The mechanism by which many athletes and millions of Americans go broke can be easily visualized by a metaphor of a large bathtub.
For top athletes, the tub is better represented by a swimming pool. But for now let’s keep it a large tub. The faucet represents our earned money. The more we earn, the more water is pouring into the tub.
Of course, the drain represents our expenses. As we earn more, the faucet pours out more and more water, filling the tub. As we spend more, the drain gets bigger and bigger, letting more water out and lowering the level. That is our cash flow. I am using this example only to represent cash flow, not net worth. Cash flow is the most important figure in determining a person’s ability to live comfortably, not net worth. After all, it doesn’t matter what you own if you can’t pay your bills, does it?
Look at the water in the tub. As we earn more than we spend, the water level rises. When we spend more than we earn, the water level drops. While this is a simple example, it is a tremendous visualization of your cash flow.
What trips up most athletes who fail is not the uncontrollable spending that burns up entire contracts quickly (although it certainly happens quite spectacularly for some). What typically gets guys is when they earn a lot of money, create a large lifestyle, and then retire with a good chunk of money in the bank. They have a large tub filled with water with the drain wide open. As long as the faucet of income is on, the tub remains relatively full. But when the faucet is shut off, the drain isn’t very easy to close.
They have a large home and its expenses, kids to support at a high level, etc. The drain seems to get bigger, and water rushes out. They have to find a way to open the faucet and get more water pouring in. They also need to slow the drain by cutting things out. Usually it is a race to see which happens first.
Many players get hammered when a crash happens, a deal goes bad, or get a divorce. For some, it can simply mean that interest rates go down and their interest income no longer covers their monthly expenses. What about working? As many people find out when they have a life transition, it is tough to find a job that pays CEO money when your skill set doesn’t have anything to do with business. Athletes actually have a similar experience to newly divorced stay-at-home moms. They try to enter the workforce after being out of the market for 10-plus years, competing with people with contemporary, specific experience. It can be tough to turn that faucet on high.
What has that got to do with me, you ask? Remember that athletes are just an exaggerated version of you. They retire earlier, but you will have the same issues later on. Money managers will try to explain that you will spend less in retirement than when you are working. In real life, you now have 40-60 hours a week to fill that you didn’t have before. What do you plan on doing for that amount of time that doesn’t cost money? What about traveling to see the grandkids, or golfing, or getting out of bed? It all costs money. So look at your own tub to see where the faucet will be turned on.
It will never happen to me. Or will it?
Most players listen politely when they hear stories from former players but believe it will never happen to them. They see their situation differently. Maybe they believe that they make more money, so they will be fine. Or they trust their agent to do the right thing for them. Or they will be smarter and not overspend. Or they don’t have a lot of kids or extended family to support. The sad truth is that they can do everything “right” and still fail. When you look at the system in detail, you will recognize it is designed to help you fail more than it is designed to help you succeed. You will start to look past the sales pitch and see the underlying lie behind it. You will see how the miracle of projections is dangerous at best and a flat-out scam at worst.
It takes a dedicated person who is constantly vigilant to make it. It is no easy task to navigate the propaganda waters that pass for financial information in America today. Want a simple example on how you can do everything “right” and still lose your shirt? Look no further than the fixed income market. Ten years ago, you wanted something that you could count on to pay a safe income. You invest $10 million at 6.5 percent in a safe product. It is paying you $650,000 per year, so you feel confident you can maintain your lifestyle. Now you learn that for the last five years, interest rates have dropped, and now you are making $200,000 per year.
Plus, your quality rental real estate has gone down in value by 40 percent and now is less than worthless. Your stock portfolio went down by half, but luckily you didn’t panic sell and now it recovered to about where it was. Unfortunately, the dollars it brings you are really only worth about 60 cents each compared to 10 years ago. But if you listen to the news, there is no inflation. Especially when they only count the items they want to and not the items that actually went up.
Here’s your situation: You are cash flow negative, your real estate is lost, your net worth went down by a big chunk in real terms and you are depleting your savings. And what did you do to deserve this? You were a good saver, bought terrific properties in the best areas and invested with a conservative strategy in the stock market. All of the things that you were told were the “right” things to do. Does any of this sound familiar to millions of people in America right now? Aren’t you glad that you did all of the “right” things?
Purchase a copy of Fast Broke from Amazon.com for $14.95.
Danny Schayes is a Director of Business Optimization at Intensity and a leader in the business of professional sports. Schayes frequently advises sports organizations in complex business matters that include contract negotiations, pricing strategy, marketing optimization, and executive leadership. Follow him on Twitter.
EXCERPT I: WHY PLAYERS GO BROKE
EXCERPT II: SMART MONEY VS. DUMB MONEY
EXCERPT III: WHY ATHLETES AND REGULAR PEOPLE DON’T GET IT
EXCERPT IV: HOW TO GO BROKE ON $100 MILLION
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NO SMOOTHING MEANS $90 MILLION SALARY CAP, FISCAL INSANITY
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