How to Overcome the Uncertainty of Athletes’ Uneven Cash Flows with Proper Money Management
- Friday, November 30, 2018
Athletes are lucky enough to be earning more money than every average, or even well-paid job that’s out there in the job market. Nevertheless, this comes with a huge caveat; this caveat is called uncertainty of uneven cash flows or in simpler words, the fact that you may find yourself making $1,000,000 today but $50,000 in a year from now and vice versa. You may think that it doesn’t really matter, because at the end of the day you’re still earning good money but in reality, things tend to be way more complicated.
The Pizza Example
To put things into perspective, think of your money as a large pie of pizza that gets delivered to your doorstep fresh and ready to be eaten. You know that you have nothing else but this pie of pizza for the next three days, so what do you do? A large percentage of the people would eat that entire pizza pie on the spot, neglecting the fact that they’ll have to be hungry during the next two days. So, the question here is whether you have the discipline to say that you’ll spread the slices evenly to have enough food for the coming two days. Same applies to an athlete’s money; do you as an athlete have the discipline to spread your money evenly without being lured by the fact that you’re making big money in the present? To help you answer positively to this question, we’ll start by looking into the cycle of uneven cash flows.
Why uneven cash flows?
Let’s take an athlete with the average career of five years. During the first year, the athlete is a rookie and is more likely to be paid good money, without having yet reached their peak contract. Half-way through their careers, at about the second to third year, athletes will probably be making more money than they can even imagine given that they’ve reached their peak of performance and fame and are able to leverage it through immense contracts. Towards the end of their careers, athletes still make good money, but they’re no longer ‘the future’ and thus their cash flow will be much lower from their peak contract, given that the younger generation of athletes will start taking over the big contracts. Finally, after five years have gone by, athletes find themselves with zero income, a sudden and dramatic drop from their previous contract. In the cycle described above there are about four -rather dramatic- changes in cash flows within five years. This does not happen in any every-day job and this is what we need to tackle plus the fact that every season the athlete’s budget needs to cater for spending during off season when athletes don’t get paid.
Overcoming uncertainty of uneven cash flows
Initially and most importantly, if you don’t have a plan on how to handle your money from the early days of your career, you’ve gone half wrong and will be facing difficulties preserving future cash flows. Planning from the early days is the backbone of overcoming this uncertainty; it will allow you to structure your spending and saving in such way to make sure that you have enough money available during all seasons, all years, as well as after you retire. You need to think of your income as the pizza pie, realize that the money you make now will compose your income in the future and thus plan accordingly how many ‘slices’ you’ll consume throughout your lifetime. If you discipline yourself towards saying that no matter how much money you’re making, you will be saving a certain percentage of money for your future self, then you’ve almost got it right.
Another important way to tackle this uncertainty is to create alternative sources of income while you’re still a professional athlete. Investing your money in one, two, five or even ten-year investments will generate cash flows at points in your life that, right now, you have no idea how much money you’ll be making, if you’ll be making any at all. These alternative sources of income can act as a catalyst when it comes to making sure that you’ll be able to afford a good life irrespective of how much you’re making at that time.
So far, we’ve discussed the importance of planning and alternative investments which together make up about 90% of the solution to our issue of uncertainty. The remaining 10% that we haven’t solved is the prevalence of an unexpected financial setback during or after your career. These kinds of setbacks happen every day to all of us and can take any form. Your investments may turn out badly or your career may end earlier than expected; so, what do you do in these cases? You make sure that you get a proper insurance policy in place that will cover you from the effects of such setbacks. Insurance companies are willing to create any plan that will suit your needs and we thus highly recommend that you create a plan that covers such cases. One may think that the premiums to such a plan would be high and they’re probably right, but, when comparing it to the risk of finding yourself penniless, the insurance premiums will seem like a huge discount.