Financial Planning Strategies for the 2018 NBA Draft Picks
You may have heard of a Sports Illustrated study reporting that 60 percent of NBA players – who earn more in one year than most people can save in a lifetime – either go broke or struggle financially after five years of retirement from the game.
You would expect a few financial horror stories here and there – a dishonest advisor, a business deal gone bad, etc. – but SIXTY PERCENT?
It’s not just young athletes who have a tendency to overspend when money comes in too quickly or too easily: Seventy percent of rich families lose their wealth by the second generation.
This article will show a better financial path, not only for pro athletes but for anyone lucky enough to receive a sizable one-time windfall or large payout early in life.
The Danger of Overlooking Real Risks
Once you’ve built enough wealth to sustain financial independence without earning additional income, financial planning is all about addressing risks. The NBA Draft was held last night, so let’s use a hypothetical late first-round NBA Draft pick “Bobby Smith” to illustrate what I mean.
Bobby is headed to a California team and is guaranteed $1,920,000 per year over four years. The first NBA contract for a player who may never receive a second contract should be treated similarly to a one-time windfall from an inheritance, lottery winnings, or even the one-time sale of a business early in life.
How would he run out of money?
After taxes and agent fees, approximately $3.8 million of his $7.68 million contract will actually reach his bank account. That’s still a lot of money, but being young and feeling invincible, he believes his next contract will pay him eight figures annually over four or five years.
As a result, he may feel comfortable spending what his peers spend. The average NBA player, according to Money, spends $510,000 per year. This means Bobby will save 23% of his pre-tax annual income, a far higher percentage than young professionals in other industries save.
At this savings level, however, he’s still exceeding his “speed limit” – the amount he can safely spend each year without putting his lifestyle at risk.
Even if he cuts his spending in half after his playing days are over, without that second contract, he’ll run out of money – or at least the money earned during his brief NBA career.
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