Why is financial planning important for you?
Financial planning and education are important for everyone and not specific to professional athletes, but there are certain specificities of a professional sports career that make it important to have some basic knowledge of finance.
Have a look at these examples:
The average individual…
Will work 35 to 45 years.
Will enjoy peak earnings during the five years just prior to retirement.
The average professional athlete…
Will work for 35 or 45 years; however, his or her career in professional sports will only last 7 to 12 years and will be over before reaching age 40.
Will enjoy peak earning before age 35. In fact, they will likely earn 50% to 75% of their lifetime earnings before age 35.
Furthermore, professional athletes…
Have short career spans and so cash flow needs to last longer
Have early peak earnings
Have careers that will often involve playing in different countries which creates financial issues such as moving large sums of money across borders, living and working in different countries adhering to different tax regulations, etc., all of which if not handled properly can result in severe financial loss
Have a lot of people that surround them, all of which are not necessarily qualified to deal with finances
Have a public image and can fall prey to targeted scams
Have unpredictable careers and often a lack of educational qualifications
Have little experience or background in money management
Financial planning is therefore important for any professional athlete – whether you are a rookie or veteran, having the knowledge to secure your financial future can make the differences between a great career and a bad one.
If you have any other questions that are not covered here, we encourage you to speak to your local bank to see where you can get more information. By being aware and educated you are in the best position to protect yourself and be a winner on and off the court!
Do's and Don'ts of financial planning
It is important to turn to the right person for financial advice; choosing the right people could be the difference between growing your wealth and losing everything. If you don’t have the knowledge or the time to do your own financial planning, there are professional advisors that can help.
Here are few do’s and don’ts regarding your financial planning:
Do's
Hire an independent financial advisor A professional financial advisor with a proven track record should have the knowledge to help you with many different aspects of your financial planning. He or she should advise you on a variety of aspects related to the management of your money and assets as you could not be qualified to handle those difficult questions. As part of their main duties, they would help you:
Set your financial goals/objectives
Make the right choices to reach your objectives
Advise you on how to invest your money
Monitor your assets
Revise your objectives over time
Advise you on the types of insurances you need
Visit your bank
If you do not have the resources to hire a financial advisor, obtaining advice from your bank is a good alternative.
Don'ts
Rely only on your family and friends
Even though they might have been always on your side supporting you career, they might not be qualified to deal with financial issues. It can even lead to unnecessary conflicts.
Rely only on your agent
Your agent is entrusted with your business and acts on your behalf in negotiating your contracts with professional teams or organisation. Agents can offer a wide range of services but not all agents have the necessary knowledge and qualification to take care of your finances. Even if your agent or agency offers financial advice, it is still recommended to have an independent advisor overlooking your finances.
Rely only on your coach or teammates
You probably trust them on the court but that does not mean that you have to trust them when making important financial decisions. The pressure to go along with a new plan that will ‘make you lots of money’ or trusting the advice of a veteran player may be strong, but the desire to protect your own finances and make educated decisions should be stronger.
Choosing a financial advisor
Finding the right financial advisor is not always easy as professional athletes can become financial prey as disreputable people can see athlete’s money as very easy to get to. Here are some hints on how to choose the right financial advisor:
Hint 1: Educate yourself
Different advisors have different areas of expertise, so it is important that you find someone who can address your specific situation as a professional athlete. Take the time to educate yourself on basic technical financial language as there is no shortage of certifications, designations, and acronyms in the financial world. Understanding what these terms mean will allow you to be more comfortable when meeting with a prospective advisor – see the ‘Financial terms explained’ below.
Hint 2: Talk to others
Seek advice from those around you. Even though you may not want your family, friends, teammates, or agent to handle your finances directly, you can still ask them for recommendations. If there is a good financial advisor in your area that works with athletes their name should come up when you ask around.
Hint 3: Interview the candidate(s)
Any reputable financial advisor will hold an introductory meeting at no cost. This first meeting is beneficial to both you and the advisor. It provides an opportunity for you to explain what you’re looking for and ask questions, while the advisor can determine if they are suitable for the job. The professional you choose will need to know a lot about you and your finances. You have to be comfortable enough to share this information and be as truthful as possible. If not, you may be putting your finances in jeopardy.
Examples of questions you could ask before hiring your financial advisor:
What do you charge and what method do you use to get paid?
What are your credentials?
What kind of experience do you have?
What exact services do you provide and how often do you see your clients?
If you play internationally – Do you have the right credentials and experience to navigate the international aspects of my finances?
Do you have any questions for me?
Financial terms explained
Here is list of definitions of customary financial terms that will help you kick start your understanding of the financial game!
Accountant is a practitioner of accountancy, which is the measurement, and analysis of financial information that helps managers, investors, tax authorities and individuals make financial decisions.
Annual Percentage Yield (APY) is the rate actually earned or paid in one year, taking into account the effect of compounding. The APY is calculated by taking one plus the interest rate and raising it to the number of periods in a year or number of years.
Annuity is a financial product sold by financial institutions that are designed to accept and grow funds from an individual and then paying out a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years.
Assets are anything of value (e.g., securities, property) that you own.
Bond is a debt certificate or IOU issued by a corporation or unit of government.
Borrowers are promised interest for loaning their money to the bond issuer and the return of their investment at a specified future date.
Budget is an estimation of the revenue and expenses over a specified future period of time.
Broker is an individual or firm that charges a fee or a commission for executing buy and sell orders submitted by an investor.
Cash equivalents are investment securities that are short-term, have high credit quality and are highly liquid.
Cash flow is the relationship between household income and expenses. For example, households that spend more than they earn have negative cash flow.
Certificate of deposit (CD) is a savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination.
Commission is a service charge assessed by a broker or investment advisor in return for providing investment advice and/or handling the purchase or sale of a security.
Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.
Credit is the receipt of money, goods, or services in exchange for a promise to repay the amount borrowed at a future date, generally with interest.
Debt is a general term used to indicate an outstanding balance of money owed for loans, mortgages, credit cards, and other forms of credit.
Disposable income is a portion of a person’s income, including social service payments, that is left for spending or saving after the Tax Department has taken its share.
Dividend is what is paid out of a company’s profits to its shareholders, usually yearly (final dividend) and sometimes half-yearly (interim dividend).
Expense is a cost that is “paid”, including basic needs, such as housing and utilities, and other purchases, such as entertainment and clothing.
Fee based is information or a service that is only available upon payment of a fee.
Financial Planner is a practicing professional who helps people deal with various personal financial issues through proper planning, which includes but is not limited to these major areas: cash flow management, education planning, retirement planning, investment planning, risk management and insurance planning, tax planning, estate planning and business succession planning (for business owners).
Financial Planning is a process of establishing financial goals and developing an action plan to achieve them. The financial planning process includes all aspects of personal finance including managing cash flow, insurance, investing, taxes, and retirement and estate planning.
Fixed income investment is an investment that provides a return in the form of fixed periodic payments and eventual return of principal at maturity.
Flat fee, also referred to as a flat rate or a linear rate, refers to a pricing structure that charges a single fixed fee for a service, regardless of usage.
Rarely, it may refer to a rate that does not vary with usage or time of use.
Funds are pools of money contributed by individuals to make investments with the benefit of size or to gain tax advantages.
Gross income is an individual’s total personal income before taking taxes or deductions into account.
Income is economic wealth that is generated in exchange for an individual’s performance of agreed upon activities or through investing capital. Common sources of income include salary from a job, self-employment earnings, alimony and child support payments, gifts, tax refunds, and public assistance.
Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
Insurance is a contract (policy) in which an individual or entity receives protection or reimbursement against losses from an insurance company.
Interest is the charge for the privilege of borrowing money, typically expressed as an annual percentage rate.
Investing is the process of purchasing assets such as stocks, bonds, real estate, and mutual funds with the expectation of future income and/or capital gains (growth in value).
Investment is an asset or item that is purchased with the hope that it will generate income or appreciate in the future.
IOU is a contraction of ‘I owe you’; written evidence of a debt, usually signed by the debtor and held by the creditor.
Liabilities are money owed by an individual or business that decreases net worth.
Lump sum is a one-time payment of money, as opposed to a series of payments.
Mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.
Net income is an individual’s income after deductions, credits and taxes are factored into gross income.
Net worth refers to an individual’s net economic position calculated by using the value of all liabilities minus the value of all assets.
Peak earnings refer to the time in life when workers earn the most money per year.
Periodic rate is a finance charge on consumer credit loan balances, expressed as a percentage. The rate is recorded at regular intervals, such as daily, weekly, or monthly charges.
Portfolio is the combined holding of stocks, bonds, cash equivalents, or other assets (e.g., real estate) by an individual or household.
Preferred stock is a class of ownership in a corporation that has a higher claim on the assets and earnings than common stock.
Principal is the original amount of money invested or borrowed, excluding any interest or dividends.
Rate of return is profit earned in relation to capital invested; what you get back as a reward for risking your money.
Risk is an exposure to investment loss.
For example, a high-risk investment carries with it a high chance of loss.
Risk management is the process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. Essentially, risk management occurs anytime an investor or fund manager analyses and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance.
Savings is the amount left over when the cost of a person’s spending is subtracted from the amount of disposable income that he or she earns in a given period of time.
Savings account is an account established at a bank or credit union for storing money. Interest is paid on deposited. Minimum deposit amounts may be required in order to avoid fees.
Securities are written evidence of ownership or creditorship, such as bonds and stock certificates.
Share is certificate representing one unit of ownership in a corporation, mutual fund, or limited partnership.
Social security is a Federal government programme that provides retirement and disability benefits to workers and their dependents. Workers pay for Social Security through payroll taxes.
Stock is a type of investment that represents a unit of ownership of a corporation. This ownership is represented by shares of stock, which are a claim on the corporation’s assets and earnings.
Variable expenses change depending on your consumption of a good or service. A variable expense is a cost that changes significantly from period to period, such as week to week, month to month, quarter to quarter or year to year.
Variable income investment is an investment where payments change based on some underlying measure such as short-term interest rates.