6 Money Management Strategies For Athletes
- Friday, November 30, 2018
“Mo Money, Mo Problems” is the title of one of the top hits American rapper Notorious B.I.G wrote back in the 90’s, describing the struggle of managing increasing levels of income. Money management, in simple terms, is the process of knowing where money is going, how it is being spent and having a well-drawn-out plan to facilitate a specific goal.
Along with their on field success, athletes might find themselves in a position where they need to properly manage their increasing income very early in their career, without the help of proper advisors and without having the financial knowledge to do so. Smart money management is essential for achieving personal or family goals, not only at the beginning, but through all stages of your career and life, such as when you start a family, buy a house or start your own business.
There are unlimited ways and strategies to manage money. In this article we propose 6 money management strategies that any athlete can easily implement, whether he or she is just shopping for food or actively trading in the equities market:
1. Track Where You Spend Your Money
You need to have a clear picture of your spending habits, so you will have to pull out all your bank statements, utility bills, ATM withdrawals and any electronic payment records. Use a spreadsheet or just paper and pen and total your expenses.
You can separate your expenses in needs and wants or be more detailed and separate them in categories such as entertainment, food costs, travel and transportation, etc. Total each category to see where your money goes.
2. Create an Emergency fund
Living paycheck to paycheck is not only irresponsible but it’s also very dangerous. Any decrease in your income, caused let’s say by an injury or termination of a contract with a team or a sponsor can bring havoc to your lifestyle and even worse, send you to a spiral of debt.
The rule of thumb to creating an emergency fund is to have six months of living expenses in a very liquid account in case anything bad happens. If you are the kind of person who needs gradual change, you can start by setting up an automatic deduction of 2% of your paycheck and transfer it to a separate emergency account. If you want to build up your emergency fund faster, you can increase this rate to a percentage you feel comfortable with.
3. Create alternative sources of income
You might have the feeling that the money you are currently receiving as a salary from your sports contract are more than enough to ensure you a lavish lifestyle now and after the end of your playing career. Unfortunately, that’s not usually true and there are many cases of athletes who went bankrupt after the end of their athletic career. As an athlete you have the ability to earn off-the-field income by signing endorsement deals or setting up a parallel business; adding other streams of active income to your sports salary should be a priority for any athlete.
4. Automating your finances
The most difficult part of implementing and sticking to any money management strategy is finding the willpower to do so and making the effort. Being your own worst enemy in this case, you need to remove yourself from the equation by automating your savings, bill payments and investments.
Simply create a different bank account for each purpose, such as an emergency fund, savings and investment accounts and have money automatically deposited to each account every month. This way you can achieve specific goals by systematically creating positive long-term habits while fighting the temptation to deviate from your financial plan.
5. Saving for retirement
If you are reading this article trying to find ways to better manage your money, you must have an ultimate goal in mind, right? Otherwise, what’s the point of going all through this and not just live paycheck to paycheck?
Retiring does not always mean that you will stop working; it means not having to work for money. To be able to do that, you need to create passive income through a retirement fund that will pay you a stable income every year for the rest of your life. To create such a fund, you need to start with a principal amount, $100,000 for example, which you will invest in a mix of investments that will give you a return of 5% a year, or $5,000. Then you pay yourself 4%, or $4,000.
If you start with a higher principal, let’s say $500,000, then 4% a year is $20,000. 4% of $1,000,000 is $40,000 a year. Building a retirement fund that can produce income for the rest of your life should be the ultimate goal of any money management strategy.
6. Have a Plan and stick to it
Once you know how much money you earn and how much money you spend, you need to make a plan. This plan needs to align your financial goals with your spending habits.
For example, if you have just a few days a year for vacation and you love spending this time in a luxury tropical destination, you can easily fit the necessary cash outflows into your spending plan. But, if you have set as a priority to buy a house for your parents by the end of the year, then you will need to plan cutting expenses elsewhere and modify your long-term spending plan to accommodate such a large outflow.
Once you create a plan, give it a try for at least a month. You need at least a month to see if it works for you; anything less than that, and you won’t see the benefit of keeping an eye on your finances.