“Don't lock your money into real estate!” » A financial analyst's advice for footballers who don't know what to do with their money

Radu Puiu, financial analyst at XTB Romania, explains to Gazeta Sporturilor what are the mechanisms behind “concentrated income” and why the discipline from the field must be urgently transferred to the management of bank accounts. From the “friendship tax” to the real estate mirage, a financial survival guide of sorts for those accustomed to glory but unprepared for the first day after retirement.

– How important is financial education for an athlete and where should they start while they are still active?
– Financial education is very important regardless of the field of activity, but, for an athlete who is part of a slightly different category of activity (incomes generally higher than average, but on a much narrower time horizon (15-20 years in happy cases)), it is even more important. Understanding asymmetric risk is essential. An athlete must understand that, in fact, his human capital has a close correlation with his health and physical ability. Education should begin with “cash flow modeling” and setting a strategy for transitioning from a fast-growing active income to income from different sources as your career ends. Statistics are numerous, but few are updated to the situation of recent years and can be considered reliable. However, according to a 2009 Sports Illustrated article, 35% of NFL players either go bankrupt or experience financial hardship within the first two years of retirement, and approximately 60% of NBA players, 78% of NFL players, and a significant percentage of MLB players go bankrupt within the first five years of retirement. Considering the income level of this category of players, the importance of financial education becomes obvious.

– Athletes earn well, but in the short term. Why is it important for an athlete to think about investing early in their career?
– Athletes face “concentrated income”. They are likely to earn 80% of their total lifetime income in just 10 years. If they wait until retirement to invest, they are wasting the most powerful tool in finance: time. Lifetime investments allow them to use their maximum salary to build an “income machine” to replace their lifetime earnings on the day they “hang up their boots.”

“Don't lock up money in prestige assets like luxury cars or real estate”

– What are the most common mistakes athletes can make when managing their money?
– The main mistake is that they do not take into account the fact that their activity has an “expiration period” and they do not prepare for the period after the sports career. This makes the transition extremely difficult without having a plan in place from the active period. The approach also leads to the repetition of other mistakes. Maintaining an extravagant lifestyle and the “friendship tax” are two very expensive items. Many feel compelled to maintain a high-status image or fund the business ideas of friends and family. From a technical point of view, the biggest mistake is lack of liquidity, blocking all funds in “prestige goods” such as luxury cars or real estate, which “burn money” instead of generating it. “Invisible entourage” can be another mistake because often it's not just the people close to you, but acquaintances of acquaintances can appear to offer uninspired advice or “guaranteed” business ideas.

– Many athletes want to go into business after retirement. What types of investments are suitable for someone with no financial experience?
– Most of the time the best entrepreneurship advice is to invest in areas you know so you have an “edge” and can offer quality products or services. If we talk about investing in the capital market, we can look to low-cost index funds and ETFs (exchange-traded funds). They allow an athlete to own a piece of the best companies in the world without having to be a stock market expert. They offer diversification and professional management at a very low cost, but we must not forget that there are no investments with guaranteed earnings, each type of investment instrument having a certain degree of risk. That's why it's important to have a foundation of financial education so you don't invest in something you don't understand.

“Discipline, resilience in the face of failure and the ability to function under extreme pressure all help financially”

– Are there qualities from sports that you think could help former athletes in entrepreneurship?
– Discipline, resilience in the face of failure and ability to function under extreme pressure. Entrepreneurs, like athletes, must be open to guidance. If a former athlete applies the same “match analysis” mentality to business failures, analyzing mistakes to adjust strategy, they will have a considerable advantage.

– What businesses should athletes be careful or avoid entering?
– Any activity with high operational intensity and low scalability. Restaurants and retail are notorious for tight profit margins. For an athlete, the “cost of time” is high, he should avoid businesses that require intense supervision and instead look for capital efficient initiatives or private equity investment opportunities where he can call on professionals. Unless the athlete has a deep passion and has a trusted partner or manager who can run the business, they can become “black holes” for capital.

– How important is it to have a business partner or a consultant?
– They are essential, especially during activity, but must be selected carefully. An athlete needs a “coordinator” to defend his interests. A good consultant should not be a “yes man”, but protect the athlete from uninspired business. Thus, it must be confirmed that the consultant's interests are aligned with the athlete's long-term stability, not just commissions. A partner should be complementary. If the athlete brings the capital, the partner should bring proven operational experience or technical knowledge. A partnership should not only be based on trust, but bring additional expertise or an impressive “track record” in the respective field.

– Can an athlete use his image to increase the value of his investments?
– There are several methods by which an athlete can use his image to improve investment results. First of all, if we are talking about a personal business, in which he is involved, he can use his image for promotion, benefiting from his “image capital”. Another example may be by choosing to promote in exchange for a stake in that business. Image becomes a marketing engine that drives company value, turning a standard promotional contract into a long-term source of income. An early example of such an approach was that of Michael Jordan, who requested royalties from Nike for every pair of sneakers sold bearing his name. Thus, he benefited from the “weight” of his name even after retiring from basketball.

– What does a balanced portfolio mean for a former athlete?
– It means the segregation of funds in several accounts. A safety portfolio (cash and highly liquid assets like bonds for current expenses), a growth portfolio (which can be a mix of stocks and ETFs) and a more complex portfolio (real estate or private businesses). Balance means diversification, which means that the daily life of the athlete is not affected during more difficult times for a certain sector.

“In 10 years, your life will look like the decisions you make now”

– If you had a 27-year-old athlete in front of you, in the middle of his career, who asked you “What do I do with my money?”, what would you say to him?
– I would say that although he is at the peak of his career physically, he is in the middle of his professional career if he is lucky to avoid injury. In 10 years, the image in the mirror will show a 37-year-old person who will depend entirely on the choices he makes today. Thus, I would suggest that he create a well-planned plan where he sets a fixed “salary” that is a portion of his income to use for recurring expenses, and save the difference until he can get the knowledge to have a well-planned investment plan.

– Why do you think real estate is such a popular option for athletes or former athletes?
– It represents a class of assets that is much easier to understand, being tangible. In addition, if we are talking about real estate development projects, the athletes can use their image to promote the said complex, which is a plus. Real estate offers leverage and tax advantages that are easy to understand. However, athletes often treat them as a passive investment when in fact it is an operational business. They see the capitalization rate but ignore the vacancy risk and maintenance expenses.

– What are the risks that athletes ignore when investing in real estate?
– Concentration risk and liquidity are two ignored elements in real estate. Many athletes invest 100% of their net worth in local real estate. If the local market collapses (as was the case in 2009) or an unforeseen geopolitical phenomenon occurs (the conflict in Ukraine) their entire wealth is at riskthe respective properties not being able to be sold even with considerable discounts. They also overlook maintenance, taxes, maintenance and insurance costs, which erode returns if the property is not rented out. In addition, athletes often overlook the liquidity of investments. You can't sell 10% of a house to pay off an unexpected expense.

– If you had to give one piece of advice to an athlete approaching retirement, what would it be?
– Create a plan for life after retirement from work. It must be understood that this will be a new reality that will no longer involve daily training, training camps, matches, but will bring bills and a lot of free time, which will require “maturing”. Very often athletes, especially high-performance ones, are in a “bubble” because they don't have to deal with many of the tasks of an average person. Meals are taken at the training base, housing in many cases is rented by the sports club, which bears the related expenses. Thus, retirement represents a new stage of life, and for many athletes who do not prepare from active time it can be a cold shower. Transition is a psychological change. Financial peace of mind comes from realizing that success is not proven by spending, but by future financial security. You can compare retirement with a new debut season. You start from scratch in a new league. Stay modest, keep expenses low, and don't jump headfirst into an unknown project just to occupy time. Your greatest asset now is not physical strength, but patience.