Why Athletes Go Broke

The latest to join the ranks is Allen Iverson. After earning $154 million in the NBA, and even more through sponsorship deals, Iverson is now broke. A judge recently ordered Iverson to pay a jeweler $860,000 but once he revealed that he couldn't pay, the judge ordered his bank account to be seized. 

College football fans know of Raghib "Rocket" Ismael, the presumptive NFL No.1 draft pick who played in the National Football League as well as the Canadian Football league. Ismael earned around $20 million in his football career, but lost all of it due to a string of bad investments that included phone-card dispensers, a movie and cosmetics. 

Marion Jones was a three-time gold medalist making more than $7 million per year until she was indicted on check fraud and IRS forgery charges among other problems. She lost all of her medals and later filed for bankruptcy after serving six months in jail. 

Finally, who was once worth up to about $400 million and later had less than $700 to his name? Mike Tyson. After spending time in jail for rape, and dealing with a wealth of other problems, Tyson has slowly recovered but is still worth a fraction of what he once was. 

According to "Sports Illustrated," 78% of NFL players who are retired for only two years file for bankruptcy, and after five years of retirement, 60% of NBA players suffer the same fate. Why have so many athletes and celebrities, who were once financially well off, later found themselves bankrupt and more important, what can we learn from their falls from financial grace?

Small Earnings WindowAthletes have a unique problem that many other professions don't: the earnings window is small. While the more traditional careers may allow a person to work 30 to 50 years, a professional athlete will work only a fraction of that time. This leaves the retired athlete with the job of managing what they have to last for the rest of their life with only a fraction of their old salary being earned. 

Although most people aren't in that situation, the lesson to learn here is that our income is never guaranteed, and living within our means while putting money away for the unknowns of tomorrow is a necessity.

Lack of Financial KnowledgeAccording to "Sports Illustrated," most athletes lack the financial knowledge to manage the large sums of money they're earning. Allen Iverson is one of the many athletes who lived a lifestyle based on his peak earnings, yet failed to think about the money he would need later in life.

Even worse, some like Rahib "Rocket" Ismael, trusted his money to attorneys and other advisors who steered him into overly risky investments that later left him bankrupt.
Regardless of your net worth, you have to play an active role in the management of your financial affairs. Even the best money manager won't care about your money as much as you do, and for that reason, you have to be the final and most important decision maker and those decisions have to be made based on your financial knowledge. If you know very little about managing money, it's not too late to change that.

ExtravaganceWarren Buffett may be one of the richest men in the world, but you may not know it by looking at his modest home and relatively simple lifestyle. He chooses a modest lifestyle because he knows that the accumulation of "stuff" is contrary to good, long-term money management. Many of the athletes who find themselves bankrupt overspent on extravagance only to find their possessions nearly worthless later in life. Regardless of your level of income, live a lifestyle that doesn't stretch your budget. Not only will it set you up for financial freedom, but it's far easier to sleep at night when you're not worried about the next paycheck.

The Bottom Line
Take a cue from the many athletes who have found themselves bankrupt later in life. Spending, rather than saving, is a losing proposition regardless of how much money you have. If you don't consider yourself a good money manager, ask for help.

Read more: http://www.investopedia.com/financial-edge/0312/Why-Athletes-Go-Broke.aspx#ixzz1oh5o8bgj