Why do professional athletes, some of the highest-paid people in the world, disproportionately go bankrupt? It’s easy to look at players who have made extravagant or frivolous purchases and dismiss their financial woes as a result of nothing more than poor decision-making. However, the reality is that the unique career path, nature, and culture of pro athletes pose a number of challenges to their long-term success.
A primary obstacle that athletes face for financial well-being is their short and volatile careers. A typical pro athlete spends about 10 years in the league, but in some sports, such as the NFL, that number goes down to three years. While their earnings are far greater than the average worker, their careers can be ten or more times shorter. The challenge of a brief career is twofold; not only are athletes making money for a shorter period of time, but their earnings need to stretch across a much longer retirement period. According to CNBC, around 78% of NFL players go broke or struggle financially within two years of their retirement.
Consistency also poses a challenge for athletes. An injury or cut notice could occur at any time and end a player’s cash flow permanently, which would force them to completely entirely restructure their financial plans. To make matters worse, many players lack the education or experience to pursue viable careers outside of sports if their playing careers fail to pan out. Mark Ogden, for example, seemed was destined to be the next big thing in the NBA when he was drafted in 2007 by the Portland Trail Blazers over Kevin Durant. However, a series of injuries inhibited his rise to stardom, as he only managed to play 101 games in the league over an x year career. He was primed to make a fortune, but retired with little to show for it.
Perhaps the most unique quality of a professional athlete’s career arc is that they enjoy a rapid increase in net worth at the beginning of their career. Typically, healthy financial habits are acquired over time and peak as the worker’s salary is peaking at the end of their career. In sports, the opposite occurs. Vast sums of money flow when the athlete has the least financial know-how. For many people, taking calculated financial risks is healthy at the beginning of their career, but for athletes a risk that fails to payout can be catastrophic. For athletes, it sometimes only takes a few poor choices to squander a fortune. A restaurant venture under one’s name sounds enticing, but a failure could have detrimental consequences on future financial stability.
Oftentimes, the nature of players themselves poses a challenge to financial success. Many are young and are prone to poor decision-making. In an article for RBC Wealth Management, Jay Liberman said he believes that this is a primary obstacle between athletes and sound decision making.
“Some of them come into money at the age of 18,” Liberman said. “It’s almost inconceivable that anyone that age would have a good set of financial skills.”
The competitive nature of pro athletes also poses challenges to their financial security. An unrelenting desire to win often extends beyond the field. Competition for the flashiest car or piece of jewelry rarely leads to responsible purchases. Gambling addictions also run rampant throughout pro leagues as athletes are enabled by their own fortunes. Michael Jordan, Pete Rose, and Charles Barkley all famously suffered from an addiction to gambling. According to Barclay Palmer from Investopedia.com, athletes who lose it all often share similar psychological tendencies. Bankruptcy is frequently accompanied by substance abuse and domestic violence among pro players. Lots of money can lead to big financial errors and pro players are particularly susceptible given their youth and ignorance.
Perhaps the largest hurdle for athletes is the culture surrounding spending for pro players. Athletes are frequently in the limelight show business and are expected to live lavish lifestyles. There is competition off the field to outdo on-field rivals with grander houses, flashier cars, and jewelry with even more bling. This may seem like nothing more than peer pressure, but it becomes problematic when combined with the confluence of their extreme youth and large salaries as it incentivizes the excessive spending and lifestyle that is simply impossible to maintain.
Another cultural challenge is the ‘thank you’ purchase. It’s common for athletes to give extravagant gifts to those who helped them along the way, but many are too generous with their money. While there is certainly value in getting one’s parents into a nicer neighborhood with a new house, oftentimes there are too many people who feel like they deserve a slice of the pie. For young athletes with a poor conception of money and value, it’s easy to pay a little too much back to a few too many people.
Lastly, the pro-athlete culture is filled with conning people who don’t have the best interests of the athletes at heart. Far too often, players fail to consult advisors before putting their name on a new restaurant venture or a business plan that is typically riskier than the players perceive it to be. Sometimes fellow athletes present the riskiest propositions. An early mistake at the hands of a con man can be financially devastating.
During an athlete’s career, actively earning money mitigates the perceived damage of any of the aforementioned forms of spending because players will typically remain out of debt. However, it is challenging to regress and spend less lavishly later in life when the players need to make their money stretch. This is why athletes often stay out of financial trouble during their careers but fall into debt within a few years of their retirement.
Perhaps most troubling is that athletes are equally likely to go bankrupt no matter how long they play or how much they earn in their careers. All-stars with long illustrious careers are just as likely to fall into debt as their second or third-string backups. This suggests that athlete spending is not proportional to needs, as most would agree almost all pro players have their basic necessities covered, but proportional to the salaries themselves. That is, spending for the sake of spending.
The unique nature of the professional athlete, their salary, and culture make long-term financial success challenging. But as much as we hear about the stories of devastating losses, we rarely acknowledge the success stories. Thousands of athletes live luxurious lives without worry of financial ruin. Many even grow their net worth during retirement through careful investment and saving. More players deserve to live comfortable lives given the sacrifices they have made, which begs the question: What currently exists to break the cycle of broke athletes?
The most prominent form of financial education for professional athletes comes from the NBA. In the league, the main solution for the financial management crisis is the Rookie Transition Program (RTP).
The RTP provides newly drafted players with a course that covers a variety of subjects that the league feels are important for athletes. The program focuses on breaking down broad strokes topics alluding to the keys of a long and healthy career as well as life after basketball.
The RTP is a four-day seminar, with panels of guest teachers including current and former NBA players that talk about their own experiences and mistakes. Rookies listen to the information given similar to if it was a college class, except it is a year’s worth of material squeezed into four days of instruction.
While financial literacy is a topic during this seminar, it is likely washed out by the multitude of concepts about dieting, nutrition, relationships, and more. It does not seem likely that anyone would be able to develop a deep understanding of a topic, particularly financial management, in just four days.
It is not clear as to what financial management classes are available after the Rookie Transition Program. Individual teams are supposedly responsible to touch on the topic of financial management unofficially. The NBA and NBPA (Nation Basketball Players Association) state that there are lessons given throughout the year, but no official times or transcripts are released. Players can also opt into taking a year-long course taught by Jamila Wideman, the NBA’s Vice President of Player Development, but these courses are not required.
Professional athletes’ contracts are lengthy and often include confusing language about signing bonuses, timelines and deal-breakers. It becomes difficult for players to realize what they owe for taxes and other payments, which can cause them to have a false sense of the money in their pockets. Players are often supposed to find an agency to represent them and help manage their salaries, but oftentimes rookies, high on the feeling of receiving a multi-million dollar contract, are taken advantage of by these sports management agencies.
The RTP, which has been around for 30 years, fails to educate rookie players on the complexity and importance of their personal finances. This sets players up for a lifetime of financial struggle and fighting to stay out of bankruptcy. The RTP was started in 1986, and still, 60% of NBA players will go broke within five years of retiring.
The percentage of athletes who go broke makes it clear that the RTP, the best financial program in all of pro athletics, does not work. After decades of evidence, it is time to shine a light on the negligence of professional and collegiate sports leagues when it comes to the lack of education about financial management.
Given the financial challenges that pro players face, there is no straightforward solution that would create more responsible athletes with the snap of a finger, particularly considering the depth of the problem. However, there are steps that can be taken now in order to ensure long-term financial stability for players.
The main aspects of an athlete’s life that may be causing a lack of financial literacy come down to a spending-heavy culture and a lack of financial education in college programs and the professional leagues.
First, without a change in culture, success is unfeasible. Aspiring athletes see their favorite players flaunting their new New York City penthouse, or their new, million-dollar watch. This is not to say that professional athletes should not be allowed to flex the items they earned, but rather that prominent figures in the sports world, who are role models to so many, should talk publicly about the importance of being responsible with your money. Current athletes play a role in creating an environment where future stars are primed for long-term success.
This change has to start with leaders of sports organizations at the college and professional levels. These organizations need to not only recognize that this is a serious issue that needs addressing now but also to start to take real steps to strive for change.
The NCAA must mandate a certain level of financial literacy for an athlete to be eligible to play in college. There are far too many athletes who leave their respective universities after a little over a year without a degree or any sort of financial management training. Among all of the unreasonable NCAA guidelines that student-athletes must follow to retain their eligibility, something as beneficial for these young people as financial literacy training should be mandatory.
These financial literacy courses would not only include what basic education of responsible saving or investing in your future would look like, but also examples of what happens when you’re not responsible with the money you earn in your career. While not all players who undergo the training will find themselves in professional contracts, the information provided would certainly serve them regardless of their future careers.
With foreign athletes becoming more and more prevalent in American professional leagues along with a generation of young athletes who don’t see college as their only option coming out of high school, programs for financial literacy must happen in professional leagues such as the NBA and NFL as well. These financial literacy programs would have to be frequent, short, and continuous throughout the careers of these athletes, rather than crammed educational sessions in their rookie years. They would be similar to the aforementioned college programs in that they would be a combination of meaningful financial education accompanied with exposure to the possible outcomes of a lack of financial responsibility.
However, the content of these courses must extend beyond the typical money matters class. According to Susan Bradley, a member of the Financial Education Advisory Board for the NFLPA, in a recent article for RBC Wealth Management, these types of courses often fail to have an impact on player’s spending and saving habits.
“In reality, the culture they live in is pretty tough to crack,” she said.
Bradley believes that the most effective manner of education must delve into the roots of athlete’s perception of money.
“The best way I’ve found to make a difference is to help them understand what we call their ‘money story,’ which is basically the hardwiring they learned as a kid,” Bradley said.
With an understanding of what formed their innate beliefs and tendencies regarding finances, Bradley believes that players develop an increased capacity for sound decisions.
This marks yet another challenge with the current athlete culture: some of the elements of athletes’ ‘money story’ are created as a result of seeing their favorite players’ spending habits as a child. This acts as a double-edged sword. If the spending culture persists, future players will likely have some of the same challenges as today’s stars. However, if there is a shift in the way athletes manage their money, it may have a positive influence on the ‘money story’ of tomorrow’s athletes.
The life of a professional athlete comes with many benefits: playing the sport you love, being a role model to so many young kids, and of course, the tremendous amount of money that the industry holds. As the sports world continues to grow, the amounts of money made by players will only go up. A change in culture and programs that teach athletes, both young and old, what financial literacy looks like will allow the athletes of the future to find long-term financial success and security.