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The Top Five Reasons Highly-Paid Athletes Go Broke and What You Can Learn From Them

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It can be easy to gawk at the inflated salaries of today’s sports stars, but those extremely high paychecks are unfortunately accompanied by extremely high rates of bankruptcy.

Athletes go broke all the time.

Within five years after their careers end, Mint.com estimates that 60% of National Basketball Association (the NBA) players in the USA will go bankrupt. The percentage is even higher for National Football League (NFL) stars in the same country, 78% of whom file for bankruptcy. Professional football players in the UK suffer the same fate as three out of five former players are either bankrupt or in dire financial straits within 5 years of their retirement.

We know what you’re thinking: If even the highest paid athletes cannot stay solvent, is there any hope for the little guys? Well, yes. After taking a look at the most common reasons sports stars go broke, there are some simple ways you can avoid the same mistakes.

Here are five lessons we can learn from athletes who go bankrupt.

1. Keep working!

An unfortunate truth about professional sports is that the lifespan of a typical athlete’s career is incredibly short. Take, for example, how impressed basketball followers are with basketball superstar Kobe Bryant’s 17-year NBA career. In what other universe would working for 17 years be considered “amazing longevity?” Don’t you wish you could retire at 40?

The reality is that Bryant is the outlier, here; players in the NBA have an average professional career of 4.8 years. NFL players have an even worse outlook, playing for only 3.2 years on average! So yes, their salaries may be large, but they aren’t on the payroll for very long.

Because their playing income only lasts a couple of years, it’s especially important for athletes to follow some advice: Invest early. Their salaries may not last in perpetuity, but if they’re smart with their investments, their returns will.

2. Don’t gamble (everything)

Several bankrupt athletes have a hobby in common: Hitting the tables. Stars from golfer John Daly to basketball player Antoine Walker have hit serious financial trouble because of their gambling habits. While it’s true that not everyone loses in the casinos in Marina Bay Sands or Genting Singapore’s (SGX: G13) Resorts World Sentosa, most financial advisors would agree that gambling is one of the riskiest ways to “invest” your money.

Not all gambling is done in the casino, of course. There are plenty of risky investments that cross an investor’s path everyday; sometimes they pay off… often they don’t. The lesson here is to actively manage your risk, and understand exactly what risk is.  Smart investors approach risk deliberately, and balance their riskier investments with more conservative vehicles.

Buying shares of a company, valued at 10 times profits while growing earnings at 15% a year with a clean balance sheet, and holding for the long-term? A much safer idea than calling the roll of a dice.

3. Diversify

Let’s play a game. We’ll list three professional athletes who declared bankruptcy, and see if you can spot what they have in common.

1. Mark Brunell (NFL player) – lost $9M investing in Whataburger franchises.

2. Curt Schilling (baseball player) – founded a video game company, 38 Studios, that lost him his entire $50M fortune.

3. Dorothy Hamill (Olympic ice-skater) – declared bankruptcy after investing heavily in an Arizona skating rink.

Did you notice that all three had only one investment vehicle listed after their name? Yes, if you guessed that a lack of diversification failed them financially, you’d be correct.  What these athletes didn’t do was hedge their bets by spreading their wealth.

Investing in something you are passionate about and believe in can pay off, but not if you put all of your eggs in one basket. Because if you drop that basket, that’s right, you end up with nothing but broken eggs.

As non-professional athletes who may not have the discretionary income to fund multiple fast-food chains, we can still learn from these mistakes. The more ways we choose to save and invest our money, the less risk we have in building future wealth. Don’t let your Central Provident Fund savings end up as water down the drain.

4. Be lawful

This should be an easy one. Don’t break the law. Too many professional athletes have squandered their millions in completely avoidable, unlawful ways.

We can all start by avoiding drugs and alcohol. Take it from former American Football professional, Lawrence Taylor. Aside from the obvious health consequences, they also cost a lot of money. And don’t forget that abusing them can get you fired. Basically a horrible idea all around.

Also, let’s make sure we all pay our taxes, OK? This seems to be a problem for the super rich, and it has caused serious financial problems for athletes like Marion Jones, a track and field world champion.

In fact, tax evasion has become such an epidemic among football stars in Europe that countries like the U.K. and Spain have made investigating it a large priority. Even their biggest stars, like Lionel Messi, have had to face the music and fight tax battles in court. Financially, they’d likely be better off avoiding the legal fees and paying the taxes up front.

Speaking of legal fees, have you heard that they are consistently enormous? Whether from failing to pay child support, defaulting on debt, or [enter any other type of legal case here], ending up in court can cost you a pretty penny. Just ask NFL player Michael Vick, who owes enough in legal fees to negate an incredibly large portion of his future earnings.

The lesson here is that the lawful citizen can avoid a lot of unnecessary expenses. Hopefully this will be one of the simpler rules to follow.

5. Spend within your means

This, Fools, is the big one. If you spend less than you have, you’ll always be rich. (Easier said than done, right?)

If you’ve ever felt the temptation to spend money you don’t have, imagine how that temptation must feel for someone making 100 times your salary. With millions, sometimes hundreds of millions, of dollars coming in, it would certainly be easy to feel invincible with money. And so it is with many athletes, who overspend despite their large paychecks.

Former NBA superstar Allen Iverson, for example, “was known to travel with a 50 person entourage, blew millions of dollars gambling, lavished friends with expensive gifts and had massive monthly child support obligations.” Unfortunately for him, jewelry, cars, and entourages don’t pay dividends. If he had spent that money on stocks, bonds, or even unit trusts, he’d probably be much better off.

Jack Clark (a baseball professional in the 70s) bought 18 luxury cars. He went broke before paying many of them off. The same goes for you, boxer Evander Holyfield. Learn from these mistakes, Fools: If you have to make 11 child support payments every month, you cannot afford a $10 million estate.

Foolish Bottom Line

So, let these examples go to show that a large paycheck does not necessarily equate to meaningful wealth. Whether you start by investing one dollar or one million dollars, the tenets to growing your money (and not losing it) are the same: Start investing early, manage your risk, and remember to diversify. Most of all, try not to spend more than you have… even if what you have is a pro athlete’s salary.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Wall Street Survivor and first published on fool.com. It has been edited for fool.sg.