Few among us haven't dreamed of sudden riches – the financial windfall of a big legal settlement, an unexpected inheritance, a winning lottery ticket, or, for the young and athletically gifted, a lucrative contract with a major professional sports franchise.
But it turns out that few are prepared for a financial windfall when it comes their way.
Nowhere is this more obvious than with big sports stars.
Despite the proliferation of multimillion-dollar contracts, an astonishing number of professional athletes are forced to declare bankruptcy within a few years of hanging up their jerseys.
In the National Football League, for example, where the average salary is $1.9 million, 78% of former players are in bankruptcy within five years of retirement. That figure is 60% for former National Basketball Association players, who earn an average of $5.5 million a year as players.
How can people so generously compensated go broke so quickly?
Part of it has to do with youth, but many of the mistakes athletes make with the financial windfall of a professional sports salary also are made by regular people who suddenly come into large sums of money.
There's a lot we all can learn from their mistakes. When it comes to financial windfalls, it's best to know what to expect ahead of time so you can put the money to work for you instead of squandering it.
"Every single day, people come into large sums of money, whether it's a thousand dollars or a million, and without proper planning, funds quickly disappear," writes Jim Wang in U.S. News and World Report. "Just look at the horrible stories you often hear of lottery winners, and you'll have enough evidence that everyone needs a little preparation, even if you don't expect to get a windfall."
Mistakes to Avoid with a Financial Windfall
Not being prepared to deal with a financial windfall can lead to all sorts of bad decisions.
One trap that snares many sports stars as well as lottery winners is the urge to spend to the point of overspending.
"I bought myself a yacht, a mansion, a couple of cars," retired NFL linebacker Keith McCants said last year in "Broke," an ESPN documentary. "That ain't a million dollars. That's $7 million. I pretty much gave it away."
Then there's the temptation to give money to friends and relatives, many of whom are not shy about asking.
"[Lottery winners] tend to be the ones, because they didn't do anything to earn it, who give to people who appear out of the woodwork," Elizabeth Ruch, a financial planner at Waddell & Reed in San Diego, told The New York Times. "They feel guilty not giving money to a friend or their brother."
Finally, people with limited knowledge of the business world often take much of their financial windfall and invest it in risky business ventures that are prone to fail.
Here again, sports stars show how easy it is to lose vast amounts of money.
Former Major League Baseball pitcher Rollie Fingers lost $8 million by investing in pistachio farms, Arabian horses and wind turbines.
Former Jacksonville Jaguars quarterback Mark Brunell has lost tens of millions on a failed Whataburger franchise and other bad investments.
And NBA star Antoine Walker lost $110 million on real estate ventures that went bad when the housing bubble burst.
How to Handle a Financial Windfall
So if you're fortunate enough to experience a financial windfall, what do you do?
First, experts say, take a deep breath before doing anything.
"Spend the day after your windfall like you spent the day before your windfall," Timothy Greenleaf, managing director of private equity firm Fairmont Capital, told The New York Times. "Many of the things you thought you wanted are going to seem less desirable. You can only spend a dollar once, so spend it wisely."
After that, it's generally a good idea to pay off any debts first, including a mortgage.
It's also a good idea to enlist the help of a financial expert, but beware – most of the sports stars who lost their shirts had financial advisors.
"People need to take the time to understand what they want out of life. Many financial adviserstell people what they should have…. There's a big difference," warned Money Morning Chief Investing Strategist Keith Fitz-Gerald.
While there's nothing wrong with enjoying some of a financial windfall by splurging on a new flat screen TV or a trip to Disneyworld – depending upon how big the windfall is – blowing most of the money on frivolities would be wasting an opportunity.
A significant sum of money wisely invested could satisfy a range of future needs, such as paying for a college education or providing the basis for a retirement fund.
Fitz-Gerald said smart investing is smart investing whether you have a financial windfall at your disposal or not.
"All the fancy trading in the world won't matter one iota if you don't understand the basics as we outline them inthe"50-40-10 Strategy' I created years ago: safety first; an emphasis on big "glocals;' having thewherewithalto withstand all sorts of government nonsense; a heavy dose of income; and carefully controlled risk management," Fitz-Gerald said.
Finally, Fitz-Gerald offered a piece of advice that could have saved a lot of bankrupt sports stars a lot of heartache.
"It's not the winners that matter.Believeit or not, avoiding the losers is the real key over time," he explained. "Handle that and your life becomes a lot simpler and your investments dramaticallymore profitable."
[Editor's Note: Keith Fitz-Gerald's track record is jaw-dropping. At the moment, 79.4% of the recommendations in his Money Map model portfolio are in the win column.
And that's not to mention the 50 other double- or triple-digit wins Keith's rung up for his readers across the board since the Great Recession began in 2008. His secret is the proprietary 50/40/10 Strategy and his amazing Money Map Method.
If you would like to learn more about Money Map Press and receive a free copy of Keith's latest book entitled The Money Map Method: Lifelong Wealth in a World of Runaway Debt, click here.]
Related Articles and News:
- Money Morning:
How to Make Your Mega Millions Last
- Money Morning:
This Time-Tested Strategy Could Be Your Winning Lottery Ticket
- U.S. News and World Report:
How to Handle a Windfall
From Stoked to Broke: Why Are So Many Professional Athletes Going Bankrupt?
- Business Insider:
12 Outrageous Quotes From ESPN's Documentary On Athletes Going Broke
- The New York Times:
Navigating Pitfalls of a Windfall