker also notes that "an agent may or may not feel comfortable or be qualified to take on this responsibility as financial matters have become increasingly complicated for the professional athlete. Frequently, the agent will hire an expert independent financial manager to take on this role. Some agencies hire financial managers specifically to take on this role. For many agents, this is also a matter of professional ethics to avoid the potential for conflict of interest."
Whoever you end up choosing to manage your money, make sure their compensation is not based on commission because self-interest would skew their recommendations to the most expensive products and accounts. “My best advice for any young person coming into a situation where they are earning more than they ever imagined is to hire a fee-only financial planner,” says Haynes. “They need to meet with several fee-only planners to find one who seems to take real interest in their goals and values and yet will put the brakes on bad decisions.”
Hardwiring Savings: While it’s a bad idea to just hand over complete control of your finances to someone else, putting a substantial amount of your money into a growth account that you cannot touch for years is a great way to ensure you’ll have some dough for later in life. For wealthy young athletes in particular, it’s a hedge against short-term desires and the blind optimism about the future that inevitably accompanies youth. “Setting up an automatic saving and investing program with the increase in earnings early on can provide a lifetime of financial security,” Haynes said.There are a number of ways to go about doing this, but automation is the key for busy (and perhaps forgetful) young professionals in this age of electronic banking. Not only can you establish automatic monthly withdrawals from a bank account to ensure on-time credit card payments and credit score maximization, but you can also use automatic deposits into a retirement account for a dollar-cost-averaging investment approach. The premise of dollar cost averaging is that buying a fixed dollar amount of shares in a particular fund or funds at regular intervals negates the effect of market volatility on pricing (since you get more shares when prices are low and fewer when they’re more expensive), thereby enabling you to glean a good deal in the long term without having to pay for or waste time with more hands-on management.
- Managing Risk: While some of the most successful people are natural risk takers (just think about the odds of making it to the NFL), you don’t want to put all your eggs in one basket. Rather, you should hedge your bets by spreading your money across a mix of asset classes (i.e. stocks, bonds, securities, and cash).“Investing is very foreign to most young people,” Haynes said. “I think it necessitates caution because, especially in professional sports, one never knows how long the high earnings will go on. While I have a relative who is an NFL player in his 30’s, I have had several former students whose careers in the NFL only lasted a year or two. Further, many athletes have no problem with taking risks, so I am not as concerned about them being too risk averse as I am that they are thoughtful about taking the risks, as in a portfolio asset allocation strategy that they stick to.”There's obviously more to managing risk than diversifying your investments, though. You also need to give yourself a financial safety net by taking out the right kinds of insurance and building an emergency fund. "Although there will be a lot of agents wanting someone to get insurance that is not needed, it is important to get needed insurance," says Alena Johnson, a senior lecturer in the Family, Consumer, and Human Development department at Utah State University. "I personally like to keep investing and life insurance separate, so I’m not a fan of cash value life insurance policies. However, people should always look at 5 insurances to decide if they need them: auto, health, home owners or renters, disability, and life. I give my students a quick way to start the evaluation. Ask this question: 'How financially devastating could it be if I did not get this insurance?' There is certainly a lot more to it than that, but that is a start."
- Minimizing Tax Liability: In the current tax landscape, wealthy individuals have far more flexibility when it comes to potential deductions and ways to minimize amounts owed than do lower income individuals. Their taxes also tend to be far more complicated. That’s particularly true for professional athletes since they have to pay local income taxes wherever they plan an away game. A knowledgeable accountant can therefore save you a ton of money."First of all, I would caution anyone coming into money to be aware of the tax consequences," Johnson warns."I have a friend who had a lot of medical debt and was really struggling financially. She was able to cash out a retirement fund. She asked my advice and I told her to make sure she set a large portion of it aside for taxes. She and her husband had been on such tight funds for so long that when the money came, they felt like they had some freedom and bought quite a few things. They did get most of their debt paid off. But then the tax bill came and they had spent all the money. Now they have a large monthly payment going to the IRS and the medical bills are coming back."
At the end of the day, the combination of youth and a bit of cash is your golden ticket to a bright financial future, especially in the current economic landscape. Things are still fairly depressed, but we all know they’ll bounce back sooner or later. So, if you can manage to set aside a bit of money each month through retirement and ride out temporary fluctuations as the market makes its way back up, you should be in good shape.
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