Big league gold mine, or major minefield?

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This article was published 30/06/2023 (1124 days ago), so information in it may no longer be current.

Money is a heck of a drug.

It can be great medicine curing many economic and social ailments.

But too much, too fast can do the opposite.

While an unusual metaphor, it’s an apt one especially for newly minted pro athletes, including those drafted to the NHL this past week.

“When you’re young and a lot of money comes your way very quickly, you haven’t often had the time to develop a long-term relationship with money,” says Stephanie Condra, senior director at BMO Private Wealth.

“It’s a lot at a young age when impulses and short-term satisfaction tend to rule over long-term diligence.”

Of course, most parents won’t have children who grow up and make it to the big leagues, or some other occupation leading to sudden, exorbitant wealth.

Mathematically, there is a 0.00075 per cent chance of an athlete turning pro.

That’s slightly better than being hit by lightning (0.0067 per cent).

Still, dare to dream.

Or, possibly, envision a big financial nightmare.

Certainly, enough stories of misspent pro athlete wealth are floating on the internet.

And one often-cited Sport Illustrated study from 2009 notes that nearly 80 per cent of NFL players were insolvent or at least under financial stress two years after retirement.

That statistic speaks to the pitfalls of the money windfall for pro athletes, says Sylvain Brisebois, senior portfolio manager with BMO Nesbitt Burns, who works with NHL players and coaches.

“To a 19-year-old who gets an NHL contract with a signing bonus of $275,000, this sum may sound like a lot,” says the Ottawa-based adviser.

But after taxes, agent fees and other costs of doing business, a salary of $1 million annually might look more like $400,000.

That’s still far more than most people will ever earn in one year.

But the temptation to buy big ticket items is massive and the potential impact of those decisions is equally weighty.

“There needs to be awareness to say that this isn’t enough money for the rest of your life,” Brisebois says.

The challenge for these individuals is their wealth journey is turned on its head. They might only receive a first contract of a few hundred thousand dollars and that’s it. Invested well, that sets them up for life.

The opposite is also true.

Even successful pro athletes only have a small window of earning big money, generally from their mid-20s to mid-30s. After that, their income potential fades quickly — but perhaps not their burn rate through cash.

“It’s kind of like some people who inherit money, or win the lottery where it’s largely gone in a year or two,” says John De Goey, portfolio manager with Designed Wealth Management in Toronto.

In contrast, most middle-income folks go to post-secondary, start out with a modest salary, and by their 40s and 50s, they’re earning peak income (though generally far less than a pro athlete). Most importantly, we middle-income earners have time to learn to become financially responsible over decades.

Young athletes don’t yet have that wisdom, but they have the money to start spending at a high rate, Brisebois says.

“The reality is they can start on a much higher spending rate which may not be sustainable long-term.”

That said, even a contract worth a few hundred thousand can be life-changing for the better. A 21-year-old who invests $100,000 into a low-fee balanced fund averaging about six per cent a year (net of fees) will have about $600,000 in 30 years.

Getting good financial advice is obviously paramount. History shows that doesn’t always happen, Condra notes.

“You sometimes see family members putting up their hand to be that adviser, and there can be a conflict there because what they’re recommending could be benefiting themselves.”

It bodes well for anyone — pro athlete or not — who wants to build wealth to get advice from an accredited, objective adviser, be it a certified financial planner, a licensed investment adviser or discretionary portfolio management.

Still, pro athletes — and again anyone for that matter — benefit from basic financial literacy.

“Not everyone has an aptitude or an interest in investing and all the details,” De Goey says. “But you can be financially responsible at the very least.”

In short, know the basics.

Noah Booth, an 18-year-old, recent high school graduate from Ottawa, certainly knows those basics.

A high-performance athlete — a distance runner — he has also long been interested in financial literacy.

So much so he authored and published a book (with RBC’s help) during the pandemic to share his insights with other youth, called A Rich Future: Essential financial concepts for youth.

“Learning (about money) from a young age will really help whether you get that first big pro contract or job, or whether go to university and face the big financial burden of paying tuition and staying in residence,” he says in a recent call with the Free Press.

Indeed, his book does focus on the basics: earn, budget, save and invest.

Booth notes he has stepped back from being an elite athlete now, no longer running 20 kilometres a day. “I run mostly for fitness and for fun.”

Instead, he is focused on post-secondary.

And he aims to leverage his money know-how to build a financially healthy life while in university and beyond.

He hopes his book can provide similar inspiration for others his age, including young athletes signing professional contracts.

“A Rich Future really just talks about the importance of earning money, and then reducing spending to save more, so you can invest and grow your money, putting it to work for your future.”

Words to live by — pro athlete or not.