By Doug Raetz, Co-President, Cresset Sports + Entertainment
Becoming a professional athlete is a lifelong dream that many young competitors aspire to achieve. The journey to realizing this dream is undeniably grueling – hard work, long hours, personal sacrifices – but making it to the pros is the ultimate reward.
However, for too many athletes, that feeling of euphoria is short-lived, as the financial rewards that come with success can quickly be squandered. Long-term, sustainable success requires more than just talent and grit; it requires careful preparation, a qualified team of advisors, and an education in financial literacy.
How do professional athletes protect their money?
The harsh reality is that many athletes, despite their immense talent and initial success, find themselves facing financial troubles in the long run. A solid understanding of financial principles, budgeting, and investing can protect and enhance their hard-earned money and ensure long-term financial security. Remember, it’s not what you earn, but how much you keep. Being disciplined and carefully planning for the future can make the difference between enjoying a short-term windfall or lifelong financial stability.
Pro athlete financial planning is crucial to ensure that athletes manage their wealth effectively during their careers and secure their financial futures after retirement.
14 Financial Planning Tips For Professional Athletes
1. Enhance your financial literacy
Young professional athletes often lack the knowledge and experience to manage the large sums of money they suddenly start earning. Learn the fundamentals; save more than you spend and prepare for a relatively short earning window. Your financial advisors should be able to provide you with formal financial literacy training.
Related Article: Master Your Money: Best Practices To Secure Your Financial Independence
2. Hire a qualified team experienced in working with pro athletes
You likely have already hired an agent. Next, you’ll need a vetted team comprised of a financial/wealth advisor, accountant, and attorney. You should look for advisors experienced in athlete wealth management, as they’ll be able to better help you navigate the specific challenges that come with being a pro athlete. Together, your trusted team can help you make informed financial decisions.
3. Set up your financial infrastructure, start with a budget
Open a bank account, if you don’t already have one, and establish a budget. The goal is to save at least 40% of your combined earnings for future cash flow needs and investments. This is just the beginning of creating a sound financial underpinning for your success. A qualified advisor for professional athletes can guide you through the process.
4. Learn about tax strategies for professional athletes
Taxes can be complex. Learn the basics around income, capital gains, property taxes, etc. This knowledge will help you minimize liabilities, comply with tax laws, and preserve more of your income. Again, work with a qualified tax advisor, along with your wealth advisor, to fully explore tax strategies to minimize the impact of taxes.
Related Article: Don’t Pay Taxes Twice On Stock Options: Protect Yourself From The ‘Double Tax Trap’
5. Don’t be afraid to invest
The prospect of losing money in the markets can be daunting, but investing can enhance your wealth. A well-diversified portfolio can help position your wealth to grow over time. Work with your financial advisor to learn about investment management for pro athletes and the different types of investments that are most likely to help you meet your near- and long-term goals.
6. Don’t get into debt too quickly
Act as though your first professional contract is your last and maximize your earnings. Bad financial habits can follow you for the rest of your life. Money isn’t limitless, even if it might seem like it is.
7. Pay yourself first
Determine how much you want to keep for yourself to help inform how much you can spend. Establish your budget by putting yourself first, not your expenses. Stick to the budget.
8. Identify your family’s financial needs
Engage in open conversations to establish your role and responsibilities within the financial obligations of your family and loved ones. Be sure to prioritize “needs” over “wants” and develop a plan to protect your own financial interests.
9. Determine whether you need a business entity
Athletes are their own business, as such, the establishment of a separate legal entity can yield certain tax mitigation benefits. However, the costs associated with establishing and maintaining an entity are not always worth the expense. It’s important to work with your team of financial advisors for pro athletes to determine the right structure for your situation.
10. Select your state of residency
Many athletes have a home in one state and work in another. Your state of residency determines state income tax rates, sales tax rates, property tax rates, and various deductions and credits that can impact your overall tax liability. Work with your professional team to determine which is most tax-efficient state residency for you.
Related Article: Changing Domicile: How To Change State Tax Situs
11. Learn about your benefits package
Maximize your compensation by knowing what you’re entitled to. Benefit packages can include health care, a pension plan, disability benefits, survivor benefits, post-career annuity plans, and/or a 401(k) savings plan (some professional sporting leagues match up to 200% of 401(k) contributions!). You should also inquire about any supplemental benefits like travel allowances or educational reimbursements. Don’t leave money on the table.
12. Know your credit score
Your credit score can be a valuable asset or a major burden. Establishing and maintaining a high credit score is critical when making major purchases and will have a significant impact on your financial future.
13. Protect your identity
Athletes have a higher risk of identity theft because much of their personal information is public. As much as possible, keep your personal details private, particularly what you share on social media and with friends and acquaintances.
14. Secure your future
Determine whether disability insurance makes sense for you. Permanent total disability (PTD) can protect against career-ending injuries, while loss of value (LOV) can protect against a temporary loss of earnings.
We are financial advisors with deep experience in working with athletes at various stages in their careers. Contact us to learn more about how we can help secure your financial success today, and long into the future.
