We’ve all read that crazy teaser of a story about the rich millionaire athlete that made a fortune only to blow it all and be completely broke a few years after they finish playing their sport of choice. The Mike Tysons of the world who earn $300 Million just to end up bankrupt one year into “retirement”. There is something sadistic and intriguing about the unwise financial choices others make. It certainly becomes story-worthy when the numbers are in the millions.
However, as much as we prefer not to admit it, we all have a little broke millionaire athlete in us. In fact, we tend to make the same money mistakes without the media spotlight or the spectacular meltdowns of well known celebrities. So, why are we just like the millionaire athletes that go broke? Do we make the same money mistakes as the ultra rich?
We Spend More Than We Earn
This is the simplest of all financial equations, as well as the one that fails most often. We regularly spend more than our income and we use debt to fill in the gaps. Even for those who are debt free, we often spend more than is wise and choose not to invest in things that will benefit us in the long run (Like funding retirement). Just like the calories-in calories-out approach to weight, knowing what to do is simple, but choosing to do it is hard. We are not very good at telling ourselves No.
We leverage our future earning potential for immediate gratification (debt). We borrow money to be paid back in 30 years. We finance vehicles we do not have enough money to buy and we pay for schools that are too expensive for us to afford. We make the same assumption (sometimes faulty) that we will have more money in the future. In addition, we don’t save when we are young. Think about it, many of the NBA stars begin their careers at 19. How much did you know about managing money at 19? Were you planning your retirement or making fully wise decisions? Most of us were not even remotely considering what life would be like when we are 30, much less 60.
We Are Bad at Financial Math (And Mental Accounting)
We are all pretty bad at mental accounting. Just like the former Stanford (and NBA) player Josh Childress, we are pretty bad at understanding how much we actually bring home versus our earnings. Out of an NBA player’s multi-year $10 Million dollar contact, they may only bring home $3-4.5 Mil after taxes, union dues, agent fees, and travel expenses. But we think in absolutes. Our mental accounting says we make $10 Million so a $2 Million dollar home is not too bad. But, percentage wise, our expenses after tax/debt/outflow are often a bigger part of our disposable income.
Similarly, we celebrate our raise to 100k by going on a 20k vacation without understanding that we are spending a much larger percentage of our income. For our family, doubling our salary (100% increase) would only leave 48.2% more take-home income. Our mental accounting often thinks in gross numbers. In fact, we often anticipate raises and mentally spend money we do not even have. By the time the money comes in, we’ve already allocated most of it and we have the exact same margin that we did before.
We Rely on Meeting Others’ Expectations
This is one of the tough ones. I’ve read that we are the average of our five closest friends and I would expect our spending to roughly reflect that notion. We certainly want to fit in, and spending is often the panacea that makes it happen. We spend to make others happy, even if it puts pressure on our personal balance sheet.
Many of our spending decisions are driven not by our own desires, but to meet the expectations of our peers and family. We need to live in a certain size house, we need to send our kids to certain schools, we need to vacation in certain places, and we go out to certain classes of entertainment. We want to eat out with our friends, teammates, or family. We want to live like the people we spend time with. Unfortunately, our incomes and personal goals do not always align with others’ expectations. But we continue to spend simply to keep up. This is the type of spending that is subtle yet constantly puts pressure on our financial world.
We Act Like Our Earnings Will Continue Forever
In sports we see it all the time. A promising young prospect whose income potential is cut short by a blown out knee, a torn elbow, or an unfortunate concussion. Maybe a team just doesn’t need the position or someone younger, cheaper, and more exciting will do the same work for less. But, in our minds, we think we will be young forever and continue to make money consistently over our lifetime.
We typically underinsure for disability and never plan on leaving the workforce due to inability. Again, we borrow against our future with the expectation that we will be well forever. Statistics show that at least 1/3 of the workforce leave unwillingly (end of career layoffs, obsolescent, injury, disability) and another 1/3 leave before they originally expect to “retire”. In addition, economic conditions are cyclical and even the current in-demand-fields may be downsized in the future.
Although blowing out a knee may not keep us from working; extreme hours, mental burnout, family issues, and changes in the economy over time may push us from the workforce. High paying jobs are often difficult and stressful. Many require long hours and lots of mental stress that doesn’t stop after 5:00. Just like the football player with too many concussions who knows they need to quit, many white collar workers continue in stress filled work environments until their bodies break down physically.
We’ll Feel Pressure to Help Other People
We really like helping other people. Some of it is fun. Giving is enjoyable. As our income rises, we are often expected to help other people. Our friends, our family, and people that have helped us in the past can benefit from our generosity. We are not very good at setting emotional or financial boundaries. We feel pressure to help those around us, even when it is not the best choice for our family. Many athletes feel pressure to address the needs of others (often loved ones) they see struggling. They often spend their way to bankruptcy on the people around them. We do the same thing. We spend to make our parents, friends, neighbors, and children more comfortable. Helping others is awesome, but we need to set healthy boundaries and insure our families are prioritized as well.
We Are Disorganized, With Zeros On The End
I am amazed at how often we are inefficient and disorganized with our finances. Not just in the poverty class, but in the middle and upper middle class. We fail to keep our investments in line with our needs. We do not adequately plan or prepare for our future needs. We do not communicate with our spouses, families, or children. Many of use do not have updated wills or a plan to get where we want to be. We are just like the 18 year old sports stars.
We are all pretty rich. In fact, the rest of the world sees the average American like we see the ultra rich. Almost anyone reading this is in the Global 1%. We all make financial mistakes and in-optimal decisions. It is certainly easy to see when wealthy celebrities make very public mistakes, but we can learn a lot about ourselves and their mistakes. We all have a little broke millionaire athlete in us.