Blog | Personal Finance

Why High-Paid Athletes Go Broke...and What You Can Learn From It

Getting past the “Money Makes You Rich” myth

This week one of the biggest sporting events in the world kicks off, literally. I’m talking about the World Cup of course.

Whether you’re a soccer fan or not, there’s no denying that the sport is the most popular in the world—and also the richest. Each year, it seems a new record for player transfer fees and salaries is set.

Just last year, French club Paris Saint-Germain paid over $500 million to secure rights to the Brazilian player Neymar. The amount was split between a transfer fee of $263 million and a five-year contract for Neymar that made him the highest paid player in the world with an annual salary of $53 million. And there’s already rumors that Spanish club Real Madrid are ready to break that record to steal Neymar away.

This means that when you watch the World Cup this year, you’ll be watching hundreds of millions of dollars in assets running around on the field. Because to the clubs that sign these players for major deals, that is what they are.

Sports smarts vs. financial smarts

With so much money flying at soccer players—and athletes in other sport—you’d think that those players would be set for life. But the hard reality is they are not.

According to Bleacher Report, a study by Xpro found that three out of every five Premier League Players, England’s top league and one of the highest paying the world, will go broke after they retire and declare bankruptcy.

This is not surprising when you start to realize that most of these athletes have immense sports smarts but very little financial smarts. In most cases, soccer players and other athletes are signed to enormous contracts when they are very young. Additionally, they often come from families that are not rich, and sometimes even from families that are very poor.

The adrenaline rush of being away from home and having money burning a hole in your pocket is more temptation than most players can resist. And the lack of financial smarts can lead to some very hasty and poor decisions.

Take for instance a recent player for the club Liverpool who opened his first check and immediately went and purchased a Range Rover. Later he learned he couldn’t afford the payments.

“He got confused between his net and his gross income,” said Peter Fairchild, a tax advisor who helps the young players, according to FourFourTwo. “I had to tell him what he would be earning after the taxman had taken his share. Thankfully, we had a good relationship with the garage in question and they were willing to take the car back.”

If you don’t even know the difference between Gross and Net income, you’re in for a world of hurt when it comes to a windfall of cash.

Money doesn’t make you rich

All this serves to reinforce a principle that I’ve written about before, money doesn’t make you rich.

There are six reasons why this is the case:

1. People who grow up without money have no idea how to handle it
2. When people come into money, the emotional euphoria is like a drug that boosts your spirits
3. The hardest thing for many people is to say no to people they love when they ask to borrow money
4. The person with money suddenly becomes an “investor,” but without financial education and experience, the fear of losing money increases
5. The person does not know the difference between good and bad expenses

If you read the articles I’ve linked above, you’ll see many examples of these truths in the stories of players who have gone broke.

You need financial smarts to be rich

At a young age, I knew I wanted to be rich. I saw my parents struggle financially and the stress it brought, and I knew that wasn't for me. I wanted to buy nice things, be generous, and enjoy life worry free.

When I told my rich dad, my best friend's dad who was a successful businessman, that I wanted to be rich, he asked, “How do you think you become rich?”

“You make a lot of money,” I said confidently.

“That's partially correct,” my rich dad said. “But you can make a lot of money and still not be rich.” He went on to explain how some employees and self-employed people made a lot of money but weren't rich because they had low financial intelligence. They lost most of their wealth to high taxes and by purchasing liabilities.

That was too much for my young brain to comprehend. I just knew I wanted to make a lot of money. But now that I'm older and hopefully wiser, I understand what my rich dad meant. Money doesn't make you rich. Your financial smarts does.

This is why I created Rich Dad to help people who have no financial education to learn how money works and how to make it work for them. Because once you learn how to have financial smarts, you cannot only make money but also do something even more important—keep money.

The four forces that steal your wealth

Here’s a bit of truth that most people in the world won’t understand, even when athletes are making millions of dollars, most aren't really rich at all.

Why?

Because they lose so much money to four wealth-stealing forces: Taxes, Debt, Inflation, and Retirement.

Athletes, as well as others, who make a lot of money aren't necessarily rich because they lose so much of it to those four forces. High-earning professionals are some of the highest taxed, don't have any investments that provide cash flow and hedge against inflation, are overly-burdened with debt, and aren't ready for retirement-meaning they need their paychecks or they're broke.

It's entirely possible, for example, that two different people each making $1,000,000 could have entirely different financial lives. One could be poor and the other rich.

Here's an example. Of the two people who both earn $1,000,000, one pays nearly 50 percent in taxes, has a crippling mortgage, saves money in a passive retirement account that barely keeps up with inflation, and spends money freely on liabilities like cars and clothes that put him deeply into bad credit card debt.

The other pays nothing in taxes, invests her money into rental properties that provide passive income that adjusts with inflation, and has a plan to use that passive income to purchase more passive income investments. Who's richer?

It's possible to make a lot of money and use the forces of taxes, debt, inflation, and retirement for your benefit-but it takes high financial intelligence.

Here's the fundamental problem for 'the rich', high-income employees: They have the highest tax burden, the lowest control over their retirement, and can sell only their time.

Perhaps that last bit is the most troublesome for those who are high-paid athletes. The average sports star only has a short window to earn money and could easily have a career end with an injury.

You need a new mindset about money

If you want to be really rich, you need to have a new mindset about money. This means moving from the left side of the CASHFLOW Quadrant to the right side.

There are four types of people: Employees (E's), Self-Employed (S's), Big Business Owners (B's), and Investors (I's). The E's and S's are on the left side of the CASHFLOW Quadrant and the B's and I's are on the right side of the quadrant.

Those on the left side pay the most in taxes, have the least control, and will never be truly rich. These are people like blue-collar employees but also people like doctors and lawyers who are self-employed but really don't own a company-they own a job. They are victims to the four wealth-stealing forces.

Those on the right side, however, have all the tax advantages; have control over their money, business, and investments; and have the possibility of infinite returns because they know how to create money out of thin air through passive income. And they know how to use Taxes, Debt, Inflation, and Retirement to make them even richer-not poorer. If you want to learn more about the CASHFLOW Quadrant®, I encourage you to read my book CASHFLOW Quadrant®: Rich Dad's Guide to Financial Freedom.

To be on the right side of the CASHFLOW Quadrant®, you need a high financial intelligence. That means you need to continually increase your financial education. Read books, attend seminars, network with like-minded individuals, and change your mindset.

Don't settle for the trap of just making a lot of money. Increase your financial IQ and become truly rich.