Windfalls and Excess Income

It seems like we get news on a fairly regular basis that some professional athlete, movie or rock star is going bankrupt or owes the government taxes.  I’m flabbergasted by how anyone could make that kind of money and blow it. I always say, “Give me a person who earns over a million dollars for even 2 years of their life, and I can show them how to set themselves up financially for the rest of their life!”

Last week I watched a documentary on ESPN’s 30 for 30 Series called Broke. They highlighted why such a large percentage of NFL and NBA athletes end up broke instead of set for life. The Documentary cited the following statistics:

The average length of an NFL opportunity is only 3.5 years. 65% of players leave the game with permanent injuries. By only 2 years into retirement, 78% of NFL players have gone bankrupt or are under financial stress. Similarly, within 5 years of retirement, an estimated 60% of former NBA players are broke. (Sports Illustrated 03/23/2009)

This really is not new information for me. Over the 25 years of my professional life as a financial planner, I’ve read many studies of what the documentary called The Sudden Wealth Effect. In the past I’ve seen a similar study of why a large percentage of lottery winners eventually go bankrupt, and I’m sure many of the same explanations apply to professional athletes.

In this ESPN special, they cited many reasons why players are ill equipped to handle the sudden wealth that occurs upon entry into professional athletics. Generally speaking, most come from the lower middle class on down to poverty level and don’t have the money skills to plan for their investments. They are naturally drawn to investments that are sexy versus safe. Many put their money in the hands of agents who are not financially savvy either. The best explanation I heard in the show was that the NFL or NBA (or for that matter a movie career, hit TV series, or bestselling album or book) is an opportunity, not a career. In each of those examples, people are given a limited amount of time to earn big bucks, but it’s unlikely that it will be forever.

People that experience sudden windfalls, can also succumb to similar downfalls. The chapter titled Windfalls and Excess Income in my book, It’s Just Money, So Why Does It Cause So Many Problems?; details stories about salespeople who had a banner year of earnings and people who came into an inheritance or business windfall that could have made a serious impact on their future financial success, but instead, frittered the money away.

There is a tendency for anyone who experiences a significant increase in earnings to believe that this is going to continue indefinitely. That is in essence, the big mistake. Perhaps you will be one of the lucky ones to experience a long-term run of significant financial success. But if you are more like a professional athlete, where it’s a short period of time, you might miss the opportunity to capitalize on those earnings for your future. The even bigger mistake is leveraging a future on the necessity of those increased earnings to maintain that lifestyle. This is where people tend to go broke.

In so many instances it comes down to the fact that as Americans, we simply like to spend. We feel entitled to nicer things, we feel compelled to “Keep up with the Joneses”, and quite frankly, spending is more fun than saving. This generation, unlike those of the past, is more about living in the moment, versus worrying about the future.

But as a Financial Planner, totally invested in helping my clients get to a point of financial independence, it’s been a bitter pill to swallow. One of my most challenging situations is watching people I know struggling financially, that could have made better financial decisions along the way to prevent the situation they are currently in.

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