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Six Ramifications of Not Having a Financial Plan

June 8, 2020
Illustrative design of number 6 drawn on notebook

And Why Financial Planning is Especially Important for Athletes and Entertainment Professionals

Let’s be brutally honest, professional athletes and entertainers have a bad reputation when it comes to managing their finances, and it’s not always unjustified. Michael Jackson, arguably the most famous pop star of all time, was reported to be more than $400 million in debt at the time of his death in 2009.1 While I’m not privy to the details of his downfalls, I would be willing to wager a guess that he didn’t have a written financial plan. Or if he did, he was not adhering to it.

Sports Illustrated once estimated that 78 percent of NFL players become bankrupt or are under financial stress within two years of retiring from the game, and 60 percent of NBA players run out of money within five years of retirement.2 According to Charles Schwab’s 2019 Modern Wealth Index Survey, only 28 percent of Americans have a written financial plan.3 Yet, for several reasons, it’s especially important for professional athletes and entertainers to implement and adhere to a financial plan.

  1. Uncertain careers –Professional athletes and entertainers face all kinds of uncertainties in their careers.
    • Athletes put their health and fitness on the line every day to compete at the highest possible level, which makes them susceptible to unexpected, and potentially career-ending, injuries.
    • Actors often face long periods of unemployment due to the intense competition for roles and frequent rejections. In fact, the Actor’s Equity Association has historically quoted weekly unemployment rates among actors as high at 87 percent.4
    • Musicians are increasingly crunched by the low pay associated with streaming and online music services. And, with concerts and tours being cancelled country-wide, they are currently unable to make money from live performances.
  2. Early retirement – The career span of professional athletes and entertainers is typically significantly shorter than that of other professionals. Players have, on average, 3.3 years in the 2. Early retirement – The career span of professional athletes and entertainers is typically significantly shorter than that of other professionals. Players have, on average, 3.3 years in the NFL, 4.6 years in the NBA and 5.6 years in the MLB.5 Even with a multi-million dollar salary, that’s not a lot of time to save enough to last a lifetime.
  3. Expectations – After signing on with a big movie or professional sports team, athletes and entertainers are often expected to “live large.” The pressure to showcase a certain lifestyle comes from co-workers, family members, friends and the public. When you combine these expectations with the fact that many of these professionals have little experience managing their finances, you have a deadly combination of big spending and little restraint.
  4. Unsuitable investments – The moment the ink is dry on deal to perform or compete, athletes and entertainers are often bombarded by friends, distant family members, neighbors and former teammates with “can’t lose” investments they simply must get into immediately. Most of these opportunities will not pan out and getting in over your head in an investment that doesn’t meet your needs could be financially devastating.

Any good financial advisor will tell you that the first rule of successful personal finance is to have a clearly defined plan in place. This point is emphasized by Peter Mallouk, the founder and CEO of Creative Planning, in his book The Five Mistakes Every Investor Makes and How to Avoid Them. Not having a plan is mistake #1.

Peter invokes Yogi Berra’s sentiment that “If you don’t know where you are going, you’ll end up someplace else.”6 You wouldn’t start a race without knowing where the finish line is. However, Peter advises that, “Most investors invest without an endgame laid out in advance. Without a destination, it is easy to drift off course. Without a plan, it is easy to change the strategy midstream, increasing the odds of messing everything up.”

Before you spend or invest a single dollar, you should have a plan. It doesn’t need to be a 150-page road map of how you will budget, save and invest every penny for the rest of your life. Instead, start with a plan that is simple and straightforward.

Need more incentive to begin the planning process? Consider the following. A written financial plan can:

  • Increase your financial confidence and peace of mind
  • Help you budget and meet your financial goals
  • Lead to better habits
  • Help you identify, avoid and address various risks, including investment risks, insurance risks and estate planning risks
  • Guide your risk tolerance and inform how aggressively or conservatively to invest
  • Account for a short career and provide for a long retirement

Regardless of whether our not you have a financial plan in place, you are likely aware of the benefits. Less talked about are the ramifications of not having a written financial plan.

Ramification #1 – Coming up short on your financial goals

It is often said that failing to plan is planning to fail. By not taking time to reflect on where you are financially, where you want to be and how to get there, you are unlikely to achieve your financial goals. Planning early gives you more flexibility when life throws complications your way.

Ramification #2 – Missing an opportunity to leave a legacy

Tax and inheritance laws are increasingly complex, and the best solution for other investors may not be what’s best for you and your family. Documenting your financial priorities, such as paying for children’s education, purchasing a home, funding your retirement, investing in a business or enhancing the amount you can pass to your heirs following your death, can help you choose the right path toward achieving your long-term goals.

Ramification #3 – Taking on more risk than necessary

There is inherent risk in everything from investing, to not investing, to income streams, to the general risks of life and your career. Many of these risks are necessary and worth taking. Others should be planned for by implementing appropriate insurance and a deliberate, diversified investment portfolio. Without a plan, however, it’s difficult to identify what risks you are taking that are necessary, which ones you shouldn’t be taking, and which ones can be mitigated through appropriate actions.

Ramification #4 – Having an investment strategy that is not aligned with your goals

A good financial plan helps you understand your current financial situation in relation to the goals you are trying to achieve. Only with this knowledge can you begin to identify an investment strategy to help you get to where you want to go. Without a plan (in other words, without knowing where you are and where you’re going), it’s impossible to build an investment strategy to achieve your specific goals.

Ramification #5 – Trying everything because you aren’t focused on the right thing

The options for where and in what to invest are endless. Do you choose mutual funds, exchange-traded funds, hedge funds, stocks, bonds, annuities, other insurance products, REITs, commodities…? The list goes on and on. Without a plan to keep you focused and on course, it’s easy to get sidetracked with the wrong investments charging high fees. A solid financial plan can help you stay the course by providing guidelines around the type of investments that are right for you as well as those you should avoid.

Having a plan is essential to building, understanding and achieving your goals. Planning can help increase your level of confidence and comfort, result in more constructive financial behavior, and ensure your family will be provided for throughout your lifetime and beyond. Ultimately, a good financial plan puts you in control of your future.

Starting a financial plan may seem like chore, but it doesn’t have to be. If you find you’re having a hard time taking the first step, a professional advisor can help.

Creative Planning Sports and Entertainment is a specialty practice of Creative Planning. Each of our dedicated teams specializes in working with athletes and entertainment professionals and includes an attorney, a CPA and a CERTIFIED FINANCIAL PLANNER™ practitioner. These experienced professionals work with clients to develop personalized financial plans that take into consideration a wide range of factors, including their current financial situation, goals for the future and any challenges they may face. If you’d like to begin the process of building your financial plan, please schedule a call.

1 https://www.businessinsider.com/rich-famous-celebrities-who-lost-all-their-money-2018-5#michael-jackson-was-reportedly-at-least-400-million-in-debt-when-he-died-unexpectedly-in-2009-1

2 https://andscape.com/features/why-do-so-many-pros-go-broke/

3 https://www.aboutschwab.com/modernwealth2019

4 http://stageraw.com/2016/07/01/aeas-latest-missive/

5 https://andscape.com/features/why-do-so-many-pros-go-broke/

6 https://www.goodreads.com/quotes/499411-if-you-don-t-know-where-you-re-going-you-ll-end-up

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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