Touchdown Finance - Personal Finance Tips from the Pros

Rule 1

Take It Slow

Be conservative and protect your money while developing financial goals

Anyone who makes a lot of money very quickly without strong financial instincts or education will face challenges. This is certainly true for young athletes who are suddenly making big league money. In my years serving football players early in their NFL careers, I’ve noticed two common approaches to their paychecks—spend it or save it.

Some were so excited to have money that they slipped into the “keeping up with the Joneses” mindset—big houses, tricked-out cars, gold jewelry, family members and friends on the payroll. These athletes were aggressive with spending and, sometimes, investing.

Others were overwhelmed with the money and took a cautious approach. One former pro told me he was afraid to spend his rookie salary. The cautious spenders sounded almost apologetic, as if they expected me to support aggressive investments right away.

This is a great guiding principle and Rule 1 for us all. If you don’t know what to do with money, saving it is always safe. If you’re saving it, you’re not spending it. If you’re not spending it, you’re not wasting it.

Taking it slowly is a building block of good personal financial decisions. When you get money, no matter how little or how much, spend carefully. Don’t make big decisions right away. Wait until you’ve done your research and are confident. Save, save, save. You can’t go wrong with saving.

This chapter might seem like common sense. Take it slow. Don’t make big purchases or try to hit an investment home run right away. But this is what I’ve experienced and observed with people who suddenly have money: it doesn’t feel right not to spend it. They often feel an urgency to spend or invest. The same is true for college graduates or anyone else in the workforce.

Rather than dealing with the stress of overspending or managing unwieldly investments, why not keep it simple? Finish your education, build a career, develop relationships, and grow your network. If you give into the burning desire to spend your money, you might miss those important foundational pieces that pay significant dividends throughout your life.

The idea of moving slowly doesn’t apply only to those who are receiving their first paychecks. It’s relevant anytime you receive more money than you have in the past. When you get a new job, raise, or promotion, or your business starts to thrive, or you’re trying to change poor spending habits, it’s time to learn some new skills. Just as in sports, it takes time for players to learn new plays and then practice and perfect them for the game. Take it slow and build a strong foundation for your financial future.

Many professional athletes have some learning to do about slowing down and protecting their money. One of the most dramatic examples that played out in the public eye revolved around a bad investment in an Alabama entertainment and gambling development. Financial advisor Jeff Rubin persuaded dozens of NFL players, including all-pro running back Fred Taylor and tight end Vernon Davis, to invest in Country Crossing, a casino that was basing its proposed revenue on electronic bingo machines. But two weeks after opening in January 2010, the machines were ruled illegal in the state and were confiscated by Alabama law enforcement. When the venue went bankrupt, NFL players lost a combined $43 million in investments.

The players could have protected themselves by not making a rush decision to invest in the casino. Though Rubin presented it as an opportunity to get very rich, the players could have taken the time to notice warning signs. The NFL Commissioner Roger Goodell and Alabama Governor Bob Riley were both strongly opposed to gambling. There was also a statement in a document given to potential investors that the electronic gambling machines might be considered illegal. This disastrous investment is, to date, the largest financial loss of NFL players tied to one financial advisor. It is better to learn from others’ mistakes.

Avoid the blitz of excessive spending:
needs vs. wants

Before we get to financial concepts like budgeting, saving, and goal setting, I want to emphasize two skills that are essential for you to understand and master. Think of me as a coach for a minute, emphasizing some basic foundational concepts of the game.

You need to clearly understand and respect the fundamental difference between a need and a want.

What are needs?

• A place to live
• Appropriate clothes
• Food on the table
• Transportation
• Basic necessities for living safely and securely

  What are wants masquerading as needs?

• A large, new home
• A luxury vehicle
• First-class plane tickets
• Expensive clothing and shoes
• Jewelry

  You get the idea.

  I’ve seen a lot of athletes and non-athletes convince themselves that they must spend a lot of money to fit into the world of professional sports. They join the world of name-brand clothes, expensive jewelry, flashy cars, and excessive bills at bars and restaurants. Depending on your career or level of income, you can fall into some of those traps as well.

  NBA star Antoine Walker made more than $108 million in his career but filed for bankruptcy just two years after retirement. Involved in gambling and a real estate firm that collapsed, Walker has also publicly said that he got drawn to a very expensive lifestyle that cost him millions at the beginning of his career. Walker consistently lived beyond his means.

  In contrast, Alfred Morris of the Dallas Cowboys has made millions during his NFL career but drives a 1991 Mazda, a car he bought in college for two dollars from his pastor. In an interview with ESPN, he explained a sentimental attachment to the car but also said he doesn’t see the need for a new car while this one gets him from point A to point B. “You never know when it’s going to be over. I’m just doing my best to try to save as much as I can, to set myself up for life after football,” Morris said in the interview.

  A good question to ask yourself with any purchase is, “if I give it the weekend to think about it, would I be proud of this purchase, or would I question having spent money on it?” Do I need it or do I want it? Curtailing spontaneous purchases is important. Take it slow and evaluate your needs.

  Stiff-arming debt: good debt vs. bad debt

  It’s important to know when it’s OK or not OK to borrow money. Larger purchases like cars and houses are usually made with a loan, which means the borrower is now in debt. The biggest reason people borrow money from financial institutions is because they don’t have enough lump sum cash for those purchases. Few of us will ever have enough cash on hand to buy a house, or even a car, outright. Loans can help us buy what we need and spread the payments into manageable chunks.

  A loan is an obligation, also called a debt, because you must pay it back. When you are lent money at a certain rate of interest, you pay it off over time. The interest paid to the lender is your cost of taking out a loan. The lump sum you owe on the loan is also called debt.

  The lender reports to the credit-reporting agencies how you live up to the terms of the loan. This is the basis of your credit score. The faster you pay back debt, the better your credit score becomes. The better your score, the more likely you are to qualify for loans in the future.

  I advise my clients that there are good types of debt and bad types. Some financial advisors argue that all debt is bad, and I respect that viewpoint. However, borrowing money is a necessity for most of us. If done wisely, it will not hurt us financially.

  This goes back to needs versus wants. A loan on a car or purchasing a modest house or condo would potentially be good debt, whereas taking out a loan to buy jewelry, an excessive car, or a big house is bad debt.

  Good debt

  Auto loan for reasonable car

  School loan to further your education

  Mortgage on a modest home or condo

  Bad debt

  Credit card debt (usually with 20 percent interest)

  Luxury car, boat, or jewelry loans

  Mortgages on mansions or custom homes

  Personal lines of credit

  Consider these things when taking on debt and avoid the penalties:

  • Interest rates. It’s worth shopping around with lenders and finding the best rate. The interest rate affects the monthly payment and how long it will take you to pay off the loan.
  • Affordable monthly payments. If you have a home loan, you should aim for all your debt payments to be no more than one-third of your take-home pay.
  • Credit scores. Loans are tied to your credit scores, and interest rates...