What Is Financial Planning for Professional Athletes?

Every person, irrespective of income and risks, requires financial planning. Athletes are no different. As a matter of fact, they are a particular group of individuals whose earning and risk tolerance varies from ordinary and rich individuals. 

Financial planning for professional athletes is vital to ensure their secure future. This is because the income of an athlete relies on factors like age, return, performance, competitors, endorsements, brand engagement, etc. All in all, these factors make financial planning vital for them.

Athletes need proper financial planning to set aside a portion of their income from their hefty paydays to ensure their future needs. Unlike a common individual or businessman, the future income of an athlete cannot be forecasted and planned. They are highly vulnerable to injuries, age and performance, etc., which can end their career within a second. 

Primarily, factors including inconsistency of income age, and lack of awareness about investment options requires them to consider financial planning. Typically, an athlete earns less than non-athletes in ten years post-retirement, which is why having a financial plan is an effective way to prevent uncertainty of income down the line.

The following are the best ways to do financial planning for athletes:

• Have Proper Budgeting  : Monitoring your income and expenses and proper cash flow management is the first thing that you need to follow to ensure your future income stability. Although cash flow is a common term used in the business world, it equally applies to the careers of professionals and athletes. Without a proper budget, spending lavishly to maintain a lavish lifestyle can even make you fall into a debt trap. So, proper budgeting from the beginning is the key.  

• Build Cash Reserves: Having regular savings to build a cash reserve and investing it in different schemes like mutual funds, life insurance, bonds etc., can generate consistent returns. Therefore, it makes sense to put aside a certain percentage of your income every month to build your cash reserve. Even if this requires you to forgo certain expenses, do not hesitate.

• Lessen Tax Burden With Proper Strategies: During your high-earning days, you will have to face a huge tax burden, reducing your income grossly. Therefore, make sure to invest in different tax savings schemes like life insurance, public provident funds, national savings certificates etc., once your income comes within tax brackets. This will lessen your tax burden and equally strengthen your investment portfolio.  

• Get Disability Insurance: Since having your physical ability is essential to generate income, your financial life can be affected grossly as a consequence of getting injured. Your professional life is highly prone to injury, which may end up making you unfit to get back to sports even before you can officially retire. So, make sure to get disability insurance to protect your financial stability.

• Plan for Early Retirement and New Career: Irrespective of opportunities and achievement, an athlete needs to make a plan for their retirement. Apart from ageing, there is no telling when you have to leave the sports arena suddenly due to an unforeseen injury or other situations. This is why having a new career plan for your post-retirement period is essential. This time, your investment through proper financial planning can be helpful to start your new venture.  

• Take Assistance From Sports Financial Advisors: Hiring a specialised sports financial advisor makes sense as they can help you to formulate your financial plan and achieve your goal. The financial advisor considers asset preservation, high income, investment growth, and long-term success while making the financial plan.

The following are the financial management strategies for professional athletes:

• Obtain total advantage of retirement accounts
• Reconsider the signing bonus structure
• Formulate sustainable investment strategies
• Invest in disability insurance
• Reduce tax burden

Following are some essential tax strategies for professional athletes:

• Make sure to pay your taxes and file your tax returns timely to avoid paying penalties and interests. 
• Your tax liability is determined according to Income Tax Slabs based on your annual income. Make sure to understand the slabs to leverage the benefits of tax exemptions.
• Choose the right instruments that help you get tax benefits. A few of them are stated below:

1. Public Provident Fund (PPF)
2. National Savings Certificate (NSC)
3. Tax savings fixed deposit in bank
4. Life insurance schemes like ULIP, term plan, endowment plan, etc.
5. Disability insurance scheme

1. Early career — First Contract

In this phase, an athlete needs to maintain a disciplined approach to customise their finances. Mentioned below are the steps of this disciplined approach:

Step 1: Make a cash-flow plan and budgetary plan, which comprise automobiles, housing, and other expenses.

Step 2: Set restrictions to control pressure from your family and friends for money.

Step 3: Retain a healthy credit history.

Step 4: Clearly understand all about casualty, disability, life, and other insurance plan coverage.

Step 5: Do proper planning for taxes, like multi-state taxation, international taxation, withholding, tax residency, and taxes on incentives and bonuses. 

Step 6: Go for a diversified investment plan and avoid over-exposure to “products” and illiquid “deals.”

Step 7: Begin an estate-planning work that comprises a will, healthcare proxies, trusts, etc.

2. Mid-Career — Second Contract

It is the most vital phase in the life of an athlete. During this time, a person enjoys financial success. So make sure to keep an eye on the spending plan. This way, it will help you to fulfil your needs and save for the future. Steps here include:

Step 1: Stay disciplined with family and friends who may desire to improve their lifestyles alongside you. 

Step 2: Go for long-term investments in a diversified portfolio in order to improve your chances of succeeding.

Step 3: Build a more structured estate plan to carry out tax minimisation and wealth transfer.

3. Late Career — Last Contract (Short-Duration)

With time, professional athletes need to plan for the future to meet their professional, personal and financial goals. Steps comprise:

Step 1: Consider a permanent residence

Step 2: Go for planned wealth transfer and charity opportunities.

Step 3: Focus on investing in well-organised areas, like private business opportunities and real estate.

Step 4: Go for education plans for children.

Step 5: Incentivise your fame to generate post-career employment and other career opportunities.

4. Post-Career

In this phase, retired athletes maintain a normal lifestyle which matches their financial capacity. The steps include:

Step 1: Locate a career which generates personal passion.

Step 2: Stay away from the "deals" which have no proper track record and are not researched thoroughly.

Step 3: Fulfil the financial needs of your life successfully by taking help from an advisory team. 

Consequently, you can enjoy financial independence to commence the second innings of your life after retirement.

Following are some major mistakes that athletes make during their financial planning:

• Not Planning for Long-Term: Athletes who depend on regular paycheques and spend lavishly without having any financial plan, will likely face trouble in the end. Therefore, they should focus on funding for the rest of their lives in future. Several athletes have done fascinating jobs with investments, endorsements, or even new careers in various industries.

• Not Keeping Adequate Emergency Fund: Holding sufficient money as savings is essential for everyone to cover expenses and enjoy financial success. When it comes to top athletes, trades, off-seasons, injuries, and several other factors may slow down their flow of income. Thus, it is necessary to have a substantial emergency fund to help them retain a normal life during these periods. 

• Spending Unnecessarily: Another mistake that athletes need to avoid in financial planning is to reduce spending too much money unnecessarily. Usually, athletes purchase expensive and luxurious houses, clothes, cars, etc. However, it is essential to spend less than what you earn in order to stay financially safe. 

• Not Considering the Taxes Properly: With higher income, the amount of taxes will also be higher. Usually, taxes consume a large portion of an athlete's earnings. Hence, if you do not make a tax plan correctly, you will likely end up with a money shortage during emergencies. 

  Now you have a crystal-clear idea about financial planning for professional athletes. Precisely, sportspersons should be cautious of their income, taxes, and liabilities and plan for injuries and retirement accordingly. There is no certainty when an athlete has to retire from their associated sport, so it is essential to make a financial plan beforehand by taking assistance from financial advisors.