For young men with athletic talents and big dreams, an NFL contract can seem like a gift from the gods: huge salaries for playing a game they love. But earning and saving are two different sides of the coin, and the ability to throw a perfect spiral does not necessarily arouse the skill to spend wisely. Just what are these athletes thinking when they receive their first million-dollar check?
These young men--generally fresh out of college or even high school--often come from poor or working-class backgrounds and have little or no financial skills. The temptation to splurge on the trappings of a luxury lifestyle is great, especially when these young players see colleagues doing exactly that. But those splurges come with a price, says sports financial advisor Jason Cole of Abacus Wealth Partners. Cole--a member of The Sports Financial Advisors Association--says that 25 percent of players who have played three years or less will be bankrupt within one year after they stop playing. Of those who play more than three years, 78 percent will be bankrupt, divorced or unemployed two years after their careers end. Adding to their problems is the unpredictable nature of a pro-football career where players can be traded or cut unexpectedly, or find their career cut short as a result of injury.
In addition, these young, newly affluent men are often vulnerable to scams and rip-off artists. The NFL Players Association estimates that at least 78 NFL players were defrauded of more than $42 million between 1999 and 2002 alone.
In an effort to help new recruits handle their money responsibly, the League has stepped up its programs to educate young players about important financial issues. All new drafts are required to attend a symposium covering important lessons about finances (among other topics). In addition, players receive access to a database of qualified professional financial advisors.
Recently, Wealth Manager spoke with a few NFL players in varying situations to get the inside scoop on how these athletes spend--and, more importantly, how they try to save--their money.
Akin Ayodele is a linebacker for the Dallas Cowboys He joined the team by inking a multi-million dollar contract as a free agent after spending five years with the Jacksonville Jaguars. Like so many other players, he had very limited financial know-how when he joined the League.
"I came from a single-parent household. My mom raised four kids. You didn't really have to figure out how to manage your money because there wasn't any money to worry about," Ayodele says. "So I didn't have a lot of financial experience."
Fortunately, Ayodele had the foresight to realize he would need help. "I got a financial advisor even before I was actually drafted."
Resisting the temptation to run right out and splurge on luxuries, Ayodele's first purchase was a practical one. "I bought my mom a house in a good neighborhood and took care of my family."
However, he cautions new players against trying to help too many people because that generosity can quickly prove costly. "You feel obligated to everyone out there. But then they'll keep coming back--and soon, they can't take care of themselves."
In order to keep their savings from dwindling, it is crucial for players to learn how to resist pleas for loans and favors. "'No' must become your favorite word," Ayodele says.
Ayodele's financial advisor put him on a strict budget, setting up an account funded with just enough to cover his bills. "After that, if I want somebody big, we discuss it," he explains. It's an approach that seems to keep Ayodele's spending impulses in check: He's still driving the same car he bought during his rookie year.
Granted, staying disciplined about money isn't always easy for Ayodele, who says, "Off-season is the hardest time for players as far as money goes, because you have lots of time to travel and spend money."
His advice for rookies with money to burn? "I tell them [not to] rush to invest if you don't know what you're doing. Do your due diligence and be patient. Look for low-risk stuff at first."
Ayodele likes to spread his resources among a diverse array of investment avenues. "I started a restaurant, but want to branch out into different areas of business--maybe a construction company or a store," he says.
Ayodele's teammate and fellow linebacker Bradie James says the importance of savings was instilled in him from a young age.
"I've had a bank account since I was 10," James says. "My dad had a welding company, and I used to work for him. When it was time for me to get paid, he'd give me half and put the other half in my account. Then I'd usually turn around and put the half I had in my account. So I was taught early on about the importance of saving."
Not that a childhood bank account could even remotely compare with the financial assets he'd need to manage as a pro football player. "When you get to the NFL, the figures you see on contracts are unbelievable," he says. James found himself on the receiving end of one of those plum contracts in 2006, when the Cowboys hung onto the talented player by offering him a new five-year contract for $20 million--plus a signing bonus of several million more. "We're getting more money right out of college all at once than most people will make in a lifetime," says James.
Even as a rookie, when his income wasn't quite so high, James recalls being overwhelmed by the amount of money he could potentially earn, and by the obligations that went along with that high income. "Since I had never worked a real job, I had no idea about taxes or the other things that get deducted. A lot of people don't realize that a $1 million salary isn't really $1 million."
The realization of just how big a bite the government would take out of his paycheck was a "big and painful wakeup call," he says. "If you don't know Uncle Sam already, you definitely will now. And one thing you don't want to mess with is the IRS."
James had one thing in his favor that many of his peers lacked: He lives in Texas, so he didn't need to worry about state income taxes. That tax burden is something financial advisor Jason Cole says new players often fail to consider. "Many athletes do not realize that the state where they reside when they receive the signing bonus determines how the bonus will be taxed," Cole says. "This means paying 10.3 percent to California, which includes a millionaire's tax of 1 percent. If they want to save taxes, they should establish residency in states like Texas or Florida before contract signing to avoid state income taxes."
From the start, James took a conservative and cautious approach to handling his money.
"Once I had a million in the bank--not just earned a million, but actually had a million in the bank--I started reading the Wall Street Journal," he says "I paid attention to Warren Buffett and watched what he did and copied that. I figured if I followed him, I'd be okay."
James has noticed that NFL players generally fall into one of two financial camps: "The first group, they figure this is a once-in-a-lifetime experience and they're going to have fun and enjoy it to the fullest. But they're not thinking long-term. Then there are the guys like me. I figure, I don't need an elevator in my house. If I plan it right, I could be set for life."
Like many other young players, James is familiar with stories of NFL predecessors who ended up bankrupt. "I've heard the stories about the old players who are on the street begging," he says. "That's enough to scare you into being careful with your money."
In fact, James has established a regimented formula for spending and saving. "Any bonus money, I put away right off the bat. Money I earn from appearances, I'm okay with spending because that's unexpected and wasn't something I had planned. When it comes to my salary, I usually spend one-third or maybe even just one-quarter of it each year. The rest is earning interest."
To avoid feeling as though he's depriving himself, James focuses on a goals-and-rewards system. "I like to set certain milestones, and when you achieve that milestone, you get a certain reward. But that doesn't mean you need 10 cars."
A generous guy who likes to give back to the community, James says philanthropy can offer dual benefits: "Of course I like to help good causes, and the fringe benefit is there are things you can do to help the community that are also a tax write-off."
For players not enjoying the top-tier salaries, there's an added money-related headache. "There's a big misconception that every athlete is a millionaire," says six-year NFL veteran Isaac Keys. The truth is many players make way less than that coveted million-dollar figure. The minimum league salary for a rookie player is $285,000. Out of that, they must pay taxes, of course--along with agent fees and league union dues--before they even get to spend a dime.
When we spoke to Keys, he was a free agent--waiting to see which team would sign him. It's a time of great uncertainty for players, who must face the possibility that they may not have a dotted line to sign before the season starts.
When it comes to money, Keys credits a good support system with helping him stay level-headed. "My parents were smart, and really taught me to be careful financially," he says. Keys faced a reality check soon into his NFL career. He was hurt during his second year and was forced to sit out a season--unpaid. "That was a lesson learned early on," he recalls, "and really helped me take stock of my situation."
Keys believes it's important to find a money manager who understands the unique needs and wants of players like him. "We're talking about guys 22 years old with substantial amounts of money. Obviously, like any 22-year-old, they want to buy stuff. The advisor also needs to understand the NFL pay structure, with bonuses and things like that," he points out.
A Money Manager Weighs In
Tanya Marchiol is a Phoenix-area financial advisor and real estate specialist with many clients in the NFL (as well the NBA and other athletic leagues). A former professional athlete herself, Marchiol understands how her clients think. She has devised a multi-pronged system for helping athletes manage their money and establish a plan for long-term financial security.
"I get them in the habit of running their lives like a business," Marchiol says. By helping them to form LLCs and other types of corporations, she shows them how to benefit from a wide range of tax deductions and other breaks.
She also stresses the benefits of using real estate for cash flow. "With the right real estate investments, they can live off that income. Then they don't need to touch their game checks," she says.
Interested in Sports Clients?
Financial advisors who would like to add professional athletes to their client roster can check out these resources:
NFL Players Association: Its Financial Advisors Program allows approved professionals to be listed in a directory provided to players.
Web site: www.nflpa.org
Sports Financial Advisors Association: A non-profit organization committed to the education and promotion of financial advisors dedicated to working with professionals in the sports arena.
Web site: www.sportsfinancial.org
Bobbi Dempsey, a freelance writer and the author of several titles in the Idiot's Guide series, wrote about rural advisors in the July/August issue.