6 Financial Mistakes Pro Athletes Make and How They Apply to You

Financial Mistakes Athletes

Have you seen the new show on HBO called Ballers? It stars Dwayne Johnson (who else?) as a retired NFL player who’s transitioning into a financial advisory role for fellow athletes.

As with most shows on TV, the pro athlete lifestyle is depicted as — well, “baller.” Unfortunately, this is very different from the reality many athletes face day-to-day.

Your Money Guys would know. Brian used to work at a firm assisting A-listers and athletes with their portfolios, and Bo has a few friends in the NFL and MLB. They’ve witnessed countless athletes making the same financial mistakes over and over.

In this episode, Brian and Bo review six financial mistakes pro athletes tend to make — and that you can avoid whether or not you’ve got millions in your bank account.

Mistake #1: Not Having Emergency Reserves

Brian and Bo love to talk about how important emergency funds are, and for good reason. Without one, you might find yourself on thin ice. As a pro athlete, it’s easy to assume you’ll have tons of money rolling in at all times. That assumption is false.

During the off-season, athletes aren’t getting paid. They need to manage their money as well as anyone else. There’s no job security in the NFL with the average career of a player lasting 3.5 years. Pro athletes can be replaced, just like any of us.

Mistake #2: Not Thinking Long-Term

Our biggest motivators are often greed and fear. Pro athletes may have $50,000 to $100,000 hitting their bank account every paycheck. With that kind of income, buying a $7,000 watch might seem like “nothing.” It’s a drop in the bucket — until that paycheck stops coming in.

This is true for anyone who gets too comfortable in their job. Nothing is guaranteed, especially employment. Bo recommends adopting a “forced scarcity” mindset by earmarking money for savings and other goals so your budget feels tight. By allocating all your money, you won’t be tempted to spend it on other things. Pay yourself first.

Mistake #3: Getting Into Debt and Personal Guarantees

Some may remember the financial fallout from the Michael Vick fiasco. He made one too many personal guarantees, and when he lost his income, he owed more than he could afford. This goes hand in hand with thinking money is limitless. Your income can dry up, and it’s important to implement safety nets in case that happens.

Mistake #4: Thinking You’re Invincible

This occurs a lot among professional athletes. They love what they do, they give their sport their all, and they feel invincible on the field. But even if you love what you do and have no plans to retire, life can change those plans. Pro athletes are especially susceptible to this as they get injuries and can no longer play.

Guard yourself against these possibilities with insurance, regardless of how much money you have right now. You might think you can cover a medical emergency, but think about your family and what would happen to them if your earning power went away.

Mistake #5: Not Diversifying Enough

Diversification beyond assets is important. Get into tax diversification by putting money into taxable accounts, tax-deferred accounts, and tax-free assets. It’s a great way to secure success for your investments and financial future. Don’t put all your eggs in one basket like some athletes do, where all their income is tied to their position or team.

Mistake #6: Losing Focus Once Successful

How many times have we seen pro athletes try and branch out into fields completely unrelated to sports? Stars love to get into the apparel, restaurant, and production industries because they have big bucks, but that doesn’t mean they’ll succeed.

Lesson? Be knowledgeable about a potential investment before opening your wallet, and don’t let anyone take advantage of your money. Sadly, many newer pro athletes have to face their families and friends asking them for money once they’ve made it. Know who’s in your corner and who you can trust.

Whether you have a lot of money coming in or not, everyone would do well to be aware of these traps and take the necessary measures to avoid falling into them. Don’t get too comfortable with your financial situation and find yourself in a bind later on.

Should You Care About Retirement in Your 20s?

Saving for Retirement in Your 20s

When you’re young, it may seem like you have your entire life ahead of you to accomplish any financial goals you may have. After all, your student loans are on a 10 year repayment term, retirement is 30 to 40 years away (that’s longer than you’ve been alive!), and you have plans to live it up now that you’re earning a decent income.

It’s easy to buy into the whole “you only live once” attitude, but is that the right way to approach your financial situation?

It may appear to be the easier way, but it won’t do your future self any favors if you ignore your savings for now. You should absolutely care about your retirement in your 20s.

What Does Retirement Look Like for You?

It might be tough to visualize what you want your retirement to look like. For many people, images of sipping a cocktail on the beach come to mind. Others might want to travel around the world, spend time with family, volunteer, learn new skills, or simply relax and enjoy a hobby or two.

Whatever your retirement looks like, the reality is it’ll cost money. Money that you need to save.

You might think Social Security will pull through and help you out. While no one can predict the future of Social Security, it’s not a good idea to assume you’ll be able to live off of those benefits alone in retirement. Make sure your retirement ends up the way you want it to by taking control of the situation. Make saving a priority.

Retirement Shouldn’t Be a Struggle

Chances are you know someone struggling to afford retirement. Whether that means they’re delaying retirement because they don’t have enough saved, or they had to return to the workforce after retiring because their monthly income wasn’t enough to pay for their expenses, you don’t want to encounter any financial troubles when you retire.

You want to enjoy your golden years after putting in your time at work, right? Why make it harder on yourself?

If you’re familiar with living paycheck to paycheck, or living like a broke college student, just imagine doing it all over again when you’re in your 50s or 60s. That doesn’t sound too appealing, does it? But it’s the unfortunate reality many folks are living because they didn’t prepare appropriately for early retirement.

Take this recent study by the U.S. Government Accountability Office. The first part of their findings is, “Many retirees and workers approaching retirement have limited financial resources. About half of households age 55 and older have no retirement savings (such as in a 401(k) plan or an IRA).”

You don’t have to end up in that situation if you act today.

Why Saving Early is Important

There are so many people who start saving late in the game who won’t be able to live their ideal retirement because they didn’t have enough time to amass the savings needed. With life expectancy on the rise, you’re looking at saving around 30 years’ worth of living expenses

That means if you’re able to live off of $35,000 per year, you’ll need $1,050,000 to retire (that’s not including other things you might need to fund in retirement, like health care expenses). It sounds like a big sum — and it is! But the good news is the sooner you start, the easier it will be.

Before we get into the how, let’s explain with an example highlighting the power of compound interest. The earlier you start to save, the more time your money has to compound year over year.

Let’s say you start with putting $2,500 in your retirement account. Each month, for 30 years, you contribute another $150 to your account. Assuming a conservative interest rate of 6%, you’ll end up with a balance of $156,663.46.

However, that’s not accounting for the fact you’ll likely receive raises as you grow in your career. You’ll be able to contribute more in the future. For example, if you manage to save $30,000, and contribute $300 each month for 20 years at a 6% interest rate, you’ll have $228,642.19.

In contrast, if you have the same $30,000 balance, but only have 10 years to save, contributing $300 at a 6% interest rate gives you $101,176.29. That’s a difference of $127,465.90.

That’s powerful, and it’s proof that waiting can affect how much you’re able to save in a big way.

How You Can Save for Retirement

There are no shortage of ways you can save for retirement.

Employer-Sponsored Plan: This includes plans like 401(k)s, 403(b)s, etc. These plans are offered directly through your employer and are tax-deferred. That means the amount you contribute is deducted from your income. Besides investing for your future, you’re lowering the amount of income you’re taxed on!

Employer-sponsored plans often involve matching contributions, which can help you save even more. Say your employer matches 100% of the first 6% of your gross salary. If you make $45,000 per year, 6% is $2,700. All you have to do is contribute $2,700 to your 401(k), and your employer will do so as well. That’s free money.

IRA: You can choose to open a Roth IRA or a Traditional IRA if your employer doesn’t offer a 401(k). You can still contribute to an IRA if you’re contributing to a 401(k), though. Traditional IRAs offer tax-deferred growth, whereas Roth IRAs offer tax-free growth.

Self-Employed Plans: If you’re an entrepreneur, you have plenty of investment options as well. We go over the most common options in this post.

Don’t Base Your Plans on Things That Aren’t Guaranteed

The worst thing you can do is put off saving for retirement because you think something else will come to the rescue. Whether that’s Social Security, a pension, an inheritance, or your family helping you out, circumstances and policies can always change.

It’s safer to save for retirement the “hard way” by being responsible. If something else does come through, think of it as icing on the cake. By saving on your own, you can be confident in your ability to retire. That’s priceless.

How to Avoid Cognitive Investing Biases on the Road to Financial Independence

Cognitive Investment Biases

In celebration of Independence Day, your Money Guys are talking about how our emotions can interfere with achieving financial independence.

We all know that being invested in the stock market puts our money at risk, which can cause a roller coaster of emotions at times. When the market is up, we’re happy, and when it’s down, we’re depressed and anxious.

Letting your emotions influence your financial decisions, especially when it comes to your investments, is a bad idea. How can we push our emotions aside so they don’t cause us to make grave mistakes with our portfolio?

Brian and Bo give you the answers in this episode, and discuss 15 cognitive investing biases to avoid on the road to financial independence.

Don’t Let Your Brain Hold You Back When it Comes to Money

Rick Edelman’s book, “The Truth About Money,” reviews the cognitive biases investors are most at risk for, and Brian goes through each in detail. He provides insightful examples so you can recognize when your emotions might be controlling your investment decisions.

The first step in being able to avoid these biases is to simply be aware of them. All too often, we get caught up in our thoughts and rationality goes out the window. You don’t want to play around with your emotions or your money, especially when it comes to growing your wealth to reach financial independence.

Here are 15 cognitive biases to stay away from as an investor.

 

  • Intuition Bias: Do you rely on your gut to make investment decisions? It goes without saying that’s a big mistake!
  • Mental Accounting Bias: This is when we treat our money differently depending on where we’ve mentally allocated it.
  • Compartmentalizing Bias: If you have multiple investment accounts, are you factoring in the investments you’re holding in all of them when figuring out what to invest in? Or are you viewing each as a separate account? You shouldn’t compartmentalize your investments.
  • Pattern Recognition Bias: Many of us are guilty of seeking out patterns that don’t exist. This is why “past performance does not guarantee future results” exists.
  • Recency Bias: We have a tendency to focus on current events, and this might cause us to base future predictions on how the present is going.
  • Proud Papa Bias: This occurs when we fall in love with our investments, or when we have a personal interest in seeing a stock do well.
  • Optimism Bias: This is when we think bad things only happen to others – not us – which causes us to be overconfident in our investments and to underestimate risks.
  • Illusion of Control Bias: If you think your actions control events, you’re guilty of this one. Just because you purchase a stock doesn’t mean it will perform well.
  • Pessimism Bias: The opposite of optimism bias, this is when we second-guess all of our investment decisions and can’t take action.
  • Catastrophe Bias: A combination of the recency and pessimism biases, this occurs when we think another recession is just around the corner, and hold ourselves back from entering the market because of that belief.
  • Regret Aversion Bias: Have you ever made such a bad mistake, you take every measure you can to avoid making it again? This limits your opportunity, especially with your money.
  • Endowment Bias: This is when you overinflate the value of your investments, similar to how homeowners often think their home is worth more than it actually is.
  • Herd Mentality Bias: So many investors are guilty of going with the herd on investments, whether it’s with friends, coworkers, or the media.
  • Anchor Bias: This can happen when the price of a stock shoots up or down, and an investor makes a decision to buy based on what the previous and current price is. They’re not valuing the price correctly because they’re anchoring to the higher price.
  • Illusion of Attention Bias: This is prone to happening when you invest in individual stocks, and focus all your attention on how they’re performing. This distracts you from the total performance of your portfolio.

In short, don’t fall prey to your emotions. They won’t guide you to road that leads to financial independence. Instead, base your investment decisions on sound principles, thoroughly research your options, make use of reputable resources, consult with your financial advisor, and don’t forget to enjoy life along the way.

Money is a tool to accomplish what you want in life, but don’t let the market influence your emotions to the point of being miserable.

What Are Mid-Term Goals, and How Can You Plan for Them?

Mid-Term Goals

What kinds of financial goals do you want to work toward?

In the short term, you may like to pay off your credit card with the outrageous interest rate and to tuck away some money in the bank for an emergency fund. Perhaps in the long-term, you’d like to put a bit away towards retirement.

But what about preparing for all the things you hope to do between now and retirement? These are your mid-term goals, and they can be tough to identify and plan for. It may take a long time to achieve them, they can involve large sums of money, and they can be easy to push off in favor of shorter-term projects.

But don’t fall into this trap! Instead, educate yourself and devote a little time to thinking about those mid-term plans. Here’s how you can get started.

Find Your Mid-Term Goals

Planning for intermediate financial goals is important. But what sort of goals are we talking about here?

Mid-term goals usually happen after you’ve graduated college, secured a job and really started your career — but before you start dreaming about your day-to-day retirement schedule for when your working career is over.

In the next three to ten years, you may want to:

  • Buy a house
  • Pay for a wedding
  • Start a family or have another baby
  • Pay off student loans or go back to school
  • Go on a dream trip
  • Start a second career
  • Start a business

Many of us want to do all of these things, and it’s an expensive proposition.

With any goal, it’s essential to know exactly what you’d like to accomplish. Nail down exactly what you’d like to do, and then figure out how much money you’ll need to make it happen.

Tackling Your Mid Term Goals

One way to tackle all your goals is to sequence your goals. You’ll meet one goal, and then move on the next. Consider both the importance and the timeline of your goals.

Is there one that you’d like to do more than all the others? Which goal would you like to do in two years, and which goal would you like to do in five years? Use this to make your list.

Another approach is to save for all of your goals at the same time. Open a specific saving account for each goal and divide the money you have available to put away between the accounts (or use percentages to determine what amount goes where).

Set smaller goals for each year to remain motivated and keep those balances growing.

If you’re motivated by seeing higher balances and checking goals off of a list, you’ll probably prefer to sequence your goals. If you like the idea of pursuing all your goals at once, you might prefer the separate savings account method.

Take Care of Your Savings

Taking care of your money for medium term goals is tricky. You keep your emergency fund some place safe since it’s possible you’ll need it tomorrow. You invest your retirement money in tax-advantaged accounts like a 401(k) and a Roth IRA since you don’t expect to need it for years.

But what do you do with the money for all the goals in between? You want to preserve your savings, but you don’t want to lose out on growth if it’s going to take ten years to save up for your goal.

You want mid-term savings to be easy to access. It’s a bad idea to put the money in a 401(k) or another tax deferred retirement account as you’ll pay a penalty to access your savings.

Instead, consider a taxable investment account or a high interest savings account so you can reach your money without penalty — and give it an opportunity to work for you and compound.

Think About Your Timeline and Manage Your Risk

Since the timeline for your mid-term goals is shorter than your timeline for retirement, you’ll want to manage your risk carefully. You’ll need to strike an effective balance between protecting the savings you’ve worked so hard to accumulate while getting a bit of growth and offsetting inflation.

It depends on your timeline — is this a two year goal or a ten year goal? For more urgent goals, you can always use a high interest savings account or short term CDs. For goals with a bit longer timeline, you can consider conservative investments structured to preserve your savings in a taxable investment account.

There’s a lot of life to live between now and retirement. Start saving for your mid-term goals so you can create the life you want without worrying about how you’ll pay for it.