This article was originally published 17 February 2022, and was updated 22 August 2024.
While money management skills are important for everyone, financial planning is even more critical for professional athletes. The unique nature of their profession makes managing cash flow crucial for creating financial security.
Those with the opportunity to compete at the highest levels of sport have exciting earning potential - but this phase of life won’t last forever and, through injury, could end without a moment’s notice. This combination of high cash flow with a tremendously uncertain future makes for a unique dilemma. Athletes need to actively manage their cash flow from the start of their career, ensuring a secure plan for income changes and retirement.
So, how can athletes busy winning on the field or in the gym today, structure their finances to set themselves up for victory tomorrow?
Make a financial plan
Your teammates and fellow athletes are likely paid very differently to you, especially if you are at different stages in your sporting career, are playing other sports, or have achieved varying degrees of success. Some may be earning ten times as much as you, particularly if you’re a young, emerging player. It’s therefore important to understand that despite the barbeque banter and pub talk, the investments and strategies your peers are pursuing may not be appropriate for your personal needs and objectives.
To create a financial plan with cash flow budgeting, you first need to know the following components of your personal situation:
- Assets – lifestyle assets vs. financial assets
- Liabilities – mortgages, credit cards, car loans, investment loans, etc.
- Income – salary, bonus, sponsorships
- Expenses – fixed vs. discretional, agent fees, deductible vs non-deductible
- Timeframe – professional playing years are finite.
Needs and objectives
The foundation of a financial plan is based on your personal goals and what you want to achieve in life. A good plan should ensure you can achieve these goals in the best way possible, whether through appropriate investments, tax structures, or tax-effective strategies, whilst enjoying life as much as possible along the way, without sacrificing financial security post-retirement from sport.
Your goals may include:
- Buying a home
- Starting a business
- Supporting your family
- Achieving financial freedom by 40
- Taking two holidays a year forever, or;
- Owning a jet.
No matter the goal, it’s important to use this as a guide to your financial strategies.
Team up with a trusted adviser
It’s equally important to share your goals and any prospective investment opportunities presented to you with your financial adviser. An athlete’s relationship with their financial adviser should be a dynamic one in which both parties exchange ideas and are in sync. Your adviser shouldn’t be making decisions for you on their own.
Conversely, the world of finance is complex and you don’t know what you don’t know, so having an adviser to help you avoid investment pitfalls and assist you to make better-informed decisions can save you time, money, and heartache.
Creating a back-up plan
When creating a financial plan, changes in contracts, shifts in teams, and career-ending injuries need to be considered. It’s not uncommon for an athlete’s salary to change between contracts or stop in the off-season, and if you aren’t financially prepared for such turnarounds, it can come as a shock.
To account for the uncertainty of this profession, you can:
- Maintain low debt levels
- Maintain a lifestyle that’s realistic and within your means
- Aim to have at least two years of living needs in cash at all times
- Seek professional advice to make better-informed decisions
- Use surplus cash to buy financial assets that will appreciate and provide a growing income stream
- Have transferrable skills to make yourself as employable as possible, very few athletes become coaches or commentators
- Take out personal risk insurance to provide financial security. Insurance can be hard to obtain for athletes due to the risk of claims being high, however, there are solutions available.
Avoid excessive debt
Because many athletes peak in their careers at a young age, it’s often tempting to cash in that first big paycheck for something flashy and expensive. It can also be easy to gradually slip into a lifestyle creep with the habit of blindly purchasing because money is regularly rolling in.
Borrowing to invest can be a great way to build wealth, but the last thing you want to do is take on excessive debt to buy assets based on your income today. Through injury, your career can end in the blink of an eye and you could find you’re suddenly drowning in debt you can’t afford to service because you’re not earning the income you’re accustomed to.
Being able to earn an income is your biggest asset and wealth creation tool. Focusing on what matters and knowing your finances are looked after will create peace of mind, allowing you to maintain your peak athletic performance and sleep well at night.
Our team of experienced advisers work with professional athletes regularly and can help you take control of your cash flow. To learn more about setting financial goals contact your local BDO adviser today.